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                                                                                                                                 Wednesday,
                                                                                                                                 February 8, 2006




                                                                                                                                 Part II

                                                                                                                                 Securities and
                                                                                                                                 Exchange
                                                                                                                                 Commission
                                                                                                                                 17 CFR Parts 228, 229, 239, et al.
                                                                                                                                 Executive Compensation and Related
                                                                                                                                 Party Disclosure; Proposed Rule
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                                           6542             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           SECURITIES AND EXCHANGE                                 Paper Comments                                        propose to amend Schedule 14A 20
                                           COMMISSION                                                 • Send paper comments in triplicate                under the Exchange Act, as well as
                                                                                                   to Nancy M. Morris, Secretary,                        Exchange Act Forms 8–K,21 10,22
                                           17 CFR Parts 228, 229, 239, 240, 245,                   Securities and Exchange Commission,                   10SB,23 10–Q,24 10–QSB,25 10–K,26 10–
                                           249 and 274                                             100 F Street, NE., Washington, DC                     KSB 27 and 20–F.28 Finally, we propose
                                           [Release Nos. 33–8655; 34–53185; IC–                    20549–9303.                                           to amend Forms SB–2,29 S–1,30 S–3,31
                                           27218; File No. S7–03–06]                               All submissions should refer to File                  S–4 32 and S–11 33 under the Securities
                                                                                                   Number S7–03–06. This file number                     Act, Forms N–1A,34 N–2,35 and N–3 36
                                           RIN 3235–AI80                                                                                                 under the Securities Act and the
                                                                                                   should be included on the subject line
                                                                                                   if e-mail is used. To help us process and             Investment Company Act of 1940,37 and
                                           Executive Compensation and Related
                                                                                                   review your comments more efficiently,                Form N–CSR 38 under the Investment
                                           Party Disclosure
                                                                                                   please use only one method. The                       Company Act and the Exchange Act.
                                           AGENCY:  Securities and Exchange                        Commission will post all comments on                  Table of Contents
                                           Commission.                                             the Commission’s Internet Web site                    I. Background and Overview of the Proposals
                                           ACTION: Proposed rule.                                  (http://www.sec.gov/rules/proposed/                   II. Executive and Director Compensation
                                                                                                   shtml). Comments are also available for                     Disclosure
                                           SUMMARY:   The Securities and Exchange                  public inspection and copying in the                     A. Compensation Discussion and Analysis
                                           Commission is proposing amendments                      Commission’s Public Reference Room,                      1. Intent and Operation of the Proposed
                                           to the disclosure requirements for                      100 F Street, NE, Washington, DC                            Compensation Discussion and Analysis
                                           executive and director compensation,                    20549. All comments received will be                     2. Proposed Instructions to Compensation
                                           related party transactions, director                                                                                Discussion and Analysis
                                                                                                   posted without change; we do not edit                    3. ‘‘Filed’’ Status of Compensation
                                           independence and other corporate                        personal identifying information from                       Discussion and Analysis
                                           governance matters and security                         submissions. You should submit only                      4. Proposed Elimination of the
                                           ownership of officers and directors.                    information that you wish to make                           Performance Graph and the
                                           These amendments would apply to                         publicly available.                                         Compensation Committee Report
                                           disclosure in proxy and information                                                                              B. Compensation Tables
                                                                                                   FOR FURTHER INFORMATION CONTACT:
                                           statements, periodic reports, current                   Anne Krauskopf, Carloyn Sherman, or                      1. Compensation to Named Executive
                                           reports and other filings under the                                                                                 Officers in the Last Three Completed
                                                                                                   Daniel Greenspan, at (202) 551–3500, in                     Fiscal Years—The Summary
                                           Securities Exchange Act of 1934 and to                  the Division of Corporation Finance,
                                           registration statements under the                                                                                   Compensation Table and Related
                                                                                                   U.S. Securities and Exchange                                Disclosure
                                           Exchange Act and the Securities Act of                  Commission, 100 F Street, NE,                            a. Total Compensation Column
                                           1933. We also propose to require that                   Washington, DC 20549–3010 or, with                       b. Salary and Bonus Columns
                                           disclosure under the amended items                      respect to questions regarding                           c. Plan-Based Awards
                                           generally be provided in plain English.                 investment companies, Kieran Brown in                    i. Stock Awards and Option Awards
                                           The proposed amendments are intended                    the Division of Investment Management,                      Columns
                                           to make proxy statements, reports and                                                                            ii. Non-Stock Incentive Plan Compensation
                                                                                                   at (202) 551–6784.
                                           registration statements easier to                                                                                   Column
                                                                                                   SUPPLEMENTARY INFORMATION: We                            d. All Other Compensation Column
                                           understand. They are also intended to
                                                                                                   propose to amend: Items 201,1 306,2                      i. Earnings on Deferred Compensation
                                           provide investors with a clearer and
                                                                                                   401,3 402,4 403 5 and 404 6 of                           ii. Increase in Pension Value
                                           more complete picture of the                            Regulations S–K 7 and S–B,8 Item 601 9                   iii. Perquisites and Other Personal Benefits
                                           compensation earned by a company’s                      of Regulation S–K, Item 1107 10 of                       iv. Additional All Other Compensation
                                           principal executive officer, principal                  Regulation AB,11 and Rule 100 12 of                         Column Items
                                           financial officer and highest paid                      Regulation BTR.13 We also propose to                     e. Captions and Table Layout
                                           executive officers and members of its                                                                            2. Supplemental Annual Compensation
                                                                                                   add new Item 407 to Regulations S–K                         Tables
                                           board of directors. In addition, they are               and S–B. In addition, we propose to
                                           intended to provide better information                                                                           a. Grants of Performance-Based Awards
                                                                                                   amend Rules 13a–11,14 14a–6,15 14c–                         Table
                                           about key financial relationships among                 5,16 15d–11 17 and 16b–3 18 under the                    b. Grants of All Other Equity Awards Table
                                           companies and their executive officers,                 Securities Exchange Act of 1934.19 We                    3. Narrative Disclosure to Summary
                                           directors, significant shareholders and                 propose to add Rules 13a–20 and 15d–                        Compensation Table and Supplemental
                                           their respective immediate family                       20 under the Exchange Act. We further                       Tables
                                           members.
                                                                                                                                                           20 17 CFR 240.14a–101.
                                           DATES: Comments should be received on                     1 17 CFR 229.201 and 17 CFR 228.201.
                                                                                                     2 17                                                  21 17 CFR 249.308.
                                           or before April 10, 2006.                                      CFR 229.306 and 17 CFR 228.306.
                                                                                                     3 17 CFR 229.401 and 17 CFR 228.401.                  22 17 CFR 249.210.
                                           ADDRESSES: Comments may be                                4 17 CFR 229.402 and 17 CFR 228.402.                  23 17 CFR 249.210b.
                                           submitted by any of the following                         5 17 CFR 229.403 and 17 CFR 228.403.                  24 17 CFR 249.308a.

                                           methods:                                                  6 17 CFR 229.404 and 17 CFR 228.404.                  25 17 CFR 249.308b.

                                                                                                     7 17 CFR 229.10 et seq.                               26 17 CFR 249.310.
                                           Electronic Comments                                       8 17 CFR 228.10 et seq.                               27 17 CFR 249.310b.

                                              • Use the Commission’s Internet                        9 17 CFR 229.601.                                     28 17 CFR 249.220f.
                                                                                                                                                           29 17 CFR 239.10.
                                           comment form (http://www.sec.gov/                         10 17 CFR 229.1107.
                                                                                                     11 17 CFR 229.1100 et seq.                            30 17 CFR 239.11.
                                           rules/proposed.shtml); or                                                                                       31 17 CFR 239.13.
                                              • Send an e-mail to rule-
                                                                                                     12 17 CFR 245.100.
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                                                                                                     13 17 CFR 245.100 et seq.                             32 17 CFR 239.25.
                                           comments@sec.gov. Please include File                     14 17 CFR 240.13a–11.                                 33 17 CFR 239.18.
                                           Number S7–03–06 on the subject line;                      15 17 CFR 240.14a–6.                                  34 17 CFR 239.15A and 274.11A.
                                           or                                                        16 17 CFR 240.14c–5.                                  35 17 CFR 239.14 and 274.11a–1.
                                              • Use the Federal Rulemaking Portal                    17 17 CFR 240.15d–11.                                 36 17 CFR 239.17a and 274.11b.

                                           (http://www.regulations.gov). Follow the                  18 17 CFR 240.16b–3.                                  37 15 U.S.C. 80a–1 et seq.

                                           instructions for submitting comments.                     19 15 U.S.C. 78a et seq.                              38 17 CFR 249.331 and 274.128.




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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                           6543

                                              4. Exercises and Holdings of Previously                C. Benefits                                          Commission has on a number of
                                                 Awarded Equity                                      D. Costs                                             occasions explored the best methods for
                                              a. Outstanding Equity Awards at Fiscal                 E. Request for Comment                               communicating clear, concise and
                                                 Year-End                                          X. Consideration of Burden on Competition
                                                                                                        and Promotion of Efficiency,
                                                                                                                                                          meaningful information about executive
                                              b. Option Exercises and Stock Vesting
                                              5. Post-Employment Compensation                           Competition and Capital Formation                 and director compensation and
                                              a. Retirement Plan Potential Annual                  XI. Initial Regulatory Flexibility Act Analysis        relationships with the issuer.40 The
                                                 Payments and Benefits Table                         A. Reasons for the Proposed Action                   Commission also has had to reconsider
                                              b. Nonqualified Defined Contribution and               B. Objectives                                        executive and director compensation
                                                 Other Deferred Compensation Plans                   C. Legal Basis                                       disclosure requirements in light of
                                                 Table                                               D. Small Entities Subject to the Proposed            changing trends in executive
                                              c. Other Potential Post-Employment                        Amendments                                        compensation. Most recently, in 1992,
                                                 Payments                                            E. Reporting, Recordkeeping and Other                the Commission adopted amendments
                                              6. Officers Covered                                       Compliance Requirements
                                                                                                     F. Duplicative, Overlapping or Conflicting
                                                                                                                                                          to the disclosure rules that eschewed a
                                              a. Named Executive Officers
                                              b. Identification of Most Highly                          Federal Rules                                     mostly narrative disclosure approach
                                                 Compensated Officers; Dollar Threshold              G. Significant Alternatives                          adopted in 1983 in favor of formatted
                                                 for Disclosure                                      H. Solicitation of Comment                           tables that captured all compensation,
                                              7. Interplay of Items 402 and 404                    XII. Small Business Regulatory Enforcement             while categorizing the various elements
                                              8. Other Proposed Changes                                 Fairness Act                                      of compensation and promoting
                                              9. Compensation of Directors                         XIII. Statutory Authority and Text of the              comparability from year to year and
                                              C. Treatment of Specific Types of Issuers                 Proposed Amendments                               from company to company.41
                                              1. Small Business Issuers                                                                                     We believe this tabular approach
                                              2. Foreign Private Issuers                           I. Background and Overview of the
                                                                                                   Proposals                                              remains a sound basis for disclosure.
                                              3. Business Development Companies
                                                                                                                                                          However, especially in light of the
                                              D. Conforming Amendments                                We are proposing revisions to our
                                              E. General Comment Requests on the Item                                                                     complexity of and variations in
                                                                                                   rules governing disclosure of executive                compensation programs, the very
                                                 402 Proposals                                     compensation, director compensation,
                                           III. Proposed Revisions to Form 8–K and the                                                                    formatted nature of the current rules
                                                                                                   related party transactions, director                   results in too many cases in disclosure
                                                 Periodic Report Exhibit Requirements
                                              A. Proposed Revisions to Items 1.01 and              independence and other corporate                       that does not inform investors
                                                 5.02 of Form 8–K                                  governance matters and current                         adequately as to all elements of
                                              B. Proposed Extension of Limited Safe                reporting regarding compensation                       compensation. In those cases investors
                                                 Harbor under Section 10(b) and Rule               arrangements. The proposed revisions to                may lack material information that we
                                                 10b-5 to Item 5.02(e) of Form 8–K and             the compensation disclosure rules are                  believe they should receive.
                                                 Exclusion of that Item from Form S–3              intended to provide investors with a                     We are thus today proposing an
                                                 Eligibility Requirements                          clearer and more complete picture of                   approach that builds on the strengths of
                                              C. General Instruction D to Form 8–K                 compensation to principal executive
                                              D. Foreign Private Issuers
                                                                                                   officers, principal financial officers, the            directors or persons performing similar functions,
                                           IV. Beneficial Ownership Disclosure
                                           V. Certain Relationships and Related                    other highest paid executive officers and              and (b) its officers and other persons, naming them
                                                                                                   directors.                                             wherever such remuneration exceeded $25,000
                                                 Transactions Disclosure                                                                                  during any such year.’’ Section 12(b) of the
                                              A. Transactions with Related Persons                    Closely related to executive officer                Exchange Act as enacted required disclosure of ‘‘(D)
                                              1. Broad Principle for Disclosure                    and director compensation is the                       the directors, officers, and underwriters, and each
                                              a. Indebtedness                                      participation by executive officers,                   security holder of record holding more than 10 per
                                              b. Definitions                                       directors, significant shareholders and                centum of any class of any equity security of the
                                              2. Disclosure Requirements                                                                                  issuer (other than an exempted security), their
                                                                                                   other related persons in financial                     remuneration and their interests in the securities of,
                                              3. Exceptions                                        transactions and relationships with the                and their material contracts with, the issuers and
                                              B. Procedures for Approval of Related                company. We are also proposing to                      any person directly or indirectly controlling or
                                                 Person Transactions                                                                                      controlled by, or under direct or indirect common
                                              C. Promoters
                                                                                                   revise our disclosure rules regarding
                                                                                                                                                          control with the issuer;’’ and ‘‘(E) remuneration to
                                              D. Corporate Governance Disclosure                   related party transactions and director                others than directors and officers exceeding $20,000
                                              E. Treatment of Specific Types of Issuers            independence and board committee                       per annum.’’
                                              1. Small Business Issuers                            functions.                                                40 In 1938, the Commission promulgated its first

                                              2. Foreign Private Issuers                              Finally, some compensation                          executive and director compensation disclosure
                                                                                                                                                          rules for proxy statements. Release No. 34–1823
                                              3. Registered Investment Companies                   arrangements must be disclosed under                   (Aug. 11, 1938). At different times thereafter, the
                                              F. Conforming Amendments                             our recently revised rules relating to                 Commission has adopted rules mandating narrative,
                                              1. Regulation Blackout Trading Restriction           current reports on Form 8-K. We                        tabular, or combinations of narrative and tabular
                                              2. Rule 16b-3 Non-Employee Director                  propose to reorganize and more                         disclosure as the best method for presenting
                                                 Definition                                        appropriately focus our requirements on                compensation disclosure in a manner that is clear
                                              3. Other Conforming Amendments                                                                              and useful to investors. See e.g., Release No. 34–
                                           VI. Plain English Disclosure
                                                                                                   the type of compensation information                   3347 (Dec. 18, 1942) [7 FR 10653] (introducing first
                                           VII. Transition                                         that should be disclosed on a real-time                tabular disclosure); Release No. 34–4775 (Dec. 11,
                                                                                                   basis.                                                 1952) [17 FR 11431] (introducing separate table for
                                           VIII. Paperwork Reduction Act                                                                                  pensions and deferred remuneration); Uniform and
                                              A. Background                                           Since the enactment of the Securities               Integrated Reporting Requirements: Management
                                              B. Summary of Information Collections                Act and the Exchange Act,39 the                        Remuneration, Release No. 33–6003 (Dec. 4, 1978)
                                              C. Paperwork Reduction Act Burden                                                                           [43 FR 58151] (expanding tabular disclosure to
                                                 Estimates                                            39 Initially, disclosure requirements regarding     cover all forms of compensation); and Disclosure of
                                              1. Securities Act Registration Statements,           executive and director compensation were set forth     Executive Compensation, Release No. 33–6486
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                                                 Exchange Act Registration Statements              in Schedule A to the Securities Act and Section        (Sept. 23, 1983) [48 FR 44467] (the ‘‘1983 Release’’)
                                                                                                   12(b) of the Exchange Act, which list the type of      (limiting tabular disclosure to cash remuneration).
                                                 and Exchange Act Annual Reports
                                                                                                   information to be included in Securities Act and          41 Executive Compensation Disclosure, Release
                                              2. Exchange Act Current Reports                      Exchange Act registration statements. Item 14 of       No. 33–6962 (Oct. 16, 1992) [57 FR 48125] (the
                                              D. Request for Comment                               Schedule A called for disclosure of the                ‘‘1992 Release’’); See also Executive Compensation
                                           IX. Cost-Benefit Analysis                               ‘‘remuneration, paid or estimated to be paid, by the   Disclosure; Securityholder Lists and Mailing
                                              A. Background                                        issuer or its predecessor, directly or indirectly,     Requests, Release No. 33–7032 (Nov. 22, 1993) [58
                                              B. Summary of Proposals                              during the past year and ensuing year to (a) the       FR 63010], at Section II.


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                                           6544             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           the current requirements rather than                    potential sources of future gains, with a               amendment of, and termination of,
                                           discarding them. However, today’s                       focus on compensation-related equity                    material definitive agreements entered
                                           proposals do represent a thorough                       interests that were awarded in prior                    into outside the ordinary course of
                                           rethinking of our current rules that                    years (and disclosed as current                         business within four business days of
                                           would combine a broader-based tabular                   compensation for those years) and are                   the triggering event. Under our pre-
                                           presentation with improved narrative                    ‘‘at risk,’’ as well as recent realization on           existing definitions of material
                                           disclosure supplementing the tables.                    these interests, such as through vesting                contracts, many agreements regarding
                                           This proposed approach would promote                    of restricted stock and similar                         executive compensation are deemed to
                                           clarity and completeness of numerical                   instruments or the exercise of options                  be material agreements entered into
                                           information through an improved                         and similar instruments; and                            outside the ordinary course, and when,
                                           tabular presentation, continue to                          • Retirement and other post-                         for purposes of consistency, we adopted
                                           provide the ability to make comparisons                 employment benefits, including                          those definitions for use in the
                                           using tables, and call for material                     retirement and defined contribution and                 expanded Form 8–K requirements, we
                                           qualitative information regarding the                   other deferred compensation plans,                      incorporated all of these executive
                                           manner and context in which                             other retirement benefits and other post-               compensation agreements into the
                                           compensation is awarded and earned.                     employment benefits, such as those                      current disclosure requirements.
                                              The proposals that we publish for                    payable in the event of a change in                     Therefore, many agreements regarding
                                           comment today would require that all                    control.                                                executive compensation, including
                                           elements of compensation must be                           We propose to require improved                       some not related to named executive
                                           disclosed. We also seek to structure the                tabular disclosure for each of the above                officers, are required to be disclosed
                                           revised requirements sufficiently                       three categories that would be                          within four business days of the
                                           broadly so that, if they are adopted, they              supplemented by appropriate narrative                   applicable triggering event. Consistent
                                           will continue to operate effectively as                 that provides material information                      with our intent in adopting the
                                           new forms of compensation are                           necessary to an understanding of the                    expanded Form 8–K to capture only
                                           developed in the future.                                information presented in the individual                 events that are unquestionably or
                                              Under our proposals, compensation                    tables.43 We are also proposing a new                   presumptively material to investors, we
                                           disclosure would begin with a narrative                 disclosure requirement of the total                     believe it is appropriate to modify the
                                           providing a general overview. Much like                 compensation and job description of up                  Form 8–K requirements.
                                           the overview that we have encouraged                    to an additional three most highly                         We believe that executive and director
                                           companies to provide with their                         compensated employees who are not                       compensation is closely related to
                                           Management’s Discussion and Analysis                    executive officers or directors but who                 financial transactions and relationships
                                           of Financial Condition and Results of                   earn more than the highest paid                         involving companies and their directors,
                                           Operations (MD&A),42 the proposed                       executive officers.                                     executive officers and significant
                                           Compensation Discussion and Analysis                       Finally, we propose a director                       shareholders and respective immediate
                                           would call for a discussion and analysis                compensation table that is similar to the               family members. Disclosure
                                           of the material factors underlying                      proposed Summary Compensation                           requirements regarding these matters
                                           compensation policies and decisions                     Table.44                                                historically have been interconnected,
                                           reflected in the data presented in the                     We also propose to modify some of
                                                                                                                                                           given that relationships among these
                                           tables. This overview would address in                  the recently expanded Form 8–K
                                                                                                                                                           parties and the company can include
                                           one place these factors with respect to                 requirements regarding compensation.
                                                                                                                                                           transactions that involve compensation
                                           both the separate elements of executive                 Form 8–K requires disclosure on a
                                                                                                                                                           or analogous features. Such disclosure
                                           compensation and executive                              current basis of the entry into,
                                                                                                                                                           also represents material information in
                                           compensation as a whole.                                                                                        evaluating the overall relationship with
                                                                                                      43 As discussed in more detail below, this
                                              Following the Compensation                                                                                   a company’s executive officers and
                                                                                                   narrative disclosure, together with the
                                           Discussion and Analysis, we propose to                  Compensation Discussion and Analysis noted              directors. Further, this disclosure
                                           organize detailed disclosure of                         above, would replace the currently required             provides material information regarding
                                           executive compensation into three                       Compensation Committee Report and the
                                                                                                                                                           the independence of directors. The
                                           broad categories:                                       Performance Graph. Unlike the current
                                                                                                   requirements under which both the report and the        current related party transaction
                                              • Compensation with respect to the
                                                                                                   graph, although physically included in the proxy        disclosure requirements were adopted
                                           last fiscal year (and the two preceding                 statement, need only be furnished to the                piecemeal over the years and were
                                           fiscal years), as reflected in a revised                Commission, the proposed narrative disclosure,
                                                                                                                                                           combined into one disclosure
                                           Summary Compensation Table that                         along with the rest of the proposed executive officer
                                                                                                   and director compensation, would be company             requirement beginning in 1982.45 In
                                           presents compensation paid currently or
                                                                                                   disclosure filed with the Commission.                   light of the many developments since
                                           deferred (including options, restricted                    Current Item 402(a)(9) of Regulation S–K provides    then, including the increasing focus on
                                           stock and similar grants) and                           that the Compensation Committee Report and
                                                                                                                                                           corporate governance and director
                                           compensation consisting of current                      Performance Graph ‘‘shall not be deemed to be
                                                                                                   ‘‘soliciting material’’ or to be ‘‘filed’’ with the     independence, we believe it is necessary
                                           earnings or awards that are part of a
                                                                                                   Commission or subject to Regulations 14A or 14C         to revise our requirements. Today’s
                                           plan, and as supplemented by two                        [17 CFR 240.14a–1 et seq. or 240.14c–1 et seq.],        proposals include amendments to
                                           tables providing back-up information for                other than as provided in this item, or to the
                                                                                                                                                           update, clarify and slightly expand the
                                           certain data in the Summary                             liabilities of section 18 of the Exchange Act [15
                                                                                                   U.S.C. 78r], except to the extent that the registrant   related party transaction disclosure
                                           Compensation Table;
                                              • Holdings of equity-related interests               specifically requests that such information be          requirements. The proposed
                                                                                                   treated as soliciting material or specifically          amendments would fold into the
                                           that relate to compensation or are
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                                                                                                   incorporates it by reference into a filing under the
                                                                                                   Securities Act or the Exchange Act.’’
                                                                                                                                                           disclosure requirements for related
                                              42 Item 303 of Regulation S–K [17 CFR 229.303].         44 We made similar proposals, which we did not       party transactions the currently separate
                                           See also Commission Guidance Regarding                  act on, regarding director compensation in 1995.
                                           Management’s Discussion and Analysis of Financial       Streamlining and Consolidation of Executive and           45 Disclosure of Certain Relationships and

                                           Condition and Results of Operations, Release No.        Director Compensation Disclosure, Release No. 33–       Transactions Involving Management, Release No.
                                           33–8350 (Dec. 19, 2003) [68 FR 75055], at Section       7184 (Aug. 6, 1995) [60 FR 35633] (the ‘‘1995           33–6441 (Dec. 2, 1982) [47 FR 55661] (the ‘‘1982
                                           III.A.                                                  Release’’), at Section I.B.                             Release’’).


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                         6545

                                           disclosure requirement regarding                        reasoning behind this approach remains                 overview that would provide narrative
                                           indebtedness of management and                          fundamentally sound, significant                       disclosure that puts into context the
                                           directors.46 Further, we propose a                      changes are appropriate. Much of the                   compensation disclosure provided
                                           requirement that calls for a narrative                  concern with the current tables is also                elsewhere.54 This overview would
                                           explanation of the independence status                  their strength: they are highly formatted              explain material elements of the
                                           of directors under a company’s director                 and rigid.50 Thus, information not                     particular company’s compensation for
                                           independence policies, consistent with                  specifically called for in the tables is               named executive officers by answering
                                           recent significant changes to the listing               sometimes not provided. For example,                   the following questions:
                                           standards of the nation’s principal                     the highly formatted and specific                        • What are the objectives of the
                                           securities trading markets.47 We also                   approach has led some to suggest that                  company’s compensation programs?
                                           propose to consolidate this and other                   items that do not fit squarely within a                  • What is the compensation program
                                           corporate governance disclosure                         ‘‘box’’ specified by the rules need not be             designed to reward and not reward?
                                           requirements regarding director                         disclosed.51 As another example,                         • What is each element of
                                           independence and board committees                       because the tables do not call for a                   compensation?
                                           into a single expanded disclosure                       single figure for total compensation, that               • Why does the company choose to
                                           item.48                                                 information is generally not provided,                 pay each element?
                                              In order to ensure that these amended                although there is considerable                           • How does the company determine
                                           requirements result in disclosure that is               commentary indicating that a single                    the amount (and, where applicable, the
                                           clear, concise and understandable for                   total figure is high on the list of                    formula) for each element?
                                           investors, we propose to add Rules 13a–                 information that some investors wish to                  • How does each element and the
                                           20 and 15d–20 under the Exchange Act                    have. To preserve the strengths of the                 company’s decisions regarding that
                                           to require that most of the disclosure                  current approach and build on them, we                 element fit into the company’s overall
                                           provided in response to the amended                     propose several steps:                                 compensation objectives and affect
                                           items be presented in plain English.                       • First, retaining the tabular approach             decisions regarding other elements?
                                           This proposal would extend the plain                    to provide clarity and comparability                   1. Intent and Operation of the Proposed
                                           English requirements currently                          while improving the tabular disclosure                 Compensation Discussion and Analysis
                                           applicable to portions of registration                  requirements;
                                           statements under the Securities Act to                     • Second, confirming that all                          The purpose of the Compensation
                                           the disclosure required under the                       elements of compensation must be                       Discussion and Analysis disclosure
                                           amended items in Exchange Act reports                   included in the tables;                                would be to provide material
                                           and proxy or information statements                        • Third, providing a format for the                 information about the compensation
                                           incorporated by reference into those                    Summary Compensation Table that                        objectives and policies for named
                                           reports.                                                requires disclosure of a single figure for             executive officers without resorting to
                                              Finally, we propose to amend our                     total compensation; and                                boilerplate disclosure. The
                                           beneficial ownership disclosure                            • Finally, requiring narrative                      Compensation Discussion and Analysis
                                           requirements to require disclosure of                   disclosure comprising both a general                   is intended to put into perspective for
                                           shares pledged by named executive                       discussion and analysis of                             investors the numbers and narrative that
                                           officers, directors and director                        compensation and specific material                     follow it.
                                           nominees, as well as directors’                         information regarding tabular items                       The proposed Compensation
                                           qualifying shares.                                      where necessary to an understanding of                 Discussion and Analysis requirement
                                                                                                   the tabular disclosure.52                              would be principles-based, in that it
                                           II. Executive and Director                                                                                     identifies the disclosure concept and
                                           Compensation Disclosure                                 A. Compensation Discussion and
                                                                                                   Analysis                                               provides several illustrative examples.
                                              As discussed above, executive and                                                                           The application of a particular example
                                           director compensation disclosure has                      We propose requiring a new                           must be tailored to the company.
                                           been required since 1933, and the                       Compensation Discussion and Analysis                   However, the scope of the
                                                                                                   section.53 This section would be an
                                           Commission has had disclosure rules in
                                           this area since 1938. In 1992, the                                                                             we are proposing revisions to the rules so that, to
                                                                                                     50 See,  e.g., Council of Institutional Investors’   the extent material, additional narrative disclosure
                                           Commission proposed and adopted                         Discussion Paper on Executive Pay Disclosure,          would be provided following certain tables to
                                           substantially revised rules that embody                 Executive Compensation Disclosure: How It Works        supplement the disclosure in the table. See, e.g.,
                                           our current requirements.49 In doing so,                Now, How It Can Be Improved, at 11 (available at       Section II.B.3., discussing the narrative disclosure
                                                                                                   www.cii.org/site_files/pdfs/                           to the Summary Compensation Table and
                                           the Commission moved away from                          CII%20pay%20primer%20edited.pdf).                      supplemental tables. We are also proposing
                                           narrative disclosure and back to using                     51 For examples, see, e.g., The Corporate Counsel   disclosure of compensation committee procedures
                                           tables that permit comparability from                   (Sept.–Oct. 2005) at 6–7; The Corporate Counsel        and processes as well as information regarding
                                           year to year and from company to                        (Sept.–Oct. 2004) at 7; but see Alan L. Beller,        compensation committee interlocks and insider
                                           company. We believe that while the                      Director, Division of Corporation Finance, U.S.        participation in compensation decisions as part of
                                                                                                   Securities and Exchange Commission, Remarks            proposed Item 407 of Regulation S–K. See Section
                                                                                                   Before Conference of the NASPP, The Corporate          V.D., below.
                                              46 Related party transactions are currently
                                                                                                   Counsel and the Corporate Executive (October 20,         54 See Jeffrey N. Gordon, Executive
                                           disclosed under Items 404(a) of Regulations S–K         2004) (indicating that the explicit language of the    Compensation: What’s the Problem, What’s the
                                           and S–B. Indebtedness is currently disclosed under      current rules requires disclosure of such items),      Remedy? The Case for Compensation Discussion
                                           Item 404(c) of Regulation S–K.                          available at www.sec.gov/news/speech/                  and Analysis, 30 J. Corp. L. (forthcoming Spring
                                              47 See, e.g., NASD and NYSE Rulemaking:              spch102004alb.htm.                                     2006) (arguing that the SEC should require proxy
                                           Relating to Corporate Governance, Release No. 34–          52 The discussion that follows focuses on changes
                                                                                                                                                          disclosure that includes a ‘‘Compensation
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                                           48745 (Nov. 4, 2003) [68 FR 64154] (the ‘‘NASD and      to Item 402 of Regulation S–K, with Section II.C.1     Discussion and Analysis’’ section that collects and
                                           NYSE Listing Standards Release’’). This proposal        explaining the different modifications proposed for    summarizes all the compensation elements for
                                           would replace our existing disclosure requirement       Item 402 of Regulation S–B. References throughout      senior executives, providing a ‘‘bottom line
                                           about director relationships that can affect            the following discussion are to current or proposed    assessment’’ of the different compensation elements
                                           independence.                                           Items of Regulation S–K, unless otherwise              and an explanation as to why the board thinks such
                                              48 Proposed Item 407 of Regulation S–K and           indicated.                                             compensation is warranted). Also available at
                                           Regulation S–B.                                            53 Proposed Item 402(b). In addition to the         http://papers.ssrn.com/sol3/
                                              49 1992 Release.                                     narrative Compensation Discussion and Analysis,        papers.cfm?abstract_id=686464.


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                                           6546             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           Compensation Discussion and Analysis                      The Compensation Discussion and                     3. ‘‘Filed’’ Status of Compensation
                                           is intended to be comprehensive, so that                Analysis should be sufficiently precise               Discussion and Analysis
                                           it would call for discussion of post-                   to identify material differences in                      The Compensation Discussion and
                                           termination as well as in-service                       compensation policies and decisions for               Analysis will be considered a part of the
                                           compensation arrangements.55                            individual named executive officers                   proxy statement and any other filing in
                                           Boilerplate disclosure would not                        where appropriate. Where policies or                  which it is included. Unlike the current
                                           comply with the proposed item.                          decisions are materially similar, officers            Compensation Committee Report and
                                           Examples of the issues that would                       could be grouped together. Where,                     Performance Graph, which would be
                                           potentially be appropriate for the                      however, the policy for an executive                  eliminated under our proposals, as
                                           company to address in given cases in                    officer is materially different, for                  discussed below, the proposed
                                           the Compensation Discussion and                         example in the case of a principal                    Compensation Discussion and Analysis
                                           Analysis include the following:                         executive officer, his or her                         would be soliciting material and would
                                              • Policies for allocating between long-              compensation would be discussed                       be filed with the Commission.
                                           term and currently paid out                             separately.                                           Therefore, it would be subject to
                                           compensation;                                                                                                 Regulations 14A or 14C and to the
                                              • Policies for allocating between cash               2. Proposed Instructions to
                                                                                                                                                         liabilities of Section 18 of the Exchange
                                           and non-cash compensation, and among                    Compensation Discussion and Analysis
                                                                                                                                                         Act.57 In addition, to the extent that the
                                           different forms of non-cash                                                                                   Compensation Discussion and Analysis
                                           compensation;                                              We are proposing instructions to
                                                                                                   make clear that the Compensation                      and any of the other disclosure
                                              • For long-term compensation, the                                                                          regarding executive officer and director
                                           basis for allocating compensation to                    Discussion and Analysis should focus
                                                                                                   on the material principles underlying                 compensation or other matters is
                                           each different form of award;                                                                                 included or incorporated by reference
                                              • For equity-based compensation,                     the company’s executive compensation
                                                                                                   policies and decisions, and the most                  into a periodic report, the disclosure
                                           how the determination is made as to
                                                                                                   important factors relevant to analysis of             would be covered by the certifications
                                           when the award is granted;
                                              • What specific items of corporate                   those policies and decisions, without                 that principal executives officers and
                                           performance are taken into account in                   using boilerplate language or repeating               principal financial officers are required
                                           setting compensation policies and                       the more detailed information set forth               to make under the Sarbanes-Oxley Act
                                           making compensation decisions;                          in the tables and related narrative                   of 2002.58
                                                                                                                                                            In adopting the current rules in 1992,
                                              • How specific elements of                           disclosures that follow. We also propose
                                                                                                                                                         the Commission took into account
                                           compensation are structured to reflect                  to include an instruction to make clear,
                                                                                                                                                         comments that the Compensation
                                           these items of the company’s                            as is currently the case, that companies
                                                                                                                                                         Committee Report should be furnished
                                           performance and the executive’s                         are not required to disclose target levels
                                                                                                                                                         rather than filed to allow for a more
                                           individual performance;                                 with respect to specific quantitative or
                                              • The factors considered in decisions                                                                      open and robust discussion in the
                                                                                                   qualitative performance-related factors
                                           to increase or decrease compensation                                                                          reports.59 Little that we see in current
                                                                                                   considered by the compensation
                                           materially;                                                                                                   Compensation Committee Reports
                                                                                                   committee or the board of directors, or
                                              • How compensation or amounts                                                                              suggests that this treatment has resulted
                                                                                                   any factors or criteria involving
                                           realizable from prior compensation (e.g.,                                                                     in such discussions, or at least the more
                                                                                                   confidential commercial or business
                                           gains from prior option or stock awards)                                                                      transparent disclosure that the
                                                                                                   information, the disclosure of which
                                           are considered in setting other elements                                                                      comments suggested would result.
                                                                                                   would have an adverse effect on the                   Further, we believe that it is appropriate
                                           of compensation (e.g., how gains from                   company, similar to the instruction with
                                           prior option or stock awards are                                                                              for companies to take responsibility for
                                                                                                   respect to the Compensation Committee                 disclosure involving board matters as
                                           considered in setting retirement                        Report today. In applying this
                                           benefits);                                                                                                    with other disclosure.
                                                                                                   instruction, we intend the standard for
                                              • The impact of accounting and tax                   companies to use when determining                     4. Proposed Elimination of the
                                           treatments of a particular form of                      whether disclosure would have an                      Performance Graph and the
                                           compensation;                                           adverse effect on the company to be the               Compensation Committee Report
                                              • The company’s equity or other                      same one that would apply when
                                           security ownership requirements or                                                                               In light of the Compensation
                                                                                                   companies request confidential                        Discussion and Analysis proposal, we
                                           guidelines (specifying applicable                       treatment of confidential trade secrets
                                           amounts and forms of ownership), and                                                                          propose to eliminate the Performance
                                                                                                   and commercial or financial information               Graph and the Compensation
                                           any company policies regarding hedging
                                                                                                   that otherwise is required to be                      Committee Report that currently are
                                           the economic risk of such ownership;
                                                                                                   disclosed in registration statements,                 required by our rules.60 The graph and
                                              • Whether the company engaged in
                                                                                                   periodic reports and other documents
                                           any benchmarking of total
                                                                                                   filed with us.56 Similarly, to the extent               57 15  U.S.C. 78r.
                                           compensation or any material element
                                           of compensation, identifying the                        a performance target has otherwise been                 58 Exchange   Act Rules 13a–14 [17 CFR 240.13a–
                                                                                                   disclosed publicly, disclosure under                  14] and 15d–14 [17 CFR 240.15d–14]. See also
                                           benchmark and, if applicable, its                                                                             Certification of Disclosure in Companies’ Quarterly
                                           components (including component                         Item 402 would be required.                           and Annual Reports, Release No. 34–46427 (Aug.
                                           companies); and                                                                                               29, 2002) [67 FR 57275], at note 35 (the
                                                                                                                                                         ‘‘Certification Release’’) (stating that ‘‘the
                                              • The role of executive officers in the                 56 See Securities Act Rule 406 [17 CFR 230.406]
                                                                                                                                                         certification in the annual report on Form 10–K or
                                                                                                   and Exchange Act Rule 24b–2 [17 CFR 240.24b–2]
                                           compensation process.
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                                                                                                   (incorporating the criteria for non-disclosure set    10–KSB would be considered to cover the Part III
                                                                                                   forth in Exemption 4 of the Freedom of Information    information in a registrant’s proxy or information
                                             55 Forward looking information in the                 Act [5 U.S.C. 552(b)(4)] and Exchange Act Rule        statement as and when filed’’).
                                                                                                                                                            59 1992 Release, at Section II.H.
                                           Compensation Discussion and Analysis would fall         80(b)(4) [17 CFR 200.80(b)(4)]). Today’s proposed
                                           with the safe harbor for disclosure of such             rules, like the current rules, would not require a       60 The Compensation Committee Report is

                                           information. See Securities Act Section 27A [15         company to seek confidential treatment under the      currently required by Item 402(k) and the
                                           U.S.C. 77z–2] and Exchange Act Section 21E [15          procedures in Securities Act Rule 406 and             Performance Graph is currently required by Item
                                           U.S.C. 78u–5]).                                         Exchange Act Rule 24b–2.                              402(l).


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                            6547

                                           the report were intended to be                          potential adverse competitive effect on                    3. Retirement and other post-
                                           intertwined and their purpose was to                    the company of their disclosure? Why or                 employment compensation, including
                                           show the relationship, if any, between                  why not? If so, what should be the                      retirement and deferred compensation
                                           compensation and corporate                              standard for exclusion? Are there any                   plans, other retirement benefits and
                                           performance, as reflected by stock price.               other items that should be excludable                   other post-employment benefits, such as
                                           Unfortunately, the Compensation                         based on potential adverse competitive                  those payable in the event of a change
                                           Committee Report today often results in                 effect on the company of their                          in control.66
                                           boilerplate disclosure that is of little                disclosure?                                                Reorganizing the tables along these
                                           benefit to investors.61 Further, given the                 • Should we retain the Performance                   themes should help investors
                                           widespread availability of stock                        Graph?                                                  understand how compensation
                                           performance information about                                                                                   components relate to each other. At the
                                                                                                   B. Compensation Tables
                                           companies, industries and indexes                                                                               same time we would retain the ability
                                           through business-related Web sites or                      We believe that much about the                       for investors to use the tables to
                                           similar sources, we believe that the                    tabular approach to eliciting                           compare compensation from year to
                                           requirement for the Performance Graph                   compensation disclosure is sound.62 We                  year and from company to company.
                                           is outdated, particularly since the                     also believe, however, that the tables                     We note that in more clearly
                                           disclosure in the Compensation                          should be reorganized and streamlined                   organizing the compensation tables to
                                           Discussion and Analysis regarding the                   to provide a clearer and more logical                   explain how the elements relate to each
                                           elements of corporate performance that                  picture of total compensation and its                   other, we may in some situations be
                                           a given company’s policies might reach                  elements for named executive officers.                  requiring disclosure of both amounts
                                           is intended to allow broader discussion                 We propose reorganizing the                             earned (or potentially earned) and
                                           than just that of the relationship of                   compensation tables and their related                   amounts subsequently paid out. This
                                           compensation to the performance of the                  narrative disclosure into three broad                   approach raises the risk of ‘‘double
                                           company as reflected by stock price.                    categories:                                             counting’’ some elements of
                                                                                                      1. Compensation with respect to the                  compensation. However, we believe the
                                           Request for Comment                                     last fiscal year (and the two preceding                 risk inherent in such double disclosure
                                              • Does the proposed Compensation                     fiscal years), as reflected in a revised                is outweighed by the clearer and more
                                           Discussion and Analysis provide                         Summary Compensation Table that                         complete picture it would provide to
                                           companies with the same flexibility as                  presents compensation paid currently or                 investors. We would encourage
                                           MD&A to provide a clear picture to                      deferred (including options, restricted                 companies to use the narrative
                                           investors?                                              stock and similar grants) and                           following the tables (and where
                                              • Are there any further changes that                 compensation consisting of current                      appropriate the Compensation
                                           we can make to avoid boilerplate                        earnings or awards that are part of a                   Discussion and Analysis) to explain
                                           disclosure about executive                              plan, and as supplemented by two                        how disclosures relate to each other in
                                           compensation?                                           tables providing back-up information for
                                              • Is there any significant impact by                                                                         their particular circumstances.
                                                                                                   certain data in the Summary
                                           not having the report over the names of                 Compensation Table; 63                                  1. Compensation to Named Executive
                                           the compensation committee of the                          2. Holdings of equity-based interests                Officers in the Last Three Completed
                                           board of directors? If so, please explain               that relate to compensation or are                      Fiscal Years—The Summary
                                           in detail.                                              potential sources of future                             Compensation Table and Related
                                              • Would any significant impact result                compensation, focusing on                               Disclosure
                                           from treating the Compensation                          compensation-related equity-based
                                           Discussion and Analysis as filed and not                                                                          Under today’s proposals, the
                                                                                                   interests that were awarded in prior                    Summary Compensation Table would
                                           furnished? A commenter that prefers                     years 64 and are ‘‘at risk,’’ as well as
                                           furnishing over filing should describe                                                                          continue to serve as the principal
                                                                                                   recent realization on these interests,                  disclosure vehicle regarding executive
                                           any benefits that would be obtained by                  such as through vesting of restricted
                                           treating the material as furnished. In                                                                          compensation. This table, with the
                                                                                                   stock or the exercise of options and                    proposed revisions, would show the
                                           particular, such a commenter should                     similar instruments; 65 and
                                           describe those benefits in the context of                                                                       named executive officers compensation
                                           the expected benefits of the                               62 The tabular disclosure and related narrative
                                                                                                                                                           for each of the last three years, whether
                                           Commission’s decision in 1992 to treat                  disclosure under proposed Item 402 would apply,
                                                                                                                                                           or not actually paid out. Consistent with
                                           the report of the Compensation                          as does existing Item 402, to named executive           current requirements, the revised
                                           Committee as furnished and should                       officers. As discussed below in Section II.B.6.a., we   Summary Compensation Table would
                                                                                                   are proposing certain changes to the definition of      continue to require disclosure of
                                           address whether and why those benefits                  named executive officer.
                                           were achieved or not achieved.                             63 The two tables that would supplement the
                                                                                                                                                           compensation for each of the company’s
                                              • Are there any other specific items                 Summary Compensation Table would be the Grants          last three completed fiscal years.67
                                           we should list in the rule as possibly                  of Performance-Based Awards Table, discussed
                                                                                                   below in Section II.B.2.a., and the Grants of All       Stock Vested Table discussed below in Section
                                           material information? Are there any                     Other Equity Awards Table, discussed below in           II.B.4.b.
                                           items that are listed that should not be?               Section II.B.2.b. A proposed narrative disclosure          66 The proposed disclosure regarding retirement
                                              • Are there any items that we should                 requirement accompanying these three tables is          and post-employment compensation would be
                                           explicitly mandate be disclosed by                      discussed below in Section II.B.3.                      required in the Retirement Plan Potential Annual
                                                                                                      64 Under the proposals, these interests would be     Payments and Benefits Table, discussed below in
                                           every issuer?
                                                                                                   disclosed as current compensation for those prior       Section II.B.5.a., the Nonqualified Defined
                                              • Should performance targets
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                                                                                                   years.                                                  Contribution and Other Deferred Compensation
                                           continue to be excludable based on the                     65 Information regarding holdings of such equity-    Plans Table, discussed below in Section II.B.5.b.,
                                                                                                   based interests that relate to compensation would       and the narrative disclosure requirement for other
                                             61 See Martin D. Mobley, Compensation                 be disclosed in the Outstanding Equity Awards at        potential post-employment payments discussed
                                           Committee Reports Post-Sarbanes-Oxley:                  Fiscal Year-End Table, discussed below in Section       below in Section II.B.5.c.
                                           Unimproved Disclosure for Executive                     II.B.4.a. Information regarding realization on             67 Current Instruction to Item 402(b), permitting

                                           Compensation Policies and Practices, 2005 Colum.        holdings of equity-related interests would be           exclusion of information for fiscal years prior to the
                                           Bus. L. Rev. 111 (2005).                                required to be disclosed in the Option Exercises and                                                 Continued



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                                           6548                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                             However, the proposals would require                            table. As described in greater detail                      disclosure would follow the three
                                           disclosure of a figure representing total                         below, the proposals also provide for                      tables, providing disclosure of material
                                           compensation, as reflected in other                               two supplementary tables disclosing                        information necessary to an
                                           columns of the Summary Compensation                               additional information about grants of                     understanding of the information
                                           Table, and would simplify the                                     performance-based awards and all other                     disclosed in the tables.
                                           presentation from that in the current                             equity awards, respectively. Narrative

                                                                                                                   SUMMARY COMPENSATION TABLE
                                                                                                                                                                                               Non-stock        All other
                                                                                                                                                                Stock           Option         incentive
                                                                                                           Total           Salary            Bonus                                                             compensa-
                                            Name and principal position                     Year                                                               awards           awards         plan com-
                                                                                                            ($)             ($)               ($)                                                                  tion
                                                                                                                                                                 ($)              ($)          pensation            ($)
                                                                                                                                                                                                   ($)

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

                                           PEO 68 ..................................               —
                                                                                                   —
                                                                                                   —
                                           PFO 69 ..................................               —
                                                                                                   —
                                                                                                   —
                                           A ...........................................           —
                                                                                                   —
                                                                                                   —
                                           B ...........................................           —
                                                                                                   —
                                                                                                   —
                                           C ...........................................           —
                                                                                                   —
                                                                                                   —



                                           Request for Comment                     be disclosed in dollars and that a total                                               • Should total compensation be
                                                                                   of all compensation be provided.70 The                                               calculated in a different manner from
                                              • Should the Summary Compensation
                                                                                   new column disclosing total                                                          that proposed? For example, with
                                           Table continue as it currently does to
                                                                                   compensation would appear as the first                                               respect to stock-based and option-based
                                           require disclosure of compensation for
                                                                                   column providing compensation                                                        awards, should exercise or vesting date
                                           each of the company’s last three fiscal
                                                                                   information—column (c).71 This column                                                valuations be used instead?
                                           years, or is only the last completed                                                                                           • Is the proposed new instruction
                                                                                   would aggregate the total dollar value of
                                           fiscal year necessary in light of the                                                                                        which would direct that all
                                                                                   each form of compensation quantified in
                                           availability of historical data on                                                                                           compensation values are to be reported
                                                                                   the columns that would follow it
                                           compensation through the                                                                                                     in U.S. dollars necessary? Are there
                                                                                   (columns (d) through (i)). The proposed
                                           Commission’s EDGAR system and other                                                                                          particular circumstances we should
                                                                                   ‘‘Total’’ column would respond to
                                           sources?                                                                                                                     address regarding disclosure of
                                                                                   concerns that investors, analysts and
                                              • Should we require all of the       other users of Item 402 disclosure                                                   compensation in foreign currencies?
                                           proposed disclosures discussed below    cannot compute aggregate amounts of
                                           in addition to those in the Summary                                                                                          b. Salary and Bonus Columns
                                                                                   compensation using current disclosure
                                           Compensation Table, or does the         in a manner that is accurate or is                                                      The next columns we are proposing
                                           Summary Compensation Table itself       comparable across years or companies.                                                are the salary and bonus columns
                                           provide an adequate picture of                                                                                               (columns (d) and (e), respectively),
                                           compensation? Is there some other       Request for Comment                                                                  which would be retained substantially
                                           combination of the Summary                                                                                                   in their current form. However, we
                                           Compensation Table with other              • Should we include a requirement to                                              propose certain changes that should
                                           proposed disclosures that would fulfill disclose a total compensation amount?                                                give an investor a clearer picture of the
                                           our objectives?                            • Will a total compensation number                                                total amount earned, the amount
                                                                                   provide investors with meaningful                                                    deferred for the year, and the total
                                           a. Total Compensation Column
                                                                                   information about compensation? If not,                                              amount of deferred compensation that
                                              We propose to modify the Summary     why? Would disclosure of a total                                                     may be paid out at a later date.
                                           Compensation Table to provide a clearer compensation number result in any                                                       Compensation that is earned, but for
                                           picture of total compensation. We       unintended consequences? If so, how                                                  which payment will be deferred, would
                                           propose requiring that all compensation can they be mitigated?                                                               be included in the salary, bonus or other

                                           last completed fiscal year if the registrant was not                 68 ‘‘PEO’’ refers to principal executive officer. See   disclosed in per share increments rather than in
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                                           a reporting company pursuant to Exchange Act                      Section II.B.6.a. below for a description of the           dollar amounts. The instruction would further
                                           Sections 13(a) or 15(d) at any time during that year,             proposed named executive officers for whom                 require, where compensation was paid or received
                                           unless the registrant previously was required to                  compensation disclosure would be required.                 in a different currency, footnote disclosure
                                           provide information for any such year in response
                                                                                                                69 ‘‘PFO’’ refers to principal financial officer.       identifying that currency and describing the rate
                                                                                                                70 Proposed Instruction 2 to Item 402(c) (requiring     and methodology used for conversion to dollars.
                                           to a Commission filing requirement, would be                                                                                   71 Columns (a) and (b) would, as is currently the
                                           retained and redesignated as proposed Instruction                 all compensation values in the Summary
                                                                                                             Compensation Table to be reported in dollars).             case, specify the executive officer and the year in
                                           1 to Item 402(c).
                                                                                                             Currently, some stock-based compensation is                question.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                            6549

                                           column, as appropriate.72 A new                         amount and a new total compensation                     Payment (FAS 123R) for financial
                                           instruction, applicable to the entire                   figure including that salary or bonus                   reporting purposes. Stock awards
                                           Summary Compensation Table, would                       amount.                                                 subject to performance-based conditions
                                           provide that if receipt of any amount of                                                                        would also be included in this column
                                                                                                   Request for Comment
                                           compensation is currently payable                                                                               to ensure consistent reporting of stock
                                           (which must be included in the                            • Is the proposed presentation of                     awards and to ensure their inclusion in
                                           appropriate column) but has been                        deferred compensation in the Summary                    the proposed Summary Compensation
                                           deferred for any reason, the amount so                  Compensation Table and related                          Table.77
                                           deferred must be disclosed in a footnote                footnotes, along with the proposals                        Awards of options, stock appreciation
                                           to the applicable column.73 As                          outlined below, the best means for                      right grants, and similar stock-based
                                           described below, the amount deferred                    communicating the portion of                            compensation instruments that have
                                           would also generally be reflected as a                  compensation that is deferred?                          option-like features (proposed column
                                           contribution in the deferred                              • Are there ways that we could better                 (g)) would be disclosed in a manner
                                           compensation presentation.74 The new                    clarify how the amounts that would be                   similar to the proposed treatment of
                                           footnote disclosure of amounts deferred                 identified as deferred in a footnote to                 stock and other stock-based awards.78
                                           would help to clarify the extent to                     the Summary Compensation Table                          Instead of the current disclosure of the
                                           which amounts disclosed in the                          relate to the amounts that would be                     number of securities underlying the
                                           proposed Nonqualified Defined                           required in the Nonqualified Defined                    awards, this column would require
                                           Contribution and Other Deferred                         Contribution and Other Deferred                         disclosure of the grant date fair value of
                                           Compensation Plans Table described                      Compensation Plans Table?                               the award as determined pursuant to
                                           below represent compensation already                      • Is the proposed change to Form 8–                   FAS 123R for financial reporting
                                           reported, rather than additional                        K to eliminate the delay in disclosing                  purposes. In order to calculate a total
                                           compensation.                                           salary or bonus when they cannot be                     dollar amount of compensation, the
                                              We are also proposing a change                       calculated as of the most recent                        value rather than the number of
                                           eliminating the delay that exists under                 practicable date appropriate?                           securities underlying an award must be
                                           current rules where salary and bonus for                c. Plan-Based Awards                                    used. The FAS 123R valuation would be
                                           the most recent fiscal year are                                                                                 used whether the award itself is in the
                                           determined following compliance with                       The next three proposed columns—                     form of stock, options or similar
                                           Item 402 disclosure. Under our                          Stock Awards, Option Awards and Non-                    instruments or the award is settled in
                                           proposal, where salary and bonus                        Stock Incentive Plan Compensation —                     cash but the amount of payment is tied
                                           cannot be calculated as of the most                     cover plan-based awards.                                to performance of the company’s stock.
                                           recent practicable date, a current report               i. Stock Awards and Option Awards                       We propose to eliminate the current
                                           under Item 5.02 of Form 8–K would be                    Columns                                                 requirement in the Options/SAR Grants
                                           triggered by a payment, decision or                                                                             in Last Fiscal Year Table to report the
                                                                                                      The Stock Awards Column (proposed                    potential realizable value of each option
                                           other occurrence as a result of which
                                                                                                   column (f)) would disclose stock-related                grant under 5% or 10% increases in
                                           such amounts become calculable in
                                                                                                   awards that derive their value from the                 value or the present value of each grant
                                           whole or part.75 The Form 8–K would
                                                                                                   company’s equity securities or permit                   (computed under any option pricing
                                           include disclosure of the salary or bonus               settlement by issuance of the company’s                 model),79 because these alternative
                                              72 This is the case today for salary and bonus.
                                                                                                   equity securities, such as restricted                   disclosures would no longer be
                                           This aspect of current Instruction 1 to Item            stock, restricted stock units, phantom                  necessary if the grant date fair value of
                                           402(b)(2)(iii)(A) and (B) will be expanded and          stock, phantom stock units, common                      equity-based awards is included in the
                                           redesignated as Proposed Instruction 4 to Item          stock equivalent units or other similar
                                           402(c).                                                                                                         Summary Compensation Table.
                                              73 Currently, the requirement is triggered only if
                                                                                                   instruments that do not have option-like                   A new instruction would require a
                                           the officer elects the deferral. We propose to revise   features.76 Valuation would be based on                 footnote referencing the discussion of
                                           this to cover all deferrals no matter who has           the grant date fair value of the award                  the relevant assumptions in the notes to
                                           initiated them.                                         determined pursuant to Financial                        the company’s financial statements or to
                                              74 See Section II.B.5.b., describing the
                                                                                                   Accounting Standards Board Statement                    the discussion of relevant assumptions
                                           Nonqualified Defined Contribution and Other
                                           Deferred Compensation Plans Table. Disclosure of
                                                                                                   of Financial Accounting Standards No.                   in the MD&A.80 The same proposed
                                           these amounts as contributions would be required        123 (revised 2004), Share-Based                         instruction would also provide that the
                                           for nonqualified deferred compensation plans. This                                                              referenced sections will be deemed to be
                                           disclosure would not be required for qualified             76 Generally speaking, a restricted stock award is
                                           plans. Nonqualified deferred compensation plans         an award of stock subject to vesting conditions,
                                                                                                                                                           part of the disclosure provided pursuant
                                           and arrangements provide for the deferral of            such as performance-based conditions or conditions      to Item 402. The referenced sections
                                           compensation that does not satisfy the minimum          based on continued employment for a specified           containing this disclosure are required
                                           coverage, nondiscrimination and other rules that        period of time. This type of award is referred to an    in the company’s annual report to
                                           ‘‘qualify’’ broad-based plans for favorable tax         ‘‘nonvested equity shares’’ in FAS 123R. Phantom
                                           treatment under the Internal Revenue Code.              stock, phantom stock units, common stock                   77 These performance-based stock awards can
                                              75 Proposed Instruction 3 to Item 5.02(e) of Form    equivalent units and other similar awards are
                                           8–K and proposed Instruction 1 to Item 402(c)(2)(iv)    typically awards where an executive obtains a right     currently be reported at the company’s election as
                                           and (v). Currently, in the event that such amounts      to receive payment in the future of an amount based     incentive plan awards. See current Instruction 1 to
                                           are not determinable at the most recent practicable     on the value of a hypothetical, or notional, amount     Item 402(b)(2)(iv). Our proposal would eliminate
                                           date, they are generally reported in the annual         of shares of common equity (or in some cases stock      this option. See the discussion of what are
                                           report on Form 10–K or proxy statement for the          based on that value). To the extent that the terms      considered performance-based conditions in note
                                           following fiscal year. We believe providing the         of phantom stock, phantom stock units, common           87, below.
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                                                                                                                                                              78 A stock appreciation right usually gives the
                                           information more quickly is appropriate and are         stock equivalents or other similar awards include
                                           therefore proposing the use of a current report on      option-like features, the awards would be required      executive the right to receive the value of the
                                           Form 8–K. Proposed Instruction 1 to Item                to be included in the Option Awards column.             increase in the price of a specified number of shares
                                           402(c)(2)(iv) and (v) would require that the            Currently, restricted stock awards are valued in the    over a specified period of time. These awards may
                                           company disclose in a footnote that the salary or       Summary Compensation Table by multiplying the           be settled in case or in shares.
                                                                                                                                                              79 Current Item 402(c)(2)(vi).
                                           bonus is not calculable through the latest              closing market price of the company’s unrestricted
                                           practicable date and the date that the salary or        stock on the date of grant by the number of shares         80 Proposed Instruction 1 to Item 402(c)(2)(vi) and

                                           bonus is expected to be determined.                     awarded.                                                (vii).


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                                           6550                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           shareholders that must precede or                         categories.84 New instructions would                     award has a performance condition,
                                           accompany the company’s proxy                             require footnote identification and                      then the details on the estimated future
                                           statement.81 In the case of Internet                      quantification of all earnings, whether                  payouts will be disclosed in a second
                                           disclosure of proxy materials,                            the earnings were paid during the fiscal                 separate supplemental table covering
                                           companies could provide hyperlinks                        year, payable during the period but                      grants of performance-based awards.88
                                           from the proxy statement to the                           deferred, or payable by their terms at a
                                                                                                                                                              Request for Comment
                                           referenced sections contained in the                      later date but earned during the year.85
                                           annual report.82                                          Previously awarded options or                               • Is the proposed presentation of
                                              Under FAS 123R, the compensation                       freestanding stock appreciation awards                   stock awards that do not have option-
                                           cost is initially measured based on the                   that the company repriced or otherwise                   like features in the Summary
                                           grant date fair value of an award.83 The                  materially modified during the last                      Compensation Table the best means for
                                           key measurement principle behind the                      fiscal year would be disclosed based on                  presenting restricted stock and similar
                                           accounting standard, measuring stock-                     the total fair value of the award as so                  awards?
                                           based payments at grant date fair value,                  modified.86                                                 • Is FAS 123R the appropriate
                                           is also followed in our proposals. Under                     If the award has no performance                       approach for valuing equity-based
                                           FAS 123R, the compensation cost                           conditions, but instead vests with the                   awards, including restricted stock,
                                           calculated as the fair value is generally                 passage of time and continued                            restricted stock units, phantom stock,
                                           recognized for financial reporting                        employment, then the number of shares                    phantom stock units, common stock
                                           purposes over the period in which the                     underlying the award and other details                   equivalent units, options, stock
                                           employee is required to provide service                   regarding the award would be disclosed                   appreciation rights and other similar
                                           in exchange for the award (generally the                  in a separate table covering grants of                   awards for purposes of Item 402
                                           vesting period). Under our proposals,                     equity awards supplementing the                          disclosure? If not, why not and what
                                           the compensation cost calculated as the                   Summary Compensation Table.87 If the                     other valuation methods would be
                                           grant date fair value will be shown as                                                                             appropriate? Would any other valuation
                                           compensation in the year in which the                        84 These earnings are currently reportable in the     method provide the same
                                                                                                     Other Annual Compensation or All Other                   comparability? If a different approach
                                           grant is made. We believe that this                       Compensation columns of the Summary
                                           approach is more consistent with the                      Compensation Table. Current Item
                                                                                                                                                              were used, would investors be confused
                                           purpose of executive compensation                         402(b)(2)(iii)(C)(2) requires disclosure of earnings     by differences between the grant date
                                           disclosure. We are in effect proposing                    on restricted stock, options, and SARs paid during       fair value for financial reporting
                                                                                                     the fiscal year (or payable during that period but       purposes and the value in the
                                           an approach that subscribes to the                        deferred at the election of the named executive
                                           measurement method of FAS 123R                            officer), to the extent those earnings are above-
                                                                                                                                                              compensation tables? 89
                                           based on grant date fair value, but that                  market or preferential. The proposal would require          • Should the expected term
                                           also provides for immediate disclosure                    disclosure of all such earnings, rather than merely      assumption used in computing the grant
                                           of compensation as preferable for                         any above-market or preferential portion. Current        date fair value for financial statement
                                                                                                     item 402(b)(2)(iii)(C)(3) requires similar disclosure    purposes under FAS 123R also be used
                                           compensation reporting purposes to the                    of all earnings on long-term incentive plan
                                           timing of recognition of the                              compensation. See also current Item 402(b)(2)(v)(B)      in measuring the value of an individual
                                           compensation cost for the company’s                       and (C).                                                 named executive officer’s compensation
                                           financial statement reporting purposes.
                                                                                                        85 Proposed Instruction 3 to Item 402(c)(2)(vi) and   for the purposes of Item 402? Or, should
                                                                                                     (vii) and Proposed Instruction 2 to Item                 an expected term assumption used to
                                              To consolidate related elements of                     402(c)(2)(viii).
                                           compensation, the Stock Awards and                           86 See current instruction 3 to Item 402(b)(2)(iv)
                                                                                                                                                              determine an individual named
                                           Option Awards columns would also                          and proposed Instruction 2 to Item 402(c)(2)(vi) and     executive officer’s compensation be
                                           require disclosure of the earnings on                     (vii). Under FAS 123R, unlike under our proposal,        used if it differs from the expected term
                                           outstanding awards in the respective                      only the incremental compensation cost is                assumption used for FAS 123R
                                                                                                     recognized for a modified award.                         purposes? 90 Should companies use the
                                                                                                        87 See Section II.B.2.b., discussing the Grants of
                                             81 See   Exchange Act Rule 14a-3 [17 CFR 240.14a-       All Other Equity Awards Table required by
                                           3].                                                       proposed Item 402(c). As defined in Appendix E of        exercisability, or other pertinent factors used in
                                             82 We   recently proposed rules that would allow        FAS 123R, a performance condition is ‘‘a condition       determining the fair value of an award under a
                                           companies and other persons to use the Internet to        affecting the vesting, exercisability, exercise price    share-based payment arrangement that relates to the
                                           satisfy proxy material delivery requirements.             or other pertinent factors used in determining the       achievement of (a) a specified price of the issuer’s
                                           Internet Availability of Proxy Materials, Release No.     fair value of an award that relates to both (a) an       shares or a specified amount of intrinsic value
                                           34–52926 (Dec. 8, 2005) [70 FR 74597].                    employee’s rendering service for a specified (either     indexed solely to the issuer’s shares or (b) a
                                              83 Under FAS 123R, the classification of an award      explicitly or implicitly) period of time and (b)         specified price of the issuer’s shares in terms of a
                                           as an equity or liability award is an important           achieving a specified performance target that is         similar (or index of similar) equity security
                                           aspect of the accounting because the classification       defined solely by reference to the employer’s own        (securities).’’
                                                                                                                                                                 88 See Section II.B.2.a., discussing the Grants of
                                           will affect the measurement of compensation cost.         operations (or activities). Attaining a specified
                                           Awards with cash-based settlement, repurchase             growth rate in return on assets, obtaining regulatory    Performance-Based Awards Table.
                                                                                                                                                                 89 See, e.g., Jonathan Weil and Betsy McKay, Coke
                                           features, or other features that do not allow an          approval to market a specified product, selling
                                           employee to bear the risks and rewards normally           shares in an initial public offering or other            Developed a New Way to Value Options, But
                                           associated with share ownership for a specified           financing event, and a change in control are             Company Will Return to its Classic Formula, Wall
                                           period of time would be classified as liability           examples of performance conditions for puropses of       St. J., Mar. 7, 2003, at C3 (highlighting potential
                                           awards under FAS 123R. For an award classified as         this Statement. A performance target also may be         issue of using one valuation methodology for
                                           an equity award under FAS 123R, the compensation          defined by reference to the same performance             financial statements and another for executive
                                           cost recognized is fixed for a particular award, and      measure of another entity or group of entities. For      compensation disclosure).
                                           absent modification, is not revised with subsequent       example, attaining a growth rate in earnings per            90 FAS 123R requires a company to aggregate

                                           changes in market prices or other assumptions used        share that exceeds the average growth rate in            individuals receiving awards into relatively
                                           for purposes of the valuation. In contrast, liability     earnings per share of other entities in the same         homogeneous groups with respect to exercise and
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                                           awards are initially measured at fair value on the        industry is a performance condition for purposes of      post-vesting employment termination behaviors for
                                           grant date, but for purposes of recognition in            this Statement. A performance target might pertain       the purpose of determining expected term; for
                                           financial statement reporting are then re-measured        either to the performance of the enterprise as a         example executives and non-executives. Our
                                           at each reporting date through the settlement date        whole or to some part of the enterprise, such as a       proposals today are not intended to change the
                                           under FAS 123R. These re-measurements would not           division or an individual employee.’’ An award also      method used to value employee share options for
                                           be the basis for executive compensation disclosure        would be considered to have a performance                purposes of FAS 123R or to affect the judgments as
                                           unless the award has been modified, as described          condition if it is subject to a market condition,        to reasonable groups for purposes of determining
                                           later in this proposal.                                   which is ‘‘a condition affecting the exercise price,     the expected term assumption required by GAS


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                                                             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                            6551

                                           full term rather than an expected term                     a company’s equity securities; those                   performance contingencies, is our
                                           assumption for calculations for named                      awards would instead be disclosed in                   approach to include the amounts in the
                                           executive officers? Would the                              the Stock Awards and Option Awards                     Summary Compensation Table when
                                           complexity of such an approach for                         columns discussed above.92                             earned appropriate? Are there particular
                                           investors or the additional burden on                      Performance-based compensation under                   models or standards that would provide
                                           companies outweigh any advantages,                         a long-term plan that is not tied to the               a basis for measuring the value of these
                                           such as possible increased                                 performance of the company’s stock (but                types of awards at grant date that we
                                           comparability among companies, of                          instead is tied to other measures such as              should consider incorporating into our
                                           adjusting assumptions?                                     a return on assets, return on equity,                  rules?
                                              • Is the timing of reporting stock-                     performance of a division, or other such                 • Should earnings on outstanding
                                           based compensation in our proposals                        measures) would be disclosed in the                    awards be reported as proposed in the
                                           the best approach? Should stock-based                      Summary Compensation Table in the                      applicable award column or should they
                                           compensation instead be reflected in                       year when the relevant specified                       be reported in another way, such as in
                                           Item 402 according to the same time                        performance criteria under the plan are                separate or different columns?
                                           schedule by which it is recognized for                     satisfied and the compensation earned,                 d. All Other Compensation Column
                                           a company’s financial statement                            whether or not payment is actually
                                           reporting purposes?                                        made to the named executive officer in                    The final column in the Summary
                                              • Should the valuation method and                       that year. The grant of an award                       Compensation Table would disclose all
                                           all of the assumptions regarding the                       (providing for future compensation if                  other compensation not required to be
                                           valuation also be disclosed in the proxy                   such performance measures are                          included in any other column. This
                                           statement when they are required to be                     satisfied) under such a plan would be                  approach would allow the capture of all
                                           disclosed, described and analyzed                          disclosed in the supplemental Grants of                current compensation in the Summary
                                           elsewhere in a document furnished to                       Performance-Based Awards Table in the                  Compensation Table and also would
                                           shareholders, including in the notes to                    year of grant, which would generally be                allow a total compensation calculation.
                                           the financial statements?                                  some year prior to the year in which                   We confirm that disclosure of all
                                              • We propose treating a modification                    performance-based compensation under                   compensation would clearly be required
                                           of an award as a new award and                             the plan is reported in the Summary                    under the proposals.95
                                           requiring disclosure of the total grant                                                                              We propose to clarify the disclosure
                                                                                                      Compensation Table.93 Because there is
                                           date fair value at the time of                                                                                    required in the All Other Compensation
                                                                                                      not one clearly required or accepted
                                           modification. Would it be more                                                                                    Column (proposed column (i)) in two
                                                                                                      standard for measuring the value at
                                           appropriate to require only disclosure of                                                                         principal respects:
                                                                                                      grant date of these non-stock based                       • Consistent with the requirement
                                           incremental compensation as is the
                                                                                                      performance-based awards that reflects                 that the Summary Compensation Table
                                           approach under FAS 123R?
                                                                                                      the applicable performance
                                              • Should we eliminate as proposed                                                                              disclose all compensation, we would
                                           the current instruction allowing                           contingencies, as there is for equity-                 state explicitly that compensation not
                                           performance-based stock awards to be                       based awards with FAS 123R, we do not                  properly reportable in the other
                                           reported at the company’s election as                      propose to include such a value in the                 columns reporting specified forms of
                                           incentive plan awards? If not, please                      Summary Compensation Table, but                        compensation must be reported in this
                                           explain whether the availability of this                   instead would continue the current                     column; and
                                           election is helpful to and not confusing                   disclosure format of reflecting these                     • To simplify the Summary
                                           to investors.                                              items of compensation when earned.94                   Compensation Table and eliminate
                                                                                                         As with the Stock Awards and Option                 confusing distinctions between items
                                           ii. Non-Stock Incentive Plan                               Awards columns, earnings on                            currently reported as ‘‘Annual’’ and
                                           Compensation Column                                        outstanding awards of other incentive                  ‘‘Long Term’’ compensation, we would
                                              We propose that the Non-Stock                           plans would also be included in the                    move into this column all items
                                           Incentive Plan Compensation column                         Non-Stock Incentive Plan Compensation                  currently reportable as ‘‘Other Annual
                                           (proposed column (h)) would report the                     column.                                                Compensation.’’ 96
                                           dollar value of all other amounts earned                   Request for Comment                                       We also propose that each item of
                                           during the fiscal year pursuant to                                                                                compensation included in the All Other
                                                                                                        • Since there is not one clearly                     Compensation column that exceeds
                                           incentive plans.91 This column would
                                                                                                      required or accepted standard for                      $10,000 be separately identified and
                                           be limited to awards where the relevant
                                                                                                      measuring the value at grant date of                   quantified in a footnote. We believe that
                                           performance measure under the
                                                                                                      those cash awards that reflect                         the $10,000 threshold balances our
                                           incentive plan is not based on the price
                                           of the company’s equity securities or the                                                                         desire to avoid disclosure of clearly de
                                                                                                        92 Awards disclosed in this column are not
                                           award may not be settled by issuance of                    covered by FAS 123R for financial reporting
                                                                                                                                                             minimis matters against the interests of
                                                                                                      purposes because they do not involve share-based       investors in the nature of items
                                           123R. Under our proposals, where a company uses            payment arrangements. Awards that involve share-       comprising compensation. Each item of
                                           more than one group, the measurement of grant date         based payment arrangements would be disclosed in       compensation less than that amount
                                           fair value for purposes of Item 402 would be               the Stock Awards or Option Awards columns, as
                                                                                                      appropriate.
                                                                                                                                                             would be included in the column (other
                                           derived using the expected term assumption for the
                                           group that includes the named executive officers (or         93 See Section II.B.2.a., discussing the Grants of   than aggregate perquisites and other
                                           the group that includes directors for purposes of          Performance-Based Awards Table. Under the
                                           proposed Item 402(l)).                                     proposals, once the disclosure has been provided in      95 The only exception, as discussed below, would
                                              91 Proposed Item 402(c)(2)(viii). An incentive          the Summary Compensation Table when the                be perquisites and personal benefits if they
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                                           plan generally provides for compensation intended          specified performance criteria have been satisfied     aggregated less than $10,000 for a named executive.
                                           to serve as an incentive for performance to occur          and the compensation earned, and the grant of the      The 1992 Release, at Section II.A.4, also noted ‘‘the
                                           over a specific period, whether such performance           award has been disclosed in the Grants of              revised item includes an express statement that it
                                           is measured by reference to financial performance          Performance-Based Awards Table, no further             requires disclosure of all compensation to the
                                           of the company or an affiliate, the company’s stock        disclosure would be required under proposed Item       named executive officers and directors for services
                                           price, or any other measure. See proposed Item             402 when payment is actually made to the named         rendered in all capacities to the registrant and its
                                           402(a)(6)(iii) for definitions of ‘‘incentive plan’’ and   executive officer.                                     subsidiaries.’’ See also current Item 402(a)(2).
                                           ‘‘non-stock incentive plan.’’                                94 Current Items 402(b)(2)(iv)(C) and 402(e).          96 Current Item 402(b)(2)(iii)(c).




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                                           6552             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           personal benefits less than $10,000 as                    compensation that is deferred on a basis                understanding of the company’s
                                           discussed below), but would not be                        that is not tax-qualified or should we                  compensation obligations to named
                                           required to be identified by type and                     require disclosure only of above-market                 executive officers, given that defined
                                           amount.97 Items that would be disclosed                   or preferential earnings? If the latter,                benefit plans guarantee what can be a
                                           in the All Other Compensation column                      please explain why such an approach is                  lifetime stream of payments and allocate
                                           would include, but would not be                           more useful or informative for investors                risk of investment performance to the
                                           limited to, the items discussed below.                    than our proposed approach.                             company and its shareholders. In
                                           Request for Comment                                                                                               addition, commentators have noted that
                                                                                                     ii. Increase in Pension Value
                                                                                                                                                             the absence of such a disclosure
                                              • Should all compensation no matter                       We propose requiring in the All Other                requirement creates an incentive to shift
                                           how de minimis be required to be                          Compensation Column the aggregate of                    compensation to pensions, results in the
                                           disclosed? Will companies be able to                      increase in actuarial value to the                      understatement of non-performance-
                                           track this information without undue                      executive officer of defined benefit and                based compensation, and distorts pay
                                           burden? Is $10,000 the appropriate                        actuarial plans (including supplemental                 comparisons between executives and
                                           threshold for separate identification and                 plans) accrued during the year.103                      between companies.
                                           quantification?                                              An instruction would specify that this
                                                                                                     disclosure applies to each plan that                    Request for Comment
                                           i. Earnings on Deferred Compensation
                                                                                                     provides for the payment of retirement                    • Is disclosure of any additional
                                              We propose requiring disclosure in                     benefits, or benefits that will be paid                 information necessary to provide
                                           the All Other Compensation column of                      primarily following retirement,                         investors with meaningful information
                                           all earnings on compensation that is                      including but not limited to tax-                       about the compensation earned
                                           deferred on a basis that is not tax-                      qualified defined benefit plans and                     annually through these plans?
                                           qualified, including non-tax qualified                    supplemental employee retirement                          • Is there any particular form of
                                           defined contribution retirement plans.98                  plans, but excluding defined                            defined benefit or actuarial plan for
                                           Currently, these earnings must be                         contribution plans.104 The retirement                   which the proposed disclosure format is
                                           disclosed only to the extent of any                       section, discussed below, would                         not suitable? If so, how could the
                                           portion that is ‘‘above-market or                         provide more information regarding                      proposed disclosure requirement be
                                           preferential.’’ 99 This limitation has                    these covered plans.105 In contrast to                  adapted for such plans?
                                           generated criticism that Item 402                         defined contribution plans, for which                     • Should this disclosure instead be
                                           permits companies to avoid disclosure                     the Summary Compensation Table                          provided as a separate column in the
                                           of substantial compensation.100                           requires disclosure of company                          Summary Compensation Table?
                                              Separate footnote identification and                   contributions,106 Item 402 does not                       • Is the aggregate increase in accrued
                                           quantification of all such earnings                                                                               actuarial value the best measure for
                                                                                                     currently require disclosure of the
                                           would be required if the amount                                                                                   disclosing annual compensation earned
                                                                                                     annual increase in value of defined
                                           exceeds $10,000.101 A company would                                                                               under defined benefit and actuarial
                                                                                                     benefit plans, such as pension plans, in
                                           be permitted to identify by footnote the                                                                          plans? If not, why? What other method
                                                                                                     which the named executive officers
                                           portion of any earnings that it                                                                                   should be used?
                                                                                                     participate.107 The annual increase in
                                           considered to be paid at an above-                                                                                  • Rather than requiring disclosure of
                                                                                                     actuarial value of these plans may be a
                                           market rate, provided that the footnote                                                                           the value based on the executive
                                                                                                     significant element of compensation
                                           explained the company’s criteria for                                                                              officer’s benefit, should we require
                                                                                                     that is earned on an annual basis, thus
                                           determining the portion considered                                                                                disclosure based on the company’s cost
                                                                                                     we believe it is appropriate to include
                                           ‘‘above-market.’’ 102                                                                                             for the plan? Under our proposals,
                                                                                                     these values in the computation of total
                                           Request for Comment                                       compensation.                                           disclosure of assumptions would be
                                                                                                        Such disclosure is necessary to permit               considered by companies in the
                                             • Should we require, as proposed,
                                                                                                     the Summary Compensation Table to                       narrative disclosure following the
                                           disclosure of all earnings on
                                                                                                     reflect total compensation for the year.                Summary Compensation Table and
                                              97 See Section II.B.1.d.iii. regarding separate        Such disclosure would also permit a full                supplementary tables. Are there other
                                           standards for identification of perquisites and other                                                             preferable approaches? Should we
                                           personal benefits.                                          103 Proposed   Item 402(c)(2)(ix)(G).                 otherwise require disclosure of any of
                                              98 Proposed Item 402(c)(2)(ix)(B).                       104 Proposed   Instruction 6 to Item 402(c)(2)(ix).   the details of the calculation?
                                              99 Current Items 402(b)(2)(iii)(C)(2) and              Defined benefit plans include, for example, cash          • Is it possible to provide meaningful
                                           402(b)(2)(v)(B). An instruction specifies that interest   balance plans in which the retiree’s benefit may be     disclosure about total compensation
                                           is above-market only if the rate exceeds 120% of the      determined by the amount represented in an
                                           applicable federal long-term rate. Furthermore,           account rather than based on a formula referencing      absent tabular disclosure of the
                                           earnings disclosure is currently required in the          salary while still employed.                            compensation earned annually through
                                           Other Annual Compensation column or the All                  105 See Section II.B.5.a., discussing the proposed   these plans? If so, how? Would such an
                                           Other Compensation column, depending upon                 Retirement Plan Potential Annual Payments and           approach be preferable?
                                           when paid or payable, complicating the preparation        Benefits Table.
                                           process and generating confusion among users of              106 Current Item 402(b)(2)(v)(D), which requires     iii. Perquisites and Other Personal
                                           the Summary Compensation Table.                           annual registrant contributions or other allocations
                                              100 See, e.g., Ellen E. Schultz, Buried Treasure:
                                                                                                                                                             Benefits
                                                                                                     to vested and unvested defined contribution plans
                                           Well-Hidden Perk Means Big Money for Top                  to be disclosed in the All Other Compensation              Perquisites and other personal
                                           Executives, Wall St. J., Oct. 11, 2002, at A1.            column.                                                 benefits would be included in the All
                                              101 Proposed Instruction 3 to Item 402(c)(2)(ix).         107 A typical defined contribution plan is a
                                                                                                                                                             Other Compensation column. We
                                           Consistent with current requirements, if applicable       retirement plan in which the company and/or the
                                                                                                                                                             propose changes to disclosure of
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                                           interest rates vary depending upon conditions such        executive makes contributions of a specified
                                           as a minimum period of continued service, the             amount, and the amount that is paid out to the          perquisites and other personal benefits
                                           reported amount should be calculated assuming             executive depends on the return on investments          to improve disclosure and facilitate
                                           satisfaction of all conditions to receiving interest at   from the contributed amounts. A typical defined         computing a total amount of
                                           the highest rate. Proposed Instruction 5 to Item          benefit plan is a retirement plan in which the
                                           402(c)(2)(ix), which is derived from current              company pays the executive specified amounts at
                                                                                                                                                             compensation. We propose to require
                                           Instruction 3 to Item 402(b)(2)(iii)(C).                  retirement which are not tied to investment             the disclosure of perquisites and other
                                              102 Proposed Instruction 5 to Item 402(c)(2)(ix).      performance of the contributions that fund the plan.    personal benefits unless the aggregate

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                                                             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                  6553

                                           amount of such compensation is less                      jewelry, artwork, theater tickets and                   unless it is generally available on a non-
                                           than $10,000. We realize this may result                 housekeeping services.110                               discriminatory basis to all employees.
                                           in the total amount of compensation                         For decades questions have arisen as                    The concept of a benefit that is
                                           reportable in the Summary                                to what is a perquisite or other personal               ‘‘integrally and directly related’’ to job
                                           Compensation Table being slightly less                   benefit required to be disclosed. We                    performance is a narrow one. As
                                           than a complete total amount of                          continue to believe that it is not                      discussed below, it may extend, among
                                           compensation, but we believe $10,000 is                  appropriate for Item 402 to define                      other things, to office space at a
                                           a reasonable balance between investors’                  perquisites or personal benefits, given                 company business location, a reserved
                                           need for disclosure of total                             that different forms of these items                     parking space that is closer to business
                                           compensation and the burden on a                         continue to develop, and thus a                         facilities but not otherwise preferential
                                           company to track every benefit, no                       definition would become outdated.                       or additional clerical or secretarial
                                                                                                    Further, we are concerned that sole                     services devoted to company matters. It
                                           matter how small. The current provision
                                                                                                    reliance on a bright line definition in                 does not extend to items that facilitate
                                           permits omission of perquisites and
                                                                                                    our rules might provide an incentive to                 job performance, such as use of
                                           other personal benefits if the aggregate
                                                                                                    characterize perquisites or personal                    company-provided aircraft, yachts or
                                           amount of such compensation is the                                                                               other watercraft, commuter
                                           lesser of either $50,000 or 10% of the                   benefits in ways that would attempt to
                                                                                                    circumvent the bright lines.111                         transportation services, additional
                                           total of annual salary and bonus.108 We                                                                          clerical or secretarial services devoted to
                                           believe this current rule permits the                       In today’s proposals, perquisites and
                                                                                                    personal benefits are required to be                    personal matters, or investment
                                           omission of too much information that                                                                            management services. The fact that the
                                           investors may consider material.                         disclosed for both named executive
                                                                                                    officers and directors. This discussion                 company has determined that an
                                              We propose requiring footnote                         regarding perquisites and personal                      expense is an ‘‘ordinary’’ or ‘‘necessary’’
                                           disclosure that identifies perquisites                                                                           business expense for tax or other
                                                                                                    benefits therefore applies in the context
                                           and other personal benefits. We propose                                                                          purposes or that an expense is for the
                                                                                                    of disclosure for both named executive
                                           modifying the current requirement that                                                                           benefit or convenience of the company
                                                                                                    officers and directors.112 The concepts
                                           only perquisites and other personal                                                                              is not responsive to the inquiry as to
                                                                                                    of perquisites and personal benefits
                                           benefits that are 25% of the total                                                                               whether the expense provides a
                                                                                                    should not be interpreted artificially
                                           amount for each named executive                                                                                  perquisite or other personal benefit for
                                                                                                    narrowly to avoid disclosure. Based on
                                           officer are required to be identified and                                                                        disclosure purposes. Whether the
                                                                                                    our long experience with disclosure in
                                           quantified. We propose modifying this                                                                            company should pay for an expense
                                                                                                    this area, we are providing interpretive
                                           requirement so that, unless the aggregate                                                                        relates principally to questions of state
                                                                                                    guidance that among the factors to be
                                           value of perquisites and personal                                                                                law regarding use of corporate assets;
                                                                                                    considered in determining whether an                    our disclosure requirements are
                                           benefits is less than $10,000, any                       item is a perquisite or other personal
                                           perquisite or other personal benefit is                                                                          triggered by different and broader
                                                                                                    benefit are the following:                              concepts.
                                           identified and, if it is valued at the                      • An item is not a perquisite or                        Applying the concepts that we outline
                                           greater of $25,000 or ten percent of total               personal benefit if it is integrally and                above, examples of items requiring
                                           perquisites and other personal benefits,                 directly related to the performance of                  disclosure as perquisites or personal
                                           its value would be disclosed.109                         the executive’s duties.                                 benefits under Item 402 include, but are
                                           Consistent with our objective to                            • Otherwise, an item is a perquisite or              not limited to: club memberships not
                                           streamline the Summary Compensation                      personal benefit if it confers a direct or              used exclusively for business
                                           Table, the revised threshold is intended                 indirect benefit that has a personal                    entertainment purposes, personal
                                           to avoid requiring separate                              aspect, without regard to whether it may                financial or tax advice, personal travel
                                           quantification of perquisites having de                  be provided for some business reason or                 using vehicles owned or leased by the
                                           minimis value. As is the case today, tax                 for the convenience of the company,                     company, personal travel otherwise
                                           ‘‘gross-ups’’ or other reimbursement of                                                                          financed by the company, personal use
                                           taxes owed with respect to any                              110 See In the Matter of Tyson Foods, Inc. and       of other property owned or leased by the
                                           compensation, including but not limited                  Donald Tyson, Litigation Release No. 34–51625           company, housing and other living
                                           to perquisites and other personal                        (Apr. 28, 2005) (failure to identify perquisites).
                                                                                                       111 In the 1970s and early 1980s, the Commission
                                                                                                                                                            expenses (including but not limited to
                                           benefits, would be separately quantified                 issued several interpretive releases regarding          relocation assistance and payments for
                                           and identified in the tax reimbursement                  executive compensation disclosure issues,               the executive or director to stay at his
                                           category described below, even if the                    including disclosure of perquisites and personal        or her personal residence), security
                                           associated perquisites or other personal                 benefits. See Disclosure of Management                  provided at a personal residence or
                                                                                                    Remuneration, Release No. 33–5856 (Aug. 18, 1977)
                                           benefits are eligible for exclusion or                   [42 FR 43058]; Disclosure of Management
                                                                                                                                                            during personal travel, commuting
                                           would not require identification or                      Remuneration, Release No. 33–5904 (Feb. 6, 1978)        expenses (whether or not for the
                                           footnote quantification under the                        [43 FR 6060]; Disclosure of Management                  company’s convenience or benefit), and
                                                                                                    Remuneration, Release No. 33–6027 (Feb. 22, 1979)       discounts on the company’s products or
                                           proposal. Where perquisites are subject                  [44 FR 16368]; Disclosure of Management
                                           to identification, they must be described                Remuneration, Release No. 33–6166 (Dec. 12, 1979)
                                                                                                                                                            services not generally available to
                                           in a manner that identifies the particular               [44 FR 74803]; and Interpretation of Rules Relating     employees on a non-discriminatory
                                           nature of the benefit received. For                      to Disclosure of Management Remuneration,               basis.
                                           example, it is not sufficient to                         Release No. 33–6364 (Dec. 3, 1981) [46 FR 60421].          In addition, as noted, business
                                                                                                    In Section I of the 1983 Release, as part of a          purpose or convenience does not affect
                                           characterize generally as ‘‘travel and                   substantial revision to Item 402 adopted at the time,
                                                                                                                                                            the characterization of an item as a
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                                           entertainment’’ different company-                       the Commission rescinded those interpretive
                                           financed benefits, such as clothing,                     releases. Subsequently, neither the Commission nor      perquisite or personal benefit where it is
                                                                                                    its staff has published interpretations addressing      not integrally and directly related to the
                                                                                                    what must be disclosed as a perquisite or personal      performance by the executive of his or
                                             108 Current  Item 402(b)(2)(iii)(C)(1).                benefit.
                                             109 Proposed   Instruction 3 to Item 402(c)(2)(ix).       112 For directors, the disclosure would be           her job. Therefore, for example, a
                                           Compare current Instruction 1 to Item                    required in the Director Compensation Table             company’s decision to provide an item
                                           402(b)(2)(iii)(C).                                       discussed below in Section B.9.                         of personal benefit for security purposes

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                                           6554             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           does not affect its characterization as a               the company and its subsidiaries as the                valuing compensation, including in
                                           perquisite or personal benefit. A                       proper measure of value of perquisites                 respect of share-based compensation.
                                           company policy that for security                        and other personal benefits.114 The                    Nevertheless, we realize that there may
                                           purposes an executive (or an executive                  amount attributed to such benefits for                 be an issue whether the retail value of
                                           and his or her family) must use                         federal income tax purposes is not the                 what is received by the executive officer
                                           company aircraft or other company                       incremental cost for purposes of our                   or director, rather than the aggregate
                                           means of travel for personal travel, or                 disclosure rules unless, independently                 incremental cost to the company, better
                                           must use company or company-                            of the tax characterization, it constitutes            measures the compensation provided by
                                           provided property for vacations, does                   such incremental cost. Therefore, for                  perquisites and other personal benefits.
                                           not affect the conclusion that the item                 example, the cost of aircraft travel                   Therefore we request comment as to
                                           provided is a perquisite or personal                    attributed to an executive for federal                 whether we should require perquisites
                                           benefit.                                                income tax purposes is not generally the
                                              Examples of items that would not be                                                                         and other personal benefits to be valued
                                                                                                   incremental cost of such a perquisite or
                                           perquisites or personal benefits would                                                                         based on the retail price of the item or,
                                                                                                   personal benefit for purposes of our
                                           include, among other things, travel to                                                                         if none, the retail price of a
                                                                                                   disclosure rules.115
                                           and from business meetings, other                                                                              commercially available equivalent. In
                                           business travel, business entertainment,                Request for Comment                                    determining the commercially available
                                           security during business travel, and                      • Is $10,000 the proper minimum                      equivalents, for example, for travel on
                                           itemized expense accounts the use of                    below which disclosure of the total                    the company’s aircraft, the retail price of
                                           which is limited to business purposes.                  amount of perquisites and personal                     a commercially available equivalent
                                              In seeking to interpret current rules,               benefits should not be required? Should                would be the retail price to charter the
                                           some legal advisers have put forward to                 there be no minimum? Should the                        same model aircraft. First-class airfare
                                           the Commission staff examples of                        minimum be a higher amount, such as                    would not be considered equivalent to
                                           arrangements that they believe raise                    $25,000 or $50,000? Should the current                 travel on a private aircraft.
                                           issues requiring more detailed bright                   minimum of the lesser of $50,000 or                       • Would the proposed valuation
                                           line guidance regarding the definition of               10% of total salary and bonus be                       standard facilitate Item 402 compliance
                                           perquisites. These examples include                     retained? Would some other ratio be
                                           larger offices or a level of secretarial                                                                       while providing meaningful
                                                                                                   more appropriate?                                      compensation disclosure? Is there any
                                           service not available to employees                        • Should all perquisites be required
                                           generally. We believe that the factors                                                                         other valuation methodology that is
                                                                                                   to be separately identified when the                   preferable for valuing perquisites and
                                           enumerated above provide sufficient                     $10,000 aggregate threshold is exceeded,
                                           guidance in these areas. For example, an                                                                       other personal benefits? If so, why?
                                                                                                   as proposed?
                                           office at the job location, even if larger                • Is the greater of $25,000 or 10% of                   • Under the proposals a ‘‘gross-up’’ or
                                           than that of other employees, is                        the total amount of perquisites and                    other reimbursement of taxes owed with
                                           integrally and directly related to                      personal benefits the proper minimum                   respect to perquisites and other personal
                                           performance of the executive’s job, as is               below which perquisites and personal                   benefits would be required to be
                                           secretarial service used for business                   benefits should not be required to be                  included in the table and separately
                                           purposes, even if at a higher level than                separately identified and their value                  quantified and identified in the tax
                                           other employees. On the other hand,                     reported? Should there be a lower                      reimbursement category if it meets the
                                           provision of additional secretarial                     minimum, such as $10,000, or no                        relevant threshold, even if the
                                           services, such as a second secretary, that              minimum? Should the current                            associated perquisites or other personal
                                           is not directly related to performance of               minimum of 25% of the total amount be                  benefits would not be required to be
                                           an executive’s job would be a perquisite                retained?                                              included in the table or separately
                                           or personal benefit.                                      • Should perquisites and personal
                                              Beyond these examples, we assume                                                                            quantified. Is separate identification of
                                                                                                   benefits below the proposed threshold                  items such as tax gross-ups material to
                                           companies and their advisors, who are                   be separately identified by category,
                                           more familiar with the detailed facts of                                                                       investors even if it is clear the amount
                                                                                                   even if not separately quantified?                     must be included in the All Other
                                           a particular situation and who are                      Alternatively, is separate identification
                                           responsible for providing materially                                                                           Compensation column?
                                                                                                   and quantification of all perquisites and
                                           accurate and complete disclosure                        personal benefits so significant to                       • Should Item 402 include a
                                           satisfying our requirements, can assess                 investors that no threshold should apply               definition of perquisites or other
                                           whether particular arrangements require                 for either purpose?                                    personal benefits? If so, how should
                                           disclosure as perquisites or personal                     • We propose to retain the current                   perquisites or other personal benefits be
                                           benefits. In light of the importance of                 standard for valuing perquisites and                   defined? How can we assure that new
                                           the subject to many investors, all                      other personal benefits, based on the                  perquisites will not be developed in a
                                           participants should approach the                        aggregate incremental cost to the                      manner intended to avoid the definition
                                           subject of perquisites and personal                     company and its subsidiaries which has                 and therefore disclosure? If such a
                                           benefits thoughtfully.113                               applied since 1983.116 We believe that                 definition is principles-based, what
                                              Finally, we observe that the proposal
                                                                                                   this approach is consistent with the                   principles in addition to those described
                                           calls for aggregate incremental cost to
                                                                                                   approach we are taking otherwise in                    in this release should be considered?
                                             113 The Commission has recently taken action in
                                                                                                     114 Proposed
                                                                                                                                                             • We are providing interpretive
                                           circumstances where perquisites were not properly                       Instruction 4 to Item 402(c)(2)(ix).
                                                                                                                                                          guidance above regarding perquisites
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                                                                                                     115 See IRS Regulation § 1.61–21(g) [26 CFR 1.61–
                                           disclosed. See In the Matter of Tyson Foods, Inc.
                                           and Donald Tyson, note 110 above. See also Alex         21(g)] regarding Internal Revenue Service              and personal benefits. Are there any
                                           Berenson, From Coffee to Jets, Perks for Executives     guidelines for imputing taxable personal income to     areas regarding perquisites and personal
                                           Come Out in Court, N.Y. Times, Feb. 22, 2004, at        an employee who travels for personal reasons on        benefits where we should consider
                                           11 (citing criminal and civil litigation in which       corporate aircraft. These complex regulations are
                                                                                                   known as the Standard Industry Fare Level or SIFL
                                                                                                                                                          providing additional or different
                                           perquisites were identified and commentators
                                           discussing the benefits of improved perquisite          rules.                                                 interpretive guidance? Should any of
                                           disclosure).                                              116 See the 1983 Release, at Section III.C.          our interpretive guidance be codified?

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                                                                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                         6555

                                           iv. Additional All Other Compensation                         • For any security of the company or                 column of the table? Is there another
                                           Column Items                                               its subsidiaries purchased from the                     reason to continue to show the two
                                                                                                      company or its subsidiaries (through                    groups of items separately?
                                              The proposals also would specify that                   deferral of fees or otherwise) at a
                                           items disclosed in the All Other                                                                                      • Should we retain the treatment of
                                                                                                      discount from the market price of such                  securities purchased at a discount in
                                           Compensation column would include,                         security at the date of purchase, unless
                                           but not be limited to, the following                                                                               current Item 402(b)(2)(iii)(C)(5), which
                                                                                                      that discount is available generally                    requires inclusion in the Other Annual
                                           items: 117                                                 either to all security holders or to all                Compensation column of the dollar
                                              • Amounts paid or accrued pursuant                      salaried employees of the company, the                  value of the difference between the
                                           to a plan or arrangement in connection                     compensation cost computed in                           price paid by a named executive officer
                                           with any termination (or constructive                      accordance with FAS 123R.122                            for any security of the company or its
                                           termination) of employment or a change                                                                             subsidiaries purchased from the
                                                                                                      Request for Comment
                                           in control; 118                                                                                                    company or its subsidiaries (through
                                              • Annual company contributions or                         • Are there other items that should be
                                                                                                      specifically enumerated for inclusion in                deferral of salary or bonus, or
                                           other allocations to vested and unvested                                                                           otherwise), and the fair market value of
                                           defined contribution plans; 119                            the All Other Compensation Column? If
                                                                                                      so, what are they and how should they                   such a security at the date of purchase?
                                              • The dollar value of any insurance                     be valued and reported?                                 If so, why?
                                           premiums paid by the company with                            • Will the combination of the current                    • Because so many different types of
                                           respect to life insurance for the benefit                  Other Annual Compensation Column                        compensation would be reportable in
                                           of a named executive officer; 120                          and the All Other Compensation                          the ‘‘All Other Compensation’’ column,
                                              • ‘‘Gross-ups’’ or other amounts                        Column result in too many                               would this disclosure be clearer if it
                                           reimbursed during the fiscal year for the                  compensation items being aggregated                     were presented as a supplemental table
                                           payment of taxes; 121 and                                  and separately identified within one                    in the following or similar format:

                                                                                                                                                     Registrant
                                                               Perquisites    Earnings on                                           Payments/         contribu-
                                                                                                                 Discounted                                         Increase in
                                                                and other      deferred           Tax reim-                         accruals on     tions to de-                     Insurance
                                               Name                                                               securities                                       pension ac-                          Other
                                                                personal      compensa-          bursements                         termination      fined con-                      premiums
                                                                                                                 purchases                                         tuarial value
                                                                 benefits         tion                                                 plans           tribution
                                                                                                                                                         plans

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

                                           PEO ..........
                                           PFO ..........
                                           A ...............
                                           B ...............
                                           C ...............



                                           e. Captions and Table Layout                               captions, the current approach creates                  Request for Comment
                                                                                                      distinctions that may be confusing to
                                             Currently a portion of the table is                      users and preparers. The proposals                        • Will these changes improve the
                                           labeled as ‘‘annual compensation’’ and                     would thus define an ‘‘incentive plan’’                 table? Are there any other changes to the
                                           another portion as ‘‘long term                                                                                     captions and table layout that would
                                                                                                      as any plan providing compensation
                                           compensation.’’ These captions create                                                                              improve the table?
                                                                                                      intended to serve as incentive for
                                           distinctions that may be confusing to
                                                                                                      performance to occur over a specified                   2. Supplemental Annual Compensation
                                           both users and preparers of the
                                           Summary Compensation Table. Today’s                        period.123 Consistent with this change,                 Tables
                                           proposal would not separately identify                     as described above, we propose to merge
                                                                                                      the current Other Annual Compensation                     Following the Summary
                                           some columns as ‘‘annual’’ and other
                                                                                                      column into the proposed All Other                      Compensation Table, we propose
                                           columns as ‘‘long term’’ compensation.
                                           In eliminating this distinction, we also                   Compensation column, and include                        requiring two supplemental tables.
                                           propose to revise the definition of ‘‘long                 current information regarding incentive                 These two tables are intended to help
                                           term incentive plan’’ to eliminate any                     plan compensation in the appropriate                    explain information in the Summary
                                           distinction between a ‘‘long term’’ plan                   column for the relevant form of award.                  Compensation Table and would be
                                           and one that may provide for periods                                                                               derived from two tables currently
                                           shorter than one year, because, like the                                                                           required.

                                              117 These items are all currently required to be        pursuant to a plan or arrangement in connection           120 Proposed Item 402(c)(2)(ix)(H). Because the

                                           disclosed either under All Other Compensation or           with any termination of employment or change-in-        proposal calls for disclosure of the dollar value of
                                           under Other Annual Compensation.                           control, such as a retention bonus, acceleration of     any life insurance premiums, rather than only
                                              118 Unlike the current Item 402(b)(2)(v)(A)             option or stock vesting periods, or performance-        premiums with respect to term life insurance, as
                                           requirement, proposed Item 402(c)(2)(ix)(E) does           based compensation intended to serve as an              currently required, the requirement of current Items
                                                                                                      incentive for named executive officers to acquire       402(b)(2)(v)(E)(1) and (2) to disclose the value of
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                                           not refer to amounts payable under post-
                                           employment benefits, because the focus for this            other companies or enter into a merger agreement,       any remaining premiums with respect to
                                           item is current year compensation rather than              disclosure would be required in the appropriate         circumstances where the named executive officer
                                           aggregate amounts potentially payable in the future.       Summary Compensation Table column and in the            has an interest in the policy’s cash surrender value
                                           These items are also the subject of disclosure as          other tables or narrative disclosure where the          would be deleted.
                                                                                                                                                                121 Proposed Item 402(c)(2)(ix)(C).
                                           post-termination compensation, as described in             particular element of compensation is required to
                                           Section II.B.5., below. For any compensation as a          be disclosed.                                             122 Proposed Item 402(c)(2)(ix)(D).

                                           result of a business combination, other than                 119 Proposed Item 402(c)(2)(ix)(F).                     123 Proposed Item 402(a)(6)(iii).




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                                           6556                  Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           a. Grants of Performance-Based Awards                                        compensation if conditions are                               Disclosure in this table of grants of
                                           Table                                                                        satisfied).124 This would ensure                           incentive plan awards would
                                                                                                                        consistent reporting treatment of these                    complement Summary Compensation
                                             The first table that would supplement                                      performance-based awards, disclosing                       Table disclosure of grant date fair value
                                           the Summary Compensation Table                                               information equivalent to that currently                   of stock awards and option awards, and
                                           would include information regarding                                          required for grants of other long-term                     the disclosure of annual amounts earned
                                           non-stock grants of incentive plan                                           incentive plan awards. For purposes of                     under non-stock based incentive
                                           awards, stock-based incentive plan                                           this table, awards would be considered                     compensation. This supplemental table
                                           awards and awards of options, restricted                                     performance-based if they are subject to                   would show the terms of grants made
                                           stock and similar instruments under                                          either a performance condition, or a                       during the current year, including
                                           plans that are performance-based (and                                        market condition, as those terms are                       estimated future payouts, with separate
                                           thus provide the opportunity for future                                      defined in FAS 123R.125                                    disclosure for each grant.126

                                                                                                                    GRANTS OF PERFORMANCE-BASED AWARDS
                                                                   Perform-                                                                                                                        Estimated future payouts
                                                                 ance-based                Perform-               Non-stock                                               Perform-
                                                                  stock and                                                                Dollar
                                                                                         ance-based               incentive                                               ance or
                                                                 stock-based                                                            amount of
                                                                                           options:                 plan                                Grant date      other period
                                                                   incentive                                                             consider-
                                                                                          number of                awards:                              for stock or    until vesting
                                               Name              plans: num-                                                            ation paid
                                                                                          securities             number of                                 option        or payout        Threshold         Target          Maximum
                                                                     ber of                                                            for award, if
                                                                                          underlying               units or                               awards         and option       ($) or (#)       ($) or (#)       ($) or (#)
                                                                    shares,                                                                 any
                                                                                            options              other rights                                            expiration
                                                                    units or                                                                ($)
                                                                                              (#)                    (#)                                                    date
                                                                 other rights
                                                                      (#)

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

                                           PEO ..........
                                           PFO ..........
                                           A ...............
                                           B ...............
                                           C ...............



                                           Request for Comment                                                          table redundant with the information                       appropriate in defining performance-
                                              • Will the proposed Grants of                                             required in the Grants of Performance-                     based awards?
                                           Performance-Based Awards Table                                               Based Awards Table describing
                                                                                                                                                                                   b. Grants of All Other Equity Awards
                                           effectively supplement the equity                                            estimated future payouts to be required
                                                                                                                                                                                   Table
                                           awards and non-stock incentive plan                                          in columns (h), (i) and (j) of the Table,
                                           compensation information to be                                               such that any of these columns should                        The second table supplementing the
                                           disclosed in the Summary                                                     be eliminated? Is any other tabular                        Summary Compensation Table would
                                           Compensation Table? In particular,                                           information needed to describe                             show the equity-based compensation
                                           should tabular disclosure be required of                                     estimated future payouts in addition to                    awards granted in the last fiscal year
                                           any additional information relating to                                       the information that would be required                     that are not performance-based, such as
                                           performance-based equity awards and                                          in proposed columns (h), (i) and (j)?                      stock, options or similar instruments
                                           non-stock incentive plan awards?                                               • Are the references to the definitions                  where the payout or future value is tied
                                              • Is the information required by                                          of ‘‘performance condition’’ and                           to the company’s stock price, and not to
                                           columns (b), (c) and (d) of this proposed                                    ‘‘market condition’’ in FAS 123R                           other performance criteria.127

                                                                                                                       GRANTS OF ALL OTHER EQUITY AWARDS
                                                                                                                                       Number of                                         Number of
                                                                                                                                       securities                                         shares of
                                                                                                                                                        Exercise or
                                                                                                                                       underlying                        Expiration        stock or
                                                                                  Name                                                                  base price                                       Vesting date      Grant date
                                                                                                                                        options                            date          units grant-
                                                                                                                                                          ($/Sh)
                                                                                                                                        granted                                               ed
                                                                                                                                          (#)                                                 (#)

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

                                           PEO ..................................................................................
                                           PFO ..................................................................................
                                           A .......................................................................................
                                           B .......................................................................................
                                           C .......................................................................................
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                                             124 This table would contain the information in                            also include awards with performance, market and             127 Proposed Item 402(e). Proposed Instruction 2

                                           the current Long-Term Incentive Plan Awards                                  other conditions affecting the terms of the award          to Item 402(e) would require that if more than one
                                           Table, augmented with information regarding                                  (exercise price, for example) rather than vesting.         award is made to a named executive officer during
                                                                                                                          125 See note 87.
                                           performance-based stock, option and similar                                                                                             the last completed fiscal year, a separate line should
                                           awards. See current Item 402(e). This table would                              126 Proposed Instruction 1 to Item 402(d).               be used to disclose each award.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                           6557

                                              Instructions would require options                    3. Narrative Disclosure to Summary                     place, the narrative disclosure following
                                           and stock appreciation rights granted in                 Compensation Table and Supplemental                    the Summary Compensation Table
                                           connection with a repricing transaction                  Tables                                                 would describe, to the extent material
                                           to be included in the table, and footnote                                                                       and necessary to an understanding of
                                                                                                      We propose requiring narrative                       the tabular disclosure, repricing,
                                           descriptions of any material terms of a                  disclosure in order to give context to the
                                           grant.128 Because the Summary                                                                                   extension of exercise periods, change of
                                                                                                    tabular disclosure following the                       vesting or forfeiture conditions, change
                                           Compensation Table would disclose                        Summary Compensation Table, the
                                           grant date fair value of the options,                                                                           or elimination of applicable
                                                                                                    Grants of Performance-Based Awards                     performance criteria, change of the
                                           stock appreciation rights or similar                     Table and the Grants of All Other Equity
                                           instruments, the columns in the current                                                                         bases upon which returns are
                                                                                                    Awards Table. A company would be                       determined, or any other material
                                           Option/SAR Grants in Last Fiscal Year                    required to provide a narrative
                                           table requiring disclosure of that value                                                                        modification. The tabular disclosure
                                                                                                    description of any additional material                 would reflect the award’s total fair value
                                           or, alternatively, potential realizable                  factors necessary to an understanding of               after any such modification as a new
                                           value at assumed five percent and ten                    the information disclosed in the                       award.133
                                           percent annual rates of return, would be                 tables.130 Unlike the Compensation
                                                                                                                                                              Narrative text accompanying the
                                           eliminated.129 This table would also                     Discussion and Analysis, which would
                                                                                                                                                           tables would also describe, to the extent
                                           supplement the Summary                                   focus on broader topics regarding the
                                                                                                                                                           material and necessary to an
                                           Compensation Table disclosure of the                     objectives and implementation of
                                                                                                                                                           understanding of the tabular disclosure,
                                           aggregate grant date fair value of stock,                executive compensation policies, this
                                                                                                                                                           award terms relating to data provided in
                                           units and similar instruments with                       narrative disclosure would focus on and
                                                                                                                                                           the Grants of Performance-Based
                                           disclosure relating to the number of                     provide context to the quantitative
                                                                                                                                                           Awards Table, which could include, for
                                           underlying securities and other material                 disclosure in the tables. The material
                                                                                                                                                           example, a general description of the
                                           terms of the grants.                                     factors will vary depending on the facts,
                                                                                                                                                           formula or criteria to be applied in
                                                                                                    but may include, in given cases, among
                                           Request for Comment                                                                                             determining the amounts payable, the
                                                                                                    other things, descriptions of the material
                                                                                                                                                           vesting schedule, a description of the
                                                                                                    terms in the named executive officers’
                                             • Will the Grants of All Other Equity                  employment agreements, which may be
                                                                                                                                                           performance-based conditions and any
                                           Awards Table, as proposed, effectively                                                                          other material conditions applicable to
                                                                                                    a potential source of material
                                           supplement the option and stock grants                                                                          the award, whether dividends or other
                                                                                                    information necessary to an
                                           information to be disclosed in the                                                                              amounts would be paid, the applicable
                                                                                                    understanding of the tabular disclosure.
                                           Summary Compensation Table? In                                                                                  rate and whether that rate is
                                                                                                    The proposed narrative disclosure
                                           particular, should tabular disclosure be                                                                        preferential. Consistent with current
                                                                                                    would cover written or unwritten
                                           required of any additional information                                                                          disclosure requirements, however,
                                                                                                    agreements or arrangements. Requiring
                                           relating to these grants?                                                                                       companies would not be required to
                                                                                                    this disclosure in proximity to the
                                                                                                                                                           disclose any factor, criteria, or
                                             • Is this table or any aspect of it too                Summary Compensation Table is
                                                                                                                                                           performance-related or other condition
                                           repetitive?                                              intended to make the tabular disclosure
                                                                                                                                                           to payout or vesting of a particular
                                                                                                    more meaningful.131 Mere filing of
                                             • Will it be clear to investors how the                employment agreements (or summaries
                                                                                                                                                           award that involves confidential
                                           two supplemental tables relate to the                                                                           commercial or business information,
                                                                                                    of oral agreements) may not be adequate
                                           Summary Compensation Table? If not,                                                                             disclosure of which would adversely
                                                                                                    to disclose material factors depending
                                           how could we make that more clear?                                                                              affect the company’s competitive
                                                                                                    on the circumstances.
                                                                                                                                                           position.134
                                             • Are all plan-based awards covered                      The factors that could be material
                                           by the two supplemental tables? What                     include each repricing or other material               information contained in the ten-year option
                                           additional provisions would we need to                   modification of any outstanding option                 repricing table.
                                           add to cover all such awards?                            or other stock-based award during the                     133 While this approach is different from that

                                                                                                    last fiscal year. This disclosure would                required for accounting and financial statement
                                             • Instead, would it be preferable to                                                                          reporting purposes under FAS 123R, it does
                                           have two separate versions of the                        address not only option repricings, but                proceed from the grant date fair value concept
                                           Summary Compensation Table, with                         also other significant changes to the                  embodied in that standard, and we believe it
                                                                                                    terms of stock-based or other awards.                  provides more meaningful information for
                                           one showing all awards made during the                                                                          executive compensation disclosure than the
                                                                                                    We propose to eliminate the current ten-
                                           year and the other having exactly the                                                                           financial statement reporting approach and is
                                                                                                    year option repricing table.132 In its
                                           same columns showing all the amounts                                                                            consistent with our current requirement to treat
                                                                                                                                                           repricings as a new award. This treatment would
                                           earned by services during the year?                         130 Proposed Item 402(f)(1). Disclosure of
                                                                                                                                                           continue the current approach of essentially
                                           Would this approach increase the risk of                 employment agreement information is currently          treating a repricing as a new award in Instruction
                                           double counting? Would it be                             required by Item 402(h)(1). The standard of            3 to Item 402(b)(2)(iv). However, this approach
                                                                                                    materiality that would apply in proposed Item          would not apply to any repricing that occurs
                                           duplicative as to cash salary and bonus                  402(f)(1) is that of Basic v. Levinson, 485 U.S. 224   through a pre-existing formula or mechanism in the
                                           and other currently earned and paid                      (1988) and TSC Industries v. Northway, 426 U.S.        plan or award that results in the periodic
                                           amounts and benefits?                                    438 (1976).                                            adjustment of the option or stock appreciation right
                                                                                                       131 Provisions regarding post-termination           exercise or base price, an antidilution provision, or
                                             128 Proposed
                                                                                                    compensation would need to be addressed in the         a recapitalization or similar transaction equally
                                                             Instructions 3 and 4 to Item 402(e).   narrative section only to the extent disclosure of     affecting all holders of the class of securities
                                             129 See  current Item 402(c)(2)(vi). We also propose   such compensation is required in the Summary           underlying the options or stock appreciation rights.
                                           removing the column, required by current Item
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                                                                                                    Compensation Table; otherwise these provisions         See Proposed Instruction 2 to Item 402(f)(1).
                                           402(c)(2)(iii), requiring disclosure of the percent      would be disclosable as post-termination                  134 Proposed Item 402(f)(1)(iii), which combines
                                           that the grant represents of total options and stock     compensation in the manner described in Section        some information required by current Instruction 2
                                           appreciation rights granted to all employees during      II.B.5., below.                                        to Item 402(b)(2)(iv) with information required by
                                           the fiscal year. At this time, we do not believe that       132 Current Item 402(i). We believe that the        current Instruction 1 to Item 402(e). For a
                                           this relatively narrow disclosure is independently       disclosure requirement would provide investors         discussion of the standard companies should use
                                           material to an understanding of a named executive        with material information regarding repricings and     when determining whether disclosure would have
                                           officer’s compensation.                                  modifications and eliminate the arguably dated                                                     Continued



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                                           6558             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                              Another factor that may be necessary                 do not have a policy making function at               disclosure of this information consistent
                                           to an understanding of the information                  the company.137                                       with the overall goals of this proposal?
                                           disclosed in the tables is any material                 Request for Comment                                   4. Exercises and Holdings of Previously
                                           waiver or modification of any specified                                                                       Awarded Equity
                                           performance target, goal or condition to                   • Will the proposed narrative
                                           payout under any reported incentive                     disclosure to the Summary                               The next section of proposed
                                           plan payout because each action can                     Compensation Table enhance an                         executive compensation disclosure
                                           materially affect previously disclosed                  understanding of the table?                           would provide investors with an
                                                                                                      • Are there any additional material
                                           information about the plans. Companies                                                                        understanding of the compensation in
                                                                                                   factors that should be listed as possibly
                                           would be required to disclose as part of                                                                      the form of equity that has previously
                                                                                                   requiring disclosure in the narrative to
                                           this narrative discussion whether the                                                                         been awarded and remains outstanding,
                                                                                                   the Summary Compensation Table?
                                           waiver or modification applied to one or                   • Is the difference between the                    that is unexercised or unvested. This
                                           more specified named executive officers                 proposed required narrative disclosure                section also would disclose amounts
                                           or applied to all compensation subject                  and the Compensation Discussion and                   realized on this type of compensation
                                           to the condition.135                                    Analysis requirement sufficiently clear?              during the most recent fiscal year when,
                                                                                                   How can it be made more clear?                        for example, a named executive officer
                                              Material factors necessary to an                                                                           exercises an option or his or her stock
                                           understanding of the tabular disclosure                    • Should we require an additional
                                                                                                   column in the Summary Compensation                    award vests. We propose two tables.
                                           could also include information                                                                                One table shows the amounts of prior
                                           regarding defined benefit and deferred                  Table where companies must indicate
                                                                                                   by checkmark whether a particular                     awards outstanding and the other shows
                                           compensation plans. For example, such                                                                         the exercise or vesting of equity awards
                                                                                                   named executive officer has an
                                           information could include material                                                                            during the fiscal year.138
                                                                                                   employment agreement, so that
                                           assumptions underlying the
                                                                                                   investors will know to look for                       a. Outstanding Equity Awards at Fiscal
                                           determination of the amount of increase                 disclosure about the agreement in the
                                           in actuarial value of defined benefit or                                                                      Year-End
                                                                                                   narrative accompanying the table or to
                                           actuarial plans or the provisions in a                  look for the agreement as an exhibit to                  Outstanding awards that have been
                                           plan or otherwise for determining                       a filing with us?                                     granted but the ultimate outcomes of
                                           earnings on deferred compensation                          • Is the proposed treatment of                     which have not yet been realized in
                                           plans, including defined contribution                   repricings the most appropriate                       effect represent potential amounts that
                                           plans, that are not tax-qualified.                      approach for executive compensation                   the named executive officer might or
                                              We also propose an additional item                   disclosure purposes? Should the                       might not realize, depending on the
                                           that would require disclosure for up to                 treatment be consistent with the                      outcome for the measure or measures
                                           three employees who were not                            reporting approach of FAS 123R? Would                 (for example, stock price or performance
                                           executive officers during the last                      tabular presentation rather than                      benchmarks) to which the award relates.
                                           completed fiscal year and whose total                   discussion of material terms in the                   We are proposing a table that would
                                           compensation for the last completed                     narrative be preferable? In addition to               disclose information regarding
                                           fiscal year was greater than that of any                the disclosure proposed in the Summary                outstanding awards under, for example,
                                                                                                   Compensation Table and the related                    stock option (or stock appreciation
                                           of the named executive officers.136 The
                                                                                                   narrative, should we also require                     rights) plans, restricted stock plans,
                                           item would require disclosure of the
                                                                                                   quantification of the fair value of the               incentive plans and similar plans and
                                           amount of each of such employee’s total                 award both immediately before and                     disclose the market-based values of the
                                           compensation for the most recent fiscal                 immediately after the repricing or other              options, rights, shares or units in
                                           year and a description of his or her job                modification?                                         question as of the company’s most
                                           position. The individuals would not                        • Would the proposed disclosure of                 recent fiscal year end.139
                                           need to be named. We are proposing                      up to three employees who are not
                                           this requirement so that shareholders                   executive officers but earn more in total                138 Some of this information is currently required
                                           will have information about the use of                  compensation than any of the named                    in one table, the Aggregated Option/SAR Exercises
                                           corporate assets to compensate                          executive officers be appropriate in the              in Last Fiscal Year and Fiscal Year-End Option/SAR
                                           extremely highly paid employees in a                    narrative discussion? Should more                     Values Table required by current Item 402(d).
                                                                                                                                                            139 Proposed Item 402(g). Under current rules
                                           company. More detailed information                      disclosure be required regarding these
                                                                                                                                                         such disclosure is provided only for holdings of
                                           about these employees and their                         employees and their compensation? Is                  outstanding stock options and stock appreciation
                                           compensation does not appear                            this information material to investors?               rights. Consistent with current interpretations, this
                                           appropriate in light of the fact that they              Will disclosure of this information,                  table, like the Summary Compensation Table,
                                                                                                   particularly in the case of smaller                   would reflect that the transfer of an option or
                                                                                                                                                         similar award by an executive does not negate the
                                           an adverse impact on the company’s competitive          companies, cause competitive harm? Is                 award’s status as compensation that should be
                                           position, see Section II.A.2., above.                                                                         reported. Registration of Securities on Form S–8,
                                             135 Proposed Item 402(f)(1)(iv).                        137 See note 162 below for a discussion of the      Release No. 33–7646 (Feb. 25, 1999) [64 FR 11103],
                                             136 Proposed Item 402(f)(2).                          term ‘‘executive officer.’’                           at Section III.D.
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                                                               Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                                                                   6559

                                                                                                           OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
                                                                                                                                                                                                                                               Incentive
                                                                                                                                                                                                                            Incentive
                                                                                                                                      Number of                                                               Market                         plans: mar-
                                                                                                                                                            In-the-money              Number of                            plans: num-
                                                                                                                                    securities un-                                                           value of                        ket or pay-
                                                                                                                                                              amount of               shares or                            ber of non-
                                                                                                                                        derlying                                                            shares or                        out value of
                                                                                                                                                             unexercised                units of                              vested
                                                                                                                                     unexercised                                                              units of                        nonvested
                                                                                Name                                                                            options               stock held                             shares,
                                                                                                                                        options                                                             stock held                          shares,
                                                                                                                                                               ($) exer-              that have                              units or
                                                                                                                                       (#) exer-                                                            that have                           units or
                                                                                                                                                                cisable/              not vested                           other rights
                                                                                                                                        cisable/                                                            not vested                       other rights
                                                                                                                                                            unexercisable                 (#)                                  held
                                                                                                                                    unexercisable                                                               ($)                              held
                                                                                                                                                                                                                                (#)               ($)

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

                                           PEO .............................................................................
                                           PFO .............................................................................
                                           A ..................................................................................
                                           B ..................................................................................
                                           C ..................................................................................



                                             With respect to options, stock                                                A new instruction would require                                              • Should the table include the value
                                           appreciation rights and similar                                              footnote disclosure of the expiration                                        of out-of-the-money options and stock
                                           instruments, an instruction, which                                           dates of options, stock appreciation                                         appreciation rights? Why or why not? If
                                           would be the same as the current                                             rights and similar instruments held at                                       such instruments were included, how
                                           standard, would indicate that these                                          fiscal year-end, separately identifying                                      would the value be calculated and
                                           instruments are ‘‘in-the-money’’ if the                                      those that are exercisable and                                               presented?
                                           market price of the underlying securities                                    unexercisable, and the vesting dates of                                         • Should we require, as proposed,
                                           exceeds the exercise or base price. The                                      shares of stock (including restricted                                        that options or similar awards that have
                                           in-the-money amount of options, stock                                        stock, restricted stock units or other                                       been transferred by an executive must
                                           appreciation rights and similar                                              similar instruments) and incentive plan                                      still be included in the table? Should
                                           instruments would be calculated by                                           awards held at fiscal year-end. If the                                       continued disclosure depend on the
                                           determining the difference, at fiscal                                        expiration date of an option had                                             nature of the transfer or the identity of
                                           year-end, between the market price of                                                                                                                     the transferee?
                                                                                                                        occurred after fiscal year-end but before
                                           the underlying securities and the
                                                                                                                        the date on which the disclosure is                                          b. Option Exercises and Stock Vesting
                                           exercise or base price.140 The market
                                                                                                                        made, the footnote would need to state
                                           value of stock (including restricted                                                                                                                         We are proposing a table that would
                                           stock, restricted stock units or other                                       whether the option had been exercised                                        show the amounts received upon
                                           similar instruments) and incentive plan                                      or had expired.142                                                           exercise of options or similar
                                           award holdings would be calculated by                                        Request for Comment                                                          instruments or the vesting of stock or
                                           multiplying the closing market price of                                                                                                                   similar instruments during the most
                                           the company’s stock at the end of the                                          • Will the proposed Outstanding                                            recent fiscal year. This table would
                                           last completed fiscal year by the                                            Equity Awards at Fiscal Year-End Table                                       allow investors to have a picture of the
                                           respective numbers of stock or incentive                                     provide material information for                                             amounts that a named executive officer
                                           plan award holdings that were not then                                       investors regarding the named executive                                      realizes on equity compensation
                                           vested.141                                                                   officers’ outstanding awards?                                                through its final stage.143

                                                                                                                       OPTION EXERCISES AND STOCK VESTED
                                                                                                                                                                                                                                             Grant date
                                                                                                                                                                                                            Number of                         fair value
                                                                                                                                                                                                                            Value real-
                                                                                                                                                                                                            shares ac-                       previously
                                                                                                                                                                                                                             ized upon
                                                                                                                                                                                                             quired on                       reported in
                                                                                                     Name of Executive Officer                                                                                              exercise or
                                                                                                                                                                                                            exercise or                       summary
                                                                                                                                                                                                                               vesting
                                                                                                                                                                                                              vesting                        compensa-
                                                                                                                                                                                                                                 ($)
                                                                                                                                                                                                                (#)                           tion table
                                                                                                                                                                                                                                                  ($)

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

                                           PEO—Options .........................................................................................................................................
                                           Stock ........................................................................................................................................................
                                           PFO—Options ..........................................................................................................................................
                                           Stock ........................................................................................................................................................

                                              140 Proposed Instruction 1 to Item 402(g)(2),                                142 Proposed  Instruction 2 to Item 402(g)(2).                            Executive Pay Tally, Wall St. J. Online Edition, Jan.
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                                           which is based on current Instruction 1 to Item                                 143 Thistable is similar to a portion of the current                      26, 2005. The number and value of unexercised
                                           402(d)(2).                                                                   Aggregate Options/SAR Exercises in Last Fiscal                               options and stock appreciation rights, included in
                                              141 Proposed Instruction 3 to Item 402(g)(2). This                        Year and FY-End Options/SAR Values Table,                                    the current option exercises table, would be shown
                                           standard is based on the current Summary                                     except unlike that table it would also include the                           in the proposed Outstanding Equity Awards at
                                           Compensation Table footnote disclosure regarding                             vesting of restricted stock and similar instruments.
                                                                                                                                                                                                     Fiscal Year-End Table described immediately
                                           restricted stock, expanded to cover restricted stock                         Commentators have noted a need for comparable
                                           units and incentive plans. Current Instruction 2 to                          disclosure of restricted stock vesting. See, e.g.,                           above. See current Item 402(d).
                                           Item 402(b)(2)(iv).                                                          Phyllis Plitch, Restricted Stock Grants Cloud


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                                           6560                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                                                                                           OPTION EXERCISES AND STOCK VESTED—Continued
                                                                                                                                                                                                                                          Grant date
                                                                                                                                                                                                            Number of                      fair value
                                                                                                                                                                                                                          Value real-
                                                                                                                                                                                                            shares ac-                    previously
                                                                                                                                                                                                                           ized upon
                                                                                                                                                                                                             quired on                    reported in
                                                                                                     Name of Executive Officer                                                                                            exercise or
                                                                                                                                                                                                            exercise or                    summary
                                                                                                                                                                                                                             vesting
                                                                                                                                                                                                              vesting                     compensa-
                                                                                                                                                                                                                               ($)
                                                                                                                                                                                                                (#)                        tion table
                                                                                                                                                                                                                                               ($)

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

                                           A—Options ...............................................................................................................................................
                                           Stock ........................................................................................................................................................
                                           B—Options ...............................................................................................................................................
                                           Stock ........................................................................................................................................................
                                           C—Options ..............................................................................................................................................
                                           Stock ........................................................................................................................................................



                                             The grant date fair value of these                                         the grant-date fair value of equity-based                                    proposing revised requirements
                                           instruments would have been disclosed                                        awards? Are other sources of this                                            regarding disclosure of compensation
                                           in the Summary Compensation Table for                                        information, such as reports filed by                                        arrangements triggered upon
                                           the year in which they were awarded.                                         officers and directors pursuant to                                           termination and on changes in control.
                                           Therefore, to eliminate the impact of                                        Section 16(a) of the Exchange Act,144
                                           double disclosure, this table would                                          adequate to inform investors of the                                          a. Retirement Plan Potential Annual
                                           show that amount from applicable                                             information contained in this table?                                         Payments and Benefits Table
                                           previous years from the Summary                                                • Would it be preferable to combine                                          We are proposing significant revisions
                                           Compensation Table.                                                          proposed Outstanding Equity Awards at                                        to the rules disclosing retirement
                                                                                                                        Fiscal Year-End Table and the proposed                                       benefits to require disclosure of the
                                           Request for Comment                                                          Option Exercises and Stock Vested                                            estimate of retirement benefits to be
                                              • In light of the proposed disclosure                                     Table into one table?                                                        payable at normal retirement age and, if
                                           in the Summary Compensation Table of
                                                                                                                        5. Post-Employment Compensation                                              available, early retirement.145 Current
                                           the grant date fair value of the awards,
                                                                                                                           We are proposing significant revisions                                    disclosure frequently does not provide
                                           is separate reporting of the amounts
                                                                                                                        to the disclosure regarding post-                                            investors useful information regarding
                                           realized upon exercise or vesting
                                                                                                                        employment compensation to provide a                                         specific potential pension benefits.
                                           appropriate? Would it provide material
                                                                                                                        clearer picture of this potential future                                     Current disclosure may make it difficult
                                           information? Would separate reporting
                                                                                                                        compensation. Executive retirement                                           for the reader to understand which
                                           of the market value at exercise or
                                                                                                                        packages and other post-termination                                          amounts relate to any particular named
                                           vesting confuse users of financial
                                                                                                                        compensation may represent a                                                 executive officer, and may thus obscure
                                           statements and perhaps cause them to
                                                                                                                        significant commitment of corporate                                          the value of a significant component of
                                           call into question the original grant date
                                                                                                                        resources and a significant portion of                                       compensation.
                                           fair value estimate?
                                              • Would the proposed separate                                             overall compensation. First, we are                                            As a result, we propose a new table
                                           column for grant date fair value                                             proposing to replace the current pension                                     disclosing estimated annual retirement
                                           previously reported for the same award                                       plan table, alternative plan disclosure                                      payments under defined benefit plans
                                           eliminate potential confusion about the                                      and some of the other narrative                                              for each named executive officer,
                                           amount of compensation provided by                                           descriptions with a table regarding                                          followed by narrative disclosure.146 A
                                           options, stock appreciation rights, stock                                    defined benefit pension plans and                                            separate line of tabular disclosure
                                           and similar instruments? Are there other                                     enhanced narrative disclosure. Second,                                       would be required for each plan in
                                           ways we could make this clear, such as                                       we are proposing a table and narrative                                       which a named executive officer
                                           an explanatory footnote to the table?                                        disclosure that will disclose information                                    participates that provides for the
                                              • Will investors understand that the                                      regarding non-qualified defined                                              payment of specified retirement
                                           value of equity compensation had                                             contribution plans and other deferred                                        benefits, or benefits that will be paid
                                           already been disclosed in the form of                                        compensation. Finally, we are                                                primarily following retirement.147




                                             144 15 U.S.C. 78p(a).                                                      402(f)(1). This requirement is for plans under which                         payable to the officers upon retirement at normal
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                                             145 Currently, for defined benefit or actuarial                            benefits are determined primarily by final                                   retirement age. See current Item 402(f)(2).
                                           plans, disclosure consists of a general table showing                        compensation (or average final compensation) and                               146 Proposed Item 402(i).
                                           estimated annual benefits under the plan payable                             years of service, and includes narrative disclosure.                           147 These would include, but not be limited to,
                                           upon retirement (including amounts attributable to                           If named executive officers are subject to other
                                           supplementary or excess pension award plans) for                             plans under which benefits are not determined                                tax-qualified defined benefit plans, supplemental
                                           specified compensation levels and years of service.                          primarily by final compensation (or average final                            employee retirement plans and cash balance plans,
                                           The table does not provide disclosure for any                                compensation), narrative disclosure is required of                           but would exclude defined contribution plans, for
                                           specific named executive officer. See current Item                           the benefit formula and estimated annual benefits                            which we propose disclosure as described below.


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                                                               Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                                              6561

                                                                                                RETIREMENT PLAN POTENTIAL ANNUAL PAYMENTS AND BENEFITS
                                                                                                                                                                                         Estimated                       Estimated
                                                                                                                                                         Number of       Normal re-     normal re-      Early retire-   early retire-
                                                                                                                                                        years cred-
                                                                                  Name                                                 Plan name                       tirement age    tirement an-      ment age       ment annual
                                                                                                                                                        ited service        (#)        nual benefit         (#)           benefit
                                                                                                                                                             (#)                             ($)                             ($)

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

                                           PEO ..................................................................................
                                           PFO ..................................................................................
                                           A .......................................................................................
                                           B .......................................................................................
                                           C .......................................................................................



                                              An instruction would provide that                                         include, in given cases, among other                      the named executive officer currently is
                                           quantification of benefits should reflect                                    things:                                                   eligible to retire under the plan with a
                                           the form of benefit currently elected by                                       • The material terms and conditions                     lump sum distribution?
                                           the named executive officer, such as                                         of benefits available under the plan,                        • Is there any particular form of plan
                                           joint and survivor annuity or single life                                    including the plan’s retirement benefit                   for which the proposed disclosure
                                           annuity, specifying that form in a                                           formula and eligibility standards, and                    format is not suitable? If so, how could
                                           footnote. Where the named executive                                          early retirement arrangements;                            the proposed disclosure requirement be
                                           officer is not yet eligible to retire, the                                     • If the executive or company may                       adapted for such plans?
                                           dollar amount of annual benefits to                                          elect a lump sum distribution, the
                                           which he or she would be entitled upon                                       amount of such distribution that would                    b. Nonqualified Defined Contribution
                                           becoming eligible would be computed                                          be available on election as of the end of                 and Other Deferred Compensation Plans
                                           assuming that the named executive                                            the company’s last fiscal year,                           Table
                                           officer continued to earn the same                                           disclosing the valuation method and                         In order to provide a more complete
                                           amount of compensation as reported for                                       material assumptions applied in                           picture of potential post-employment
                                           the company’s last fiscal year. If a                                         quantifying such amount;                                  compensation, we are proposing a new
                                           named executive officer left during the                                        • The specific elements of                              table to disclose contributions, earnings
                                           year, the dollar amounts of annual                                           compensation, such as salary and                          and balances under nonqualified
                                           benefits to which he or she would be                                         various forms of bonus, included in                       defined contribution and other deferred
                                           entitled would be required to be                                             applying the benefit formula,                             compensation plans. These plans may
                                           disclosed.                                                                   identifying each such element;                            be a significant element of retirement
                                                                                                                          • Regarding participation in multiple
                                              ‘‘Normal retirement age’’ would mean                                                                                                and post-termination compensation.150
                                                                                                                        plans, the reasons for each plan; and
                                           the normal retirement age defined in the                                       • Company policies with regard to                       Our current rules elicit disclosure of the
                                           plan, or if not so defined, the earliest                                     such matters as granting extra years of                   compensation when earned and only
                                           time at which a participant may retire                                       credited service.                                         the above-market earnings on
                                           under the plan without any benefit                                                                                                     nonqualified deferred compensation.151
                                           reduction due to age. ‘‘Early retirement                                     Request for Comment                                       The full value of those earnings and the
                                           age’’ would be defined similarly as early                                       • Should any other information                         accounts on which they are payable are
                                           retirement age as defined in the plan, or                                    (including information that may be                        not currently subject to disclosure, nor
                                           otherwise available to the executive.148                                     disclosed in the narrative) be included                   are shareholders and investors informed
                                           If the credited years of service for the                                     in the proposed table? Should any of the                  regarding the rate at which these
                                           executive under any plan differ from the                                     information we propose to require to be                   amounts—and the corresponding cost to
                                           actual years of service with the                                             disclosed be excluded?                                    the company—are growing.152
                                           company, a footnote quantifying the                                             • Should this item require                               Therefore, as noted above, we are
                                           difference and any resulting benefit                                         quantification of the aggregate actuarial                 proposing to require disclosure in the
                                           increase would be required.149                                               value of a plan benefit as of the end of                  Summary Compensation Table of all
                                              The table would be followed by a                                          the company’s last fiscal year without                    earnings on compensation that is
                                           narrative description of material factors                                    regard to whether the plan permits a                      deferred on a basis that is not tax-
                                           necessary to an understanding of each                                        lump sum distribution? If so, why?                        qualified and are also proposing new
                                           plan disclosed in the table. Examples of                                     Alternatively, would this information                     tabular and narrative disclosure of
                                           such factors in the proposed rule may                                        provide meaningful disclosure only if                     nonqualified deferred compensation.153
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                                             148 Proposed   Instruction 3 to Item 402(i).                               tax treatment under the Internal Revenue Code. A            152 See Lucian A. Bebchuk and Jesse M. Fried,

                                             149 Proposed   Instruction 2 to Item 402(i).                               typical 401(k) plan, by contrast, is a qualified          Stealth Compensation via Retirement Benefits, 1
                                             150 Nonqualified defined contribution and other                            deferred compensation plan. Nonqualified defined          Berkeley Bus. L.J. 291, 314–316 (2004); See also The
                                                                                                                        contribution and other deferred compensation plans        Corporate Counsel (Sept.–Oct. 2005) at 6–7 and
                                           deferred compensation plans are plans providing                              are generally unfunded, and their taxation is
                                           for deferral of compensation that do not satisfy the                                                                                   Gretchen Morgenson, Executive Pay, Hiding Behind
                                                                                                                        governed by Section 409A of the Internal Revenue
                                           minimum coverage, nondiscrimination and other                                Code [26 U.S.C. 409A].                                    Small Print, N.Y. Times, Feb. 8, 2004, § 3, at 1.
                                                                                                                                                                                    153 Proposed Item 402(j).
                                           rules that ‘‘qualify’’ broad-based plans for favorable                         151 See Section II.B.1.d.i. above.




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                                           6562                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                                                            NONQUALIFIED DEFINED CONTRIBUTION AND OTHER DEFERRED COMPENSATION PLANS
                                                                                                                                                                Executive       Registrant       Aggregate      Aggregate       Aggregate
                                                                                                                                                                 contribu-       contribu-       earnings in   withdrawals/     balance at
                                                                                              Name                                                             tions in last   tions in last       last FY     distributions     last FYE
                                                                                                                                                                    FY              FY               ($)             ($)            ($)
                                                                                                                                                                    ($)             ($)

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

                                           PEO .........................................................................................................
                                           PFO ..........................................................................................................
                                           A ...............................................................................................................
                                           B ...............................................................................................................
                                           C ..............................................................................................................



                                             An instruction would require footnote                                       Request for Comment                                              that provides for payments at, following,
                                           quantification of the extent to which                                           • Should tabular or narrative                                  or in connection with the resignation,
                                           amounts in the contributions and                                              disclosure require presentation of any                           severance, retirement or other
                                           earnings columns are reported as                                              additional information necessary for                             termination (including constructive
                                           compensation in the year in question                                          investors to clearly understand                                  termination) of a named executive
                                           and other amounts reported in the table                                       nonqualified deferred compensation?                              officer, a change in his or her
                                           in the aggregate balance column were                                          For example:                                                     responsibilities, or a change in control
                                           reported previously in the Summary                                                                                                             of the company. Our proposals would
                                           Compensation Table for prior years.154                                        —Should the dollar amount of aggregate                           call for narrative disclosure of the
                                           This would complement the proposed                                              interest or other earnings accrued                             following information regarding
                                           instruction to the Summary                                                      from inception of the named                                    termination and change in control
                                           Compensation Table that would require                                           executive officer’s participation in the                       provisions: 158
                                           footnote disclosure of amounts for                                              plan through the end of the                                      • The specific circumstances that
                                           which receipt has been deferred.155                                             company’s last fiscal year be                                  would trigger payment(s) under the
                                           Together, these footnotes would operate                                         disclosed in the proposed table?                               termination or change-in-control
                                           to provide information so that investors                                      —Is a narrative description of the tax                           arrangements or the provision of other
                                           can avoid ‘‘double counting’’ of deferred                                       implications for both the participant                          benefits (references to benefits include
                                           amounts by clarifying the extent to                                             and the company necessary to a                                 perquisites);
                                           which amounts payable as deferred                                               material understanding of these                                  • The estimated payments and
                                           compensation represent compensation                                             plans?                                                         benefits that would be provided in each
                                           previously reported, rather than                                                • In addition to the footnote required                         termination circumstance, and whether
                                           additional currently earned                                                   by the proposed instruction, are any                             they would or could be lump-sum or
                                           compensation.                                                                 other provisions necessary or                                    annual, disclosing the duration and by
                                             The table would be followed by a                                            appropriate to avoid ‘‘double counting’’                         whom they would be provided; 159
                                           narrative description of material factors                                     of previously reported compensation                                • The specific factors used to
                                           necessary to an understanding of the                                          that will have been deferred?                                    determine the appropriate payment and
                                           disclosure in the table.156 Examples of                                         • Should only above market or                                  benefit levels under the various
                                           such factors in the proposed rule may                                         preferential earnings be included in the                         circumstances that would trigger
                                           include, in given cases, among other                                          table? If so, why would such disclosure                          payments or provision of benefits;
                                           things:                                                                                                                                          • Any material conditions or
                                                                                                                         be more useful or informative to
                                             • The type(s) of compensation                                               investors?
                                                                                                                                                                                          obligations applicable to the receipt of
                                           permitted to be deferred, and any                                                                                                              payments or benefits, including but not
                                                                                                                           • Is any of the proposed new
                                           limitations (by percentage of                                                                                                                  limited to non-compete, non-
                                                                                                                         disclosure unnecessary? If so, please
                                           compensation or otherwise) on the                                                                                                              solicitation, non-disparagement or
                                                                                                                         explain.                                                         confidentiality covenants; and
                                           extent to which deferral is permitted;
                                             • The measures of calculating interest                                      c. Other Potential Post-Employment                                 • Any other material features
                                           or other plan earnings (including                                             Payments                                                         necessary for an understanding of the
                                           whether such measure(s) are selected by                                                                                                        provisions.
                                                                                                                           We are proposing significant revisions
                                           the named executive officer or the                                            to our requirements to describe                                  The item contemplates disclosure of the
                                           company and the frequency and manner                                          termination or change in control                                 duration of non-compete and similar
                                           in which such selections may be                                                                                                                agreements, and provisions regarding
                                                                                                                         provisions. The Commission has long
                                           changed), quantifying interest rates and                                                                                                       waiver of breach of these agreements,
                                                                                                                         recognized that ‘‘termination provisions
                                           other earnings measures applicable                                                                                                             and disclosure of tax gross-up
                                                                                                                         are distinct from other plans in both
                                           during the company’s last fiscal year;                                                                                                         payments.
                                                                                                                         intent and scope and, moreover, are of                             As proposed, a company would be
                                           and                                                                           particular interest to shareholders.’’ 157
                                             • Material terms with respect to                                            Currently, disclosure does not in many
                                                                                                                                                                                          required to provide quantitative
                                           payouts, withdrawals and other                                                cases capture material information
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                                                                                                                                                                                            158 Proposed Item 402(k), which would replace
                                           distributions.                                                                regarding these plans and potential                              current Item 402(h)(2).
                                             154 Proposed
                                                                                                                         payments under them. We therefore                                  159 We propose to eliminate the current $100,000
                                                          Instruction to Item 402(j)(2).                                                                                                  disclosure threshold. With respect to post-
                                             155 Proposed Instruction 4 to Item 402(c),
                                                                                                                         propose disclosure of specific aspects of
                                                                                                                                                                                          termination perquisites, however, the same
                                           described in Section II.B.1.b., above, regarding the                          any written or unwritten arrangement                             disclosure and itemization thresholds proposed for
                                           Summary Compensation Table.                                                                                                                    the Summary Compensation Table would apply.
                                             156 Proposed Item 402(j)(3).                                                   157 1983    Release, at Section III.E.                        See Section II.B.1.d.iii, above.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                              6563

                                           disclosure under these requirements                     as is currently the case, up to two                       status of these particular officers are
                                           even where uncertainties exist as to                    additional individuals for whom                           unquestionably or presumptively
                                           amounts payable under these plans and                   disclosure would have been required                       material. At the time when a decision is
                                           arrangements. In the event that                         but for the fact that they were no longer                 made regarding the employment status
                                           uncertainties exist as to the provision of              serving as executive officers at the end                  of a particular officer, it will not always
                                           payments or benefits or the amounts                     of the last completed fiscal year would                   be clear who will be the named
                                           involved, the company would be                          be included.                                              executive officers for the current year.
                                           required to make reasonable estimates                      We believe that compensation of the                    Given these factors, it is reasonable for
                                           and disclose material assumptions                       principal financial officer is important                  the two groups not to be identical.
                                           underlying such estimates in its                        to shareholders because, along with the
                                                                                                                                                             Request for Comment
                                           disclosure. In such event, the disclosure               principal executive officer, the principal
                                           would be considered forward-looking                     financial officer provides the                              • Should the principal financial
                                           information as appropriate that falls                   certifications required with the                          officer be specifically included as a
                                           within the safe harbor for disclosure of                company’s periodic reports and has                        named executive officer?
                                           such information.160                                    important responsibility for the fair                       • Would the proposed named
                                                                                                   presentation of the company’s financial                   executive officers be those executive
                                           Request for Comment                                                                                               officers whose compensation is material
                                                                                                   statements and other financial
                                             • Should we, as proposed, eliminate                   information.163 Like the principal                        to investors? Is only the compensation
                                           the current $100,000 threshold for                      executive officer, disclosure about the                   of the principal executive officer
                                           disclosure for compensatory plans or                    principal financial officer would be                      material? The principal executive officer
                                           arrangements providing payments upon                    required even if he or she was no longer                  and the principal financial officer?
                                           termination or change-in-control?                       serving in that capacity at the end of the                  • Should Item 402 specifically
                                             • Should the proposed item                            last completed fiscal year.164 As is                      require disclosure of the compensation
                                           specifically require narrative disclosure               currently the case for the chief executive                of any other officers listed in Form 8–
                                           of any additional information? If so,                   officer, all persons who served as the                    K Item 5.02? If so, which officers and
                                           what information and why?                               company’s principal executive officer or                  why? If we were to require Item 402
                                             • Would a tabular format result in                    principal financial officer during the                    disclosure regarding compensation of
                                           more effective disclosure of any of this                last completed fiscal year would be                       additional Item 5.02 officers, should we
                                           information? If so, how should such a                   named executive officers.                                 also require Item 402 disclosure for two
                                           table be constructed so that it is easily                  We do not propose to require                           or three additional officers who receive
                                           understood, given the wide variability                  compensation disclosure for all of the                    the highest compensation?
                                           of the factors determining payments?                    officers listed in Item 5.02 of Form 8–                     • Are there any other specific
                                           For example, should such a table have                   K.165 Item 5.02 of Form 8–K was                           executive officers, such as the general
                                           separate columns for cash payments,                     adopted to provide current disclosure in                  counsel or principal accounting officer,
                                           stock payments, and perquisites;                        the event of an appointment,                              who should be specifically identified as
                                           separate lines for each potential                       resignation, retirement or termination of                 named executive officers? If so, which
                                           termination event; and narrative                        the specified officers, based on the                      officers and why?
                                           disclosure of other material terms, such                principle that changes in employment                        • Should we retain, as proposed, the
                                           as duration, renewal and applicable                                                                               current requirement that up to two
                                           covenants?                                              to a registrant, means its president, any vice            additional individuals for whom
                                             • Should we require companies to                      president of the registrant in charge of a principal      disclosure would have been required
                                           provide quantitative disclosure as                      business unit, division or function (such as sales,       but for the fact that they were no longer
                                           proposed? If not, how can there be                      administration or finance), any other officer who         serving as executive officers at the end
                                                                                                   performs a policy making function or any other
                                           assurance that investors can understand                 person who performs similar policy making                 of the year be included in the
                                           the significant amounts of compensation                 functions for the registrant. Executive officers of       disclosure?
                                           that may be involved?                                   subsidiaries may be deemed executive officers of            • Is the continuation of the current
                                                                                                   the registrant if they perform such policy making         requirement for five named executive
                                           6. Officers Covered                                     functions for the registrant.’’ Therefore, as is
                                                                                                   currently the case today, a named executive officer
                                                                                                                                                             officers appropriate? Should that
                                           a. Named Executive Officers                             may be an executive officer of a subsidiary.              number be higher or lower?
                                              We propose to have the principal                        163 Exchange Act Rules 13a–14 and 15d–14.
                                                                                                                                                             b. Identification of Most Highly
                                                                                                      164 Proposed paragraphs (a)(3)(i) and (a)(3)(ii) of
                                           executive officer, the principal financial                                                                        Compensated Officers; Dollar Threshold
                                                                                                   Item 402 would provide that all individuals who
                                           officer 161 and the three most highly                   served as a principal executive officer and principal     for Disclosure
                                           compensated executive officers other                    financial officer or in similar capacities during the
                                           than the principal executive officer and                last completed fiscal year must be considered                We propose to identify the most
                                           principal financial officer comprise the                named executive officers. Proposed Instruction 4 to       highly compensated executive officers
                                           named executive officers.162 In addition,               Item 402(a)(3) would specify that if the principal        on the basis of total compensation for
                                                                                                   executive officer or principal financial officer          the most recent fiscal year.166 We also
                                                                                                   served in that capacity for only part of a fiscal year,
                                              160 See Securities Act Section 27A and Exchange
                                                                                                   information must be provided as to all of the             propose to revise the dollar threshold
                                           Act Section 21E.                                        individual’s compensation for the full fiscal year.       for disclosure of named executive
                                              161 We propose to adopt the nomenclature used        Proposed Instruction 4 to Item 402(a)(3) would also       officers other than the principal
                                           most recently in Item 5.02 of Form 8–K, which           specify that if a named executive officer (other than     executive officer and the principal
                                           refers to ‘‘principal executive officer’’ and           the principal executive officer or principal financial
                                           ‘‘principal financial officer.’’                        officer) served as an executive officer of the            financial officer to $100,000 of total
                                                                                                                                                             compensation for the last fiscal year.167
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                                              162 Proposed Item 402(a)(3). Currently, the named    company (whether or not in the same position)
                                           executive officers for whom disclosure is required      during any part of the fiscal year, then information      Both the determination of the most
                                           include the company’s chief executive officer and       is required as to all compensation of that individual     highly compensated officers and the
                                           the four most highly compensated executive officers     for the full fiscal year.
                                           excluding the chief executive officer. As defined in       165 These are the registrant’s principal executive
                                                                                                                                                             $100,000 disclosure threshold are
                                           Securities Act Rule 405 [17 CFR 230.405] and            officer, president, principal financial officer,
                                                                                                                                                              166 Proposed   Instruction 1 to Item 402(a)(3).
                                           Exchange Act Rule 3b–7 [17 CFR 240.3b–7], ‘‘the         principal accounting officer, principal operating
                                           term ‘executive officer,’ when used with reference      officer or any person performing similar functions.        167 Id.




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                                           6564             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           currently based only on total annual                    7. Interplay of Items 402 and 404                       benefits.175 For this reason, we propose
                                           salary and bonus for the last fiscal                                                                            to delete relocation plans from this
                                           year.168 Given the proliferation of                        We propose that Item 402 require                     exclusion. For the same reason, we are
                                           various forms of compensation other                     disclosure of all transactions between                  also deleting relocation plans from the
                                           than salary and bonus, we believe that                  the company and a third party where                     exclusion from portfolio manager
                                           total compensation more accurately                      the primary purpose of the transaction                  compensation in forms used by
                                           identifies those officers who are, in fact,             is to furnish compensation to a named                   management investment companies to
                                           the most highly compensated.                            executive officer. Currently, while Item                register under the Investment Company
                                           Moreover, basing identification of                      402 states that such compensation is                    Act and offer securities under the
                                           named executive officers solely on the                  reportable under Item 402, even if also                 Securities Act.176 We also propose to
                                           compensation reportable in the salary                   called for by another requirement, Item                 revise the definition of ‘‘plan’’ so that it
                                           and bonus categories may provide an                     402 also provides that information may                  is more principles-based.177
                                           incentive to re-characterize                            be excluded if a transaction has been
                                           compensation.                                           reported in response to Item 404.171                    Request for Comment
                                              Under the current rules, companies                   This provision may cause Item 402                         • Should relocation plans be required
                                           are permitted to exclude an executive                   disclosure to omit compensation that a                  to be disclosed as compensation?
                                           officer (other than the chief executive                 transaction disclosed under Item 404                    Should group life, health,
                                           officer) due to either an unusually large               provides to executives. We propose to                   hospitalization and medical
                                           amount of cash compensation that is not                 eliminate that exclusion from Item                      reimbursement also be included in
                                           part of a recurring arrangement and is                  402.172 We also propose instructions to                 reportable compensation? Can these
                                           unlikely to continue, or cash                           Item 404 that would clarify what                        plans be operated in a manner that may
                                           compensation relating to overseas                       compensation does not need to be                        obscure compensation disclosure? Are
                                           assignments attributed predominantly to                 reported under Item 404.173 In some                     there other plans or benefits that should
                                           such assignments.169 Because payments                   cases the result may nevertheless be that               be excluded from the disclosure
                                           attributed to overseas assignments have                 compensation information is disclosed                   requirements of Item 402? If so, why?
                                           the potential to skew the application of                under Item 402 while a related person                     • Should management investment
                                           Item 402 disclosure away from                           transaction giving rise to that                         companies be required to disclose all
                                           executives whose compensation                           compensation is disclosed under Item                    relocation plans as portfolio manager
                                           otherwise properly would be disclosed,                  404. We believe the possibility of                      compensation? Should all group life,
                                           we propose to retain this basis for                     additional disclosure in the context of                 health, hospitalization, medical
                                           exclusion. However, we believe that                     each of the respective items is preferable              reimbursement, and pension and
                                           other compensation that is ‘‘not                        to the possibility that compensation is                 retirement plans and arrangements also
                                           recurring and unlikely to continue’’                    not properly and fully disclosed under                  be included in compensation that is
                                           should be considered compensation for                   Item 402.                                               disclosed for portfolio managers of
                                           disclosure purposes. There has been                     Request for Comment                                     management investment companies?
                                           inconsistent interpretation of the ‘‘not
                                                                                                                                                           9. Compensation of Directors
                                           recurring and unlikely to continue’’                       • In light of the amendments to Item
                                           standard, and it is susceptible to                      404 that we also propose, are there any                   Director compensation has continued
                                           manipulation. We therefore propose to                   circumstances for which the current                     to evolve from simple compensation
                                           eliminate this basis for exclusion.170                  exclusion from Item 402 disclosure for                  packages mostly involving cash
                                                                                                   transactions reported under Item 404                    compensation and attendance fees to
                                           Request for Comment
                                                                                                   should be retained? If so, why?                         more complex packages, which can also
                                              • Are there any particular                                                                                   include share-based compensation,
                                           circumstances or categories of                          8. Other Proposed Changes                               incentive plans and other forms of
                                           companies for which a measure other                                                                             compensation.178 In light of this
                                           than total compensation should be                          A company is currently permitted to
                                                                                                   omit from Item 402 disclosure                           complexity, we have determined to
                                           applied to identify the most highly                                                                             propose formatted tabular disclosure for
                                           compensated executive officers? If so,                  ‘‘information regarding group life,
                                                                                                   health, hospitalization, medical                        director compensation, accompanied by
                                           what measure should be applied and                                                                              narrative disclosure of additional
                                           why? Is $100,000 the correct disclosure                 reimbursement or relocation plans that
                                                                                                   do not discriminate in scope, terms or                  material information. In doing so, we
                                           threshold?                                                                                                      are revisiting an approach that the
                                              • Should payments attributable to                    operation, in favor of executive officers
                                           overseas assignments be included in                     or directors of the company and that are                  175 See, e.g., Ellen Simon, At Corporate Helm,

                                           determining the most highly                             available generally to all salaried                     Extra Benefits Still Alive and Well, Assoc. Press,
                                           compensated officers, given that the                    employees.’’ 174 Because relocation                     Apr. 26, 2004; and Carrie Johnson, Former Tyco
                                           purpose of such payments typically is to                plans, even when available generally to                 Executive Takes Stand in Trial, Wash. Post, Feb. 11,
                                                                                                   all salaried employees, are susceptible                 2004, at E2.
                                           compensate for disadvantageous                                                                                    176 Proposed amendment to Instruction 2 to Item

                                           currency exchange rates or high costs of                to operation in a discriminatory manner                 15(b) of Form N–1A; proposed amendment to
                                           living?                                                 that favors executive officers, this                    Instruction 2 to Item 21.2 of Form N–2; proposed
                                              • Are there any particular                           exclusion may deprive investors of                      amendment to Instruction 2 to Item 22(b) of Form
                                                                                                   disclosure of significant compensatory                  N–3.
                                           circumstances, such as commissions for                                                                            177 Proposed Item 402(a)(6)(ii).
                                           executives responsible for sales, for                                                                             178 See, e.g., National Association of Corporate
                                                                                                     171 Current Items 402(a)(2) and 402(a)(5).
                                           which the ‘‘not recurring and unlikely
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                                                                                                                                                           Directors and Pearl Meyer & Partners, 2003–2004
                                                                                                     172 Because  current Item 402(a)(5) otherwise is
                                           to continue’’ standard should be                                                                                Director Compensation Survey (2004); National
                                                                                                   redundant with current Item 402(a)(2), we propose       Association of Corporate Directors, Report of the
                                           retained?                                               to rescind Item 402(a)(5) in its entirety. We propose   NACD Blue Ribbon Commission On Director
                                                                                                   a conforming amendment to Item 402(a)(2).               Compensation (2001); and Dennis C. Carey, et al.,
                                             168 CurrentInstruction 1 to Item 402(a)(3).             173 Proposed Instructions 5 and 6 to Item 404(a).
                                                                                                                                                           How Should Corporate Directors Be Compensated?,
                                             169 CurrentInstruction 3 to Item 402(a)(3).             174 Current Item 402(a)(7)(ii), which generally       Investment Dealers’ Digest Inc.—Special Issue:
                                             170 Proposed Instruction 3 to Item 402(a)(3).         defines the term ‘‘plan.’’                              Boards and Directors (Jan. 1996).


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                                                                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                                                 6565

                                           Commission proposed in 1995 but did                                            opposing the proposal believed that                       proposing a Director Compensation
                                           not adopt at that time.179 The                                                 non-executive directors were generally                    Table, which would resemble the
                                           commenters supporting the proposal                                             compensated uniformly, and therefore                      proposed Summary Compensation
                                           generally believed that it was                                                 breaking out compensation for each                        Table, but would present information
                                           appropriate to treat director                                                  director in a table often could yield                     only with respect to the company’s last
                                           compensation similarly to executive                                            repetitious data.181                                      completed fiscal year.
                                           compensation.180 The commenters                                                  Director compensation has continued
                                                                                                                          to evolve since 1995 so that we are again

                                                                                                                                       DIRECTOR COMPENSATION
                                                                                                                                                                                                           Non-stock
                                                                                                                                                            Fees                                                             All other
                                                                                                                                                                            Stock           Option         incentive
                                                                                                                                                          earned or                                                         compensa-
                                                                                     Name                                                     Total                        awards           awards         plan com-
                                                                                                                                                         paid in cash                                                           tion
                                                                                                                                                                             ($)              ($)          pensation
                                                                                                                                                              ($)                                                                ($)
                                                                                                                                                                                                               ($)

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

                                           A   ...........................................................................................
                                           B   ...........................................................................................
                                           C   ...........................................................................................
                                           D   ...........................................................................................
                                           E   ...........................................................................................



                                              The All Other Compensation column                                           contribution and other deferred                           amounts of compensation paid to a
                                           of the proposed Director Compensation                                          compensation plans;                                       named executive officer and disclosed
                                           Table would include, but not be limited                                           • All consulting fees;                                 in the Summary Compensation Table
                                           to:                                                                               • Awards under director legacy or                      with footnote disclosure indicating what
                                              • All perquisites and other personal                                        charitable awards programs; 182 and                       amounts reflected in that table are
                                           benefits if the total is $10,000 or greater;                                      • The dollar value of any insurance                    compensation for services as a director.
                                              • All earnings on compensation that                                         premiums paid by, or on behalf of, the                    A proposed instruction to the Director
                                                                                                                          company for life insurance for the                        Compensation Table would permit the
                                           is deferred on a basis that is not tax-
                                                                                                                          director’s benefit.                                       grouping of directors in a single row of
                                           qualified;
                                                                                                                             In addition to the disclosure specified                the table if all of their elements and
                                              • All tax reimbursements;                                                   in the columns of the table, companies
                                              • Annual company contributions or                                                                                                     amounts of compensation are
                                                                                                                          would be required to disclose, for each                   identical.185
                                           other allocations to vested and unvested                                       director, by footnote to the appropriate                    Following the table, narrative
                                           defined contribution plans;                                                    column, the outstanding equity awards                     disclosure would describe any material
                                              • For any security of the company or                                        at fiscal year end as would be required                   factors necessary to an understanding of
                                           its subsidiaries purchased from the                                            if the Outstanding Equity Awards at                       the table. Such factors may include, for
                                           company or its subsidiaries (through                                           Fiscal Year-End table for named                           example, a breakdown of types of
                                           deferral of fees or otherwise) at a                                            executive officers were required for                      fees.186 We are not proposing the
                                           discount from the market price of such                                         directors.183 The same instructions as                    supplemental tables for directors.
                                           security at the date of purchase, unless                                       provided in the Summary
                                           the discount is generally available to all                                     Compensation Table would govern                           Request for Comment
                                           security holders or to all salaried                                            analogous matters in the Director                           • Does the proposed table organize
                                           employees of the company, the                                                  Compensation Table. As with the                           director compensation disclosure in a
                                           compensation cost computed in                                                  Summary Compensation Table, the                           format that is easy to understand?
                                           accordance with FAS 123R;                                                      proposed rules make clear that all                          • Do the proposed table and narrative
                                              • Aggregate annual increase in                                              compensation must be included in the                      disclose information that is material to
                                           actuarial value of all defined benefit and                                     table.184 As is the case with the current                 an investor’s analysis of director
                                           actuarial pension plans;                                                       director disclosure requirement,                          compensation? Should other tables be
                                              • Annual company contributions to                                           companies would not be required to                        required, such as the Grants of
                                           vested and unvested defined                                                    include in the director disclosure any                    Performance-Based Awards Table and
                                              179 1995 Release. The 1995 proposal was coupled                             Amerian Bar Association; American Institute of            agree to make a future donation to one or more
                                           with a proposal to permit companies to reduce the                              Certified Public Accountants; Association of              charitable institutions in the director’s name,
                                           detailed executive compensation information                                    Investment Management and Research; American              payable by the registrant upon a designated event
                                           provided in the proxy statement by instead                                     Society of Corporate Secretaries; Instituional            such as death or retirement. The amount to be
                                           furnishing that information in the Form 10–K. We                               Shareholder Services; and Ernst & Young LLP
                                                                                                                                                                                    disclosed in the table would be the annual cost of
                                           did not act upon the proposals.                                                (favoring tabular disclosure of director
                                              180 The Commission received approximately 153                               compensation, but with suggested improvements to          such promises and payments, with footnote
                                                                                                                          proposed rules).                                          disclosure of the total dollar amount and other
                                           letters supporting the proposal. Of those, 133, all
                                           individuals, expressed their views via a brief                                    181 Approximately 20 commenters, primarily             material terms of each such program.
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                                           statement submitted using a form letter. Additional                            corporations and associations, opposed the rules.           183 Proposed Instruction to item 402(l)(2)(iv) and

                                           supporting commenters included corporations,                                   See, e.g., comment letters in File No. S7–14–95           (v).
                                           associations, unions, and security holder resource                             from the American Corporate Counsel Association;            184 The only exception would be if all perquisites
                                           providers. See, e.g., comment letters on the 1995                              AT&T Corp.; The Business Roundtable;
                                                                                                                                                                                    received by the director total less than $10,000, they
                                           Release in File No. S7–14–95 from Bell Atlantic                                Consolidated Edison Company of New York; Deere
                                                                                                                          & Communications, Inc.                                    would not need to be disclosed.
                                           Network Services, Inc.; Chevron Corporation; and
                                                                                                                             182 Under director legacy programs, also known as        185 Proposed Instruction to item 402(l)(2).
                                           Scott Paper Company (generally offering support for
                                           proposal). See also, e.g., coment letters from the                             charitable award programs registrants typically             186 Proposed Item 402(l)(3).




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                                           6566             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           the Grants of All Other Equity Awards                   crafting the proposals, we recognize that               Request for Comment
                                           Table?                                                  the executive compensation                                 • Would reliance on narrative
                                              • Should named executive officers                    arrangements of small business issuers                  disclosure adversely affect
                                           who are also directors be omitted from                  typically are less complex than those of                comparability of disclosure among small
                                           the table, with any compensation for                    other public companies. We also                         business issuers? Are there particular
                                           services as a director reported only in                 recognize that satisfying disclosure                    forms of compensation that for this
                                           the Summary Compensation Table, as is                   requirements designed to capture more                   reason should instead be presented in a
                                           currently the case? If so, should there be              complicated compensation                                tabular format? If so, why?
                                           some indication of their status as                      arrangements may impose new,                               • Should small business issuers be
                                           directors and compensation related to                   unwarranted burdens on small business                   categorically exempted from providing a
                                           their director service in the Summary                   issuers.
                                           Compensation Table, the Director                                                                                Compensation Discussion and Analysis?
                                           Compensation Table, or both? Should                        As proposed, small business issuers                  Are there particular elements of the
                                           the nature or extent of compensation to                 would be required to provide, along                     proposed Compensation Discussion and
                                           the chairman of the board of directors be               with related narrative disclosure:                      Analysis in Item 402 of Regulation S–K
                                                                                                                                                           that small business issuers should be
                                           presented differently from that of other                   • The Summary Compensation
                                           directors?                                                                                                      required to address? If so, which
                                                                                                   Table; 188
                                              • With respect to disclosure of                                                                              elements and why?
                                                                                                      • The Outstanding Awards at Fiscal                      • Are there other provisions of our
                                           perquisites, should the director
                                                                                                   Year-End Table; 189 and                                 rule proposal that should not apply to
                                           compensation apply the same $10,000
                                           disclosure threshold as proposed for the                   • The Director Compensation                          small business issuers?
                                           Summary Compensation Table? Should                      Table.190                                                  • Should the Summary Compensation
                                           separate identification and                                                                                     Table require disclosure of
                                                                                                   Also as proposed, small business issuers
                                           quantification apply to director                                                                                compensation for each of the last two
                                                                                                   would only be required to provide                       fiscal years, or is only the last
                                           perquisites?                                            information in the Summary
                                              • Does the proposed table cover any                                                                          completed fiscal year necessary?
                                                                                                   Compensation Table for the last two                        • Should compensation disclosure be
                                           forms of compensation that typically are                fiscal years. In addition, small business
                                           not awarded to directors and therefore                                                                          provided for a larger group of executive
                                                                                                   issuers would be required to provide                    officers than we have proposed? If so,
                                           should be omitted? Should the                           information for fewer named executive
                                           requirements be modified to make it                                                                             which officers and why?
                                                                                                   officers, namely the principal executive                   • Should we require small business
                                           easier to capture forms of compensation,                officer and the two most highly
                                           if any, that develop in the future?                                                                             issuers to provide an Option Exercises
                                                                                                   compensated officers other than the                     and Stock Vested Table?
                                              • Does the proposed table omit any                   principal executive officer.191 Narrative
                                           forms of compensation awarded to                                                                                   • Should the quantitative threshold
                                                                                                   discussion of a number of items to the                  for identifying the most highly
                                           directors that should be specifically                   extent material would replace tabular or
                                           included or identified?                                                                                         compensated executive officers remain
                                                                                                   footnote disclosure, for example
                                              • Should narrative disclosure                                                                                the same in both Regulation S–B and
                                                                                                   identification of other items in the All                Regulation S–K? For example, if we
                                           regarding the company’s policies and
                                           objectives with respect to director                     Other Compensation column and a                         raise this threshold in Item 402 of
                                           compensation and share ownership or                     description of post-employment                          Regulation S–K, should it remain
                                           retention policies accompany this table?                payments and other benefits.192 Small                   $100,000 for Regulation S–B? Should
                                           Should it be included in the                            business issuers would not be required                  any other threshold be different for
                                           Compensation Discussion and Analysis?                   to provide a Compensation Discussion                    small business issuers?
                                              • Would more specific footnote                       and Analysis.193                                           • Should small business issuers also
                                           disclosure, as opposed to the proposed                                                                          be required to identify perquisites and
                                           accompanying narrative, provide                         Table columns disclosing potential realizable value     personal benefits valued, in the
                                                                                                   or grant date value. The current rules also permit      aggregate, in excess of $10,000 and to
                                           additional material information                         samll business issuers to exclude the Pension Plan
                                           regarding director compensation?                        Table.                                                  quantify perquisites and personal
                                           Should there be supplemental tables for                    188 Proposed Items 402(b) and 402(c) of              benefits valued at the greater of $25,000
                                           directors, or should we require                         Regulation S–B.                                         or ten percent of total perquisites and
                                           disclosure of the number of shares,                        189 Proposed Item 402(d) of Regulation S–B.
                                                                                                                                                           other personal benefits?
                                           units, options and other securities
                                                                                                      190 Proposed Item 402(f) of Regulation S–B.
                                                                                                                                                              • Should we require the
                                                                                                      191 Proposed Item 402(a) of Regulation S–B.
                                           awarded to directors in addition to the                                                                         supplemental tables to the Summary
                                                                                                   Proposed Item 402(c)(1)(vii) of Regulation S–B
                                           grant date fair value of such awards?                   would require an identification to the extent           Compensation Table?
                                                                                                   material of any item included under All Other              • Are there other items that should be
                                           C. Treatment of Specific Types of                       Compensation in the Summary Compensation                specifically required to be discussed in
                                           Issuers                                                 Table, however identification of an item wold not       the proposed narrative disclosure for
                                                                                                   be considered material under the proposal if it did
                                           1. Small Business Issuers                               not exceed the greater of $25,000 or 10% of all         small business issuers?
                                              The Item 402 proposals would                         items included in the specified category. All items
                                                                                                   of compensation would be requred to be included
                                                                                                                                                           2. Foreign Private Issuers
                                           continue to differentiate between small                 in the Summary Compensatio Table without regard           Currently a foreign private issuer will
                                           business issuers and other issuers.187 In               to whether such items are required to be
                                                                                                   indentified.
                                                                                                                                                           be deemed to comply with Item 402 of
                                                                                                                                                           Regulation S–K if it provides the
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                                              187 The term small business issuer is defined by        192 Proposed Item 402(c) and 402(e) of Regulation

                                           Item 10(a)(1) of Regulation S–B. Currently, under       S–B.                                                    information required by Items 6.B. and
                                           both Item 402 of Regulation S–B and Item 402 of            193 We would also eliminate the current provision    6.E.2. of Form 20–F, with more detailed
                                           Regulation S–K, a small business issuer is not          of Item 402 of Regulation S–K that allows small         information provided if otherwise made
                                           required to provide the Compensation Committee          business issuers using forms that call for Regulation
                                           Report, the Performance Graph, the Compensation         S–K disclosure to exclude the disclosure required
                                                                                                                                                           publicly available. The proposals would
                                           Committee Interlocks disclosure, the Ten-Year           by certain paragraphs of that Item. Current Item        continue this treatment of these issuers
                                           Option/SAR Repricings Table, and the Option Grant       402(a)(1)(i) of Regulation S–K.                         and clarify that the treatment of foreign

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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                             6567

                                           private issuers under Item 402 parallels                members of the advisory board, and                      Business development companies
                                           that under Form 20–F.                                   each of the three highest paid officers or              would also be required to make these
                                                                                                   any affiliated person of the company                    disclosures in their annual reports on
                                           Request for Comment
                                                                                                   that have aggregate compensation from                   Form 10–K.200
                                             • Should we eliminate the provision                   the company for the most recently                          As a result of these proposed
                                           which permits a foreign private issuer to               completed fiscal year in excess of                      amendments, the persons covered by
                                           comply with Item 402 by complying                       $60,000.197                                             the compensation disclosure
                                           with the more limited disclosure                           We are proposing to apply to business                requirements would be changed. The
                                           requirements under Form 20–F with                       development companies the same                          compensation disclosure in the proxy
                                           respect to management remuneration?                     executive compensation rules that apply                 and information statements and
                                           Should a foreign private issuer that is                 to operating companies because the                      registration statements of business
                                           required to comply with Item 402 (for                   proposed disclosure requirements are                    development companies would be
                                           example, by filing an annual report on                  intended to provide investors with a                    required to cover the same officers as for
                                           Form 10–K) be required to provide all                   clearer and more complete picture of                    operating companies, including the
                                           of the information required under Item                  executive compensation, and we are                      principal executive officer and principal
                                           402 instead of the information required                 concerned that this purpose would not                   financial officer, as well as the three
                                           under Form 20–F?                                        be achieved through piecemeal                           most highly compensated executive
                                           3. Business Development Companies                       application of some of the requirements.                officers that have total compensation
                                                                                                   Our proposal would also eliminate the                   exceeding $100,000,201 instead of each
                                              We are proposing to apply the same                                                                           of the three highest paid officers of the
                                           executive compensation disclosure                       current inconsistency between Form
                                                                                                   10–K, on the one hand, which requires                   company that have aggregate
                                           requirements to business development                                                                            compensation from the company for the
                                           companies that we are proposing for                     business development companies to
                                                                                                   furnish all of the information required                 most recently completed fiscal year in
                                           operating companies.194 Currently,                                                                              excess of $60,000. In addition, the
                                           business development companies are                      by Item 402 of Regulation S–K, and the
                                                                                                   proxy rules and Form N–2, on the other,                 registration statements of business
                                           required to provide executive                                                                                   development companies would no
                                           compensation disclosure based, in part,                 which require business development
                                                                                                   companies to provide some of the                        longer be required to disclose
                                           on the requirements that apply to                                                                               compensation of members of the
                                           operating companies and, in part, on the                information from Item 402 and other
                                                                                                   information that applies to registered                  advisory board or certain affiliated
                                           requirements that apply to investment                                                                           persons of the company.
                                           companies registered under the                          investment companies. Finally, we
                                                                                                                                                              Finally, under the proposals, the
                                           Investment Company Act. Moreover, the                   believe that, similar to operating
                                                                                                                                                           proxy and information statements and
                                           executive compensation disclosure                       companies, business development
                                                                                                                                                           registration statements of business
                                           requirements for business development                   companies should furnish
                                                                                                                                                           development companies would not be
                                           companies are not uniform in Securities                 compensation disclosure on proxies
                                                                                                                                                           required to include compensation from
                                           Act registration statements, proxy and                  relating to the compensation
                                                                                                                                                           the ‘‘fund complex.’’ Currently, this
                                           information statements, and Form 10–K.                  arrangements and other matters
                                                                                                                                                           information is required in some
                                           Under Form 10–K, business                               enumerated in Items 8(b) through (d) of                 circumstances.202
                                           development companies are required to                   Schedule 14A and not just in the case
                                           furnish all of the information required                 of director elections as currently                      Request for Comment
                                           by Item 402 of Regulation S–K for all of                required by Item 22(b)(13).                               • Should business development
                                           the persons covered by Item 402.195 In                     Under the proposals, the registration                companies be required to comply with
                                           proxy and information statements,                       statements of business development                      the same compensation disclosure
                                           business development companies are                      companies would be required to include                  requirements as operating companies or
                                           required to provide for directors and                   all of the disclosures required by Item                 registered investment companies, a
                                           each of the three highest paid officers                 402 of Regulation S–K for all of the                    combination of the compensation
                                           that have aggregate compensation from                   persons covered by Item 402.198 This                    disclosure requirements for operating
                                           the company for the most recently                       disclosure would also be required in the                companies and registered investment
                                           completed fiscal year in excess of                      proxy and information statements of                     companies, or some other set of
                                           $60,000, certain information required by                business development companies if                       compensation disclosure requirements?
                                           Item 402 of Regulation S–K and certain                  action is to be taken with respect to the               Should the same compensation
                                           other information that registered                       election of directors or with respect to                disclosure requirements apply to
                                           investment companies are required to                    the compensation arrangements and                       business development companies in
                                           provide.196 In registration statements,                 other matters enumerated in Items 8(b)                  registration statements, proxy and
                                           business development companies are                      through (d) of Schedule 14A.199                         information statements, and Form 10–
                                           required to provide the same                                                                                    K? In addressing the appropriate
                                           information required in proxy                             197 Item 18.14 of Form N–2.                           compensation disclosure requirements
                                                                                                     198 Proposed   Item 18.15 of Form N–2. Under the
                                           statements, but with respect to directors,                                                                      for business development companies,
                                                                                                   proposals, business development companies would
                                                                                                   no longer be required to respond to Item 18.14 of
                                                                                                                                                           commenters are requested to address
                                              194 Business development companies are a
                                                                                                   Form N–2, and Item 18.14(c) of Form N–2 would
                                           category of closed-end investment companies that        be deleted. Current Items 18.15 and 18.16 of Form       Proposed amendments to Item 22(b)(13) of
                                           are not required to register under the Investment       N–2 would be redesignated as Items 18.16 and            Schedule 14A.
                                           Company Act [15 U.S.C. 80a–2(a)(48)].                   18.17, respectively. As a result of the redesignation      200 Item 11 of Form 10–K.
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                                              195 Item 11 of Form 10–K.                            of current Item 18.16 of Form N–2, a change to the         201 See Section II.B.6., above.
                                              196 Items 8 and 22(b)(13) of Schedule 14A. These     cross reference to this Item in Instruction 8(a) of        202 See Instructions 4 and 6 to Item 22(b)(13)(i) of
                                           items require business development companies to         Item 24 of the form is also proposed.                   Schedule 14A; Instructions 4 and 6 to Item 18.14(a)
                                           provide certain information required by Item               199 Proposed amendment to Item 8 of Schedule         of Form N–2 (requiring certain entries in the
                                           402(b)(2)(iv) and (c) of Regulation S–K, as well as     14A. Under the proposals, business development          compensation table in the proxy and information
                                           a compensation table and a brief description of the     companies would no longer be required to respond        statements and registration statements of business
                                           material provisions of certain pension, retirement      to Item 22(b)(13) of Schedule 14A, and Item             development companies to include compensation
                                           and other plans.                                        22(b)(13)(iii) of Schedule 14A would be deleted.        from the fund complex).


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                                           6568             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           separately the persons covered by the                   executive compensation, should a                      staff’s experience over the last year
                                           disclosure requirements and the                         company be required to list in its annual             suggests that this item has elicited
                                           disclosures required with respect to                    proxy statement for the election of                   executive compensation disclosure
                                           those persons. Commenters are also                      directors all other documents filed since             regarding types of matters that do not
                                           requested to address separately                         the last proxy statement (such as Forms               appear always to be unquestionably or
                                           disclosures for executive officers and                  8–K and exhibits filed with Forms 10–                 presumptively material, which is the
                                           directors.                                              K and 10–Q) that contain this                         standard we set for the expanded Form
                                             • Should all business development                     information? Instead, should such a list              8–K disclosure events.207 We therefore
                                           companies be subject to the same                        be provided solely as an EDGAR-filed                  propose to revise Items 1.01 and 5.02 to
                                           executive compensation disclosure or                    annex to the proxy statement?                         require real-time disclosure of employee
                                           should we distinguish between smaller                     • Would the presentation and content                compensation events that more clearly
                                           and larger business development                         of the executive and director                         satisfy this standard.
                                           companies? Should business                              compensation disclosure be improved                      In addition to the proposed
                                           development companies be subject to                     by making the information available in                amendments to Items 1.01 and 5.02 of
                                           the executive compensation disclosure                   the form of interactive data? For                     Form 8–K, we propose to revise General
                                           requirements of Regulation S–B filers?                  example, could an understanding of the                Instruction D of Form 8–K to permit
                                             • Should we require disclosure of                     information reported in the proposed                  companies in most cases to omit the
                                           compensation paid to affiliated persons                 tables be enhanced by the ability to                  Item 1.01 heading if multiple items
                                           of a business development company and                   access more detailed information                      including Item 1.01 are applicable, so
                                           members of the advisory board of the                    regarding discrete amounts or items                   long as all of the substantive disclosure
                                           company?                                                reported in the tables? If the                        required by Item 1.01 is included.
                                             • Should we require disclosure of                     presentation of interactive data would                A. Proposed Revisions to Items 1.01 and
                                           certain compensation paid by the fund                   be desirable, what would be the best                  5.02 of Form 8–K
                                           complex that includes a business                        means for introducing interactive data
                                           development company?                                                                                            Item 1.01 of Form 8–K requires an
                                                                                                   capabilities into the proposed Item 402
                                                                                                                                                         Exchange Act reporting company to
                                           D. Conforming Amendments                                disclosure requirements? For example,
                                                                                                                                                         disclose, within four business days, the
                                                                                                   should we develop a data format that
                                             The Item 402 proposals necessitate                                                                          company’s entry into a material
                                                                                                   could be used to submit the information
                                           conforming amendments to the Items of                                                                         definitive agreement outside of its
                                                                                                   that has interactive capability while at
                                           Regulations S–K and S–B and the proxy                                                                         ordinary course of business, or any
                                                                                                   the same time having the information
                                           rules that cross reference amended                                                                            amendment of such agreement that is
                                                                                                   readable on its face? Should we
                                           paragraphs of Item 402. On this basis,                                                                        material to the company. When we
                                                                                                   consider having the information
                                           the rule proposals would amend:                                                                               initially proposed this item, several
                                                                                                   provided using Extensible Business
                                             • The Item 201(d) of Regulations S–                   Reporting Language, also known as
                                                                                                                                                         commenters stated that it would be
                                           K and S–B and proxy rule references to                                                                        difficult to determine, within the
                                                                                                   XBRL? Could the information be
                                           the Item 402 definition of ‘‘plan;’’ 203                                                                      shortened Form 8–K filing period,
                                                                                                   provided in a form that permits
                                             • The Item 601(b)(10) of Regulation                                                                         whether a particular definitive
                                                                                                   interactive capability in proxy and
                                           S–K reference to the Item 402 treatment                                                                       agreement met the materiality threshold
                                                                                                   information statements that are made
                                           of foreign private issuers; 204 and                                                                           of Item 1.01, and whether the agreement
                                             • The proxy rule references to Item                   available on the Internet or otherwise
                                                                                                                                                         was outside of the ordinary course of
                                           402 retirement plan disclosure.205                      electronically?
                                                                                                                                                         business.208 Some of these commenters
                                           E. General Comment Requests on the                      III. Proposed Revisions to Form 8–K                   suggested that we apply to Item 1.01 the
                                           Item 402 Proposals                                      and the Periodic Report Exhibit                       standards used in pre-existing Item
                                                                                                   Requirements                                          601(b)(10) of Regulation S–K governing
                                              We request comment on any aspect of                                                                        the filing as exhibits to Commission
                                           these proposals. In particular:                            In March 2004, the Commission
                                                                                                   adopted amendments to Form 8–K that                   reports of material contracts entered
                                              • Would the proposals effectively                                                                          into outside the ordinary course because
                                           provide clearer, more complete                          significantly expanded the number of
                                                                                                   events that are reportable on Form 8–K                these standards had been in place for
                                           disclosure of executive and director                                                                          many years and were familiar to
                                           compensation? If not, what changes are                  and reduced the reporting deadline for
                                                                                                   most Form 8–K disclosure items to four                reporting companies.209
                                           needed to accomplish this result?                                                                               In response to the concerns raised by
                                              • Are the proposals sufficiently                     business days after the triggering
                                                                                                   event.206 These amendments became                     these comments, we adopted Item 1.01
                                           broad-based to continue to operate                                                                            of Form 8–K so that it used the
                                           effectively as new forms of                             effective on August 23, 2004. As part of
                                           compensation are developed in the                       our broader effort to revise our                         207 We stated in Section I of the Form 8–K
                                           future? If not, what changes are                        executive and director compensation                   Adopting Release: ‘‘The revisions that we adopt
                                           necessary to achieve this flexibility?                  disclosure requirements, we are                       today will benefit markets by increasing the number
                                              • To clarify what other filed                        proposing revisions to Item 1.01 of Form              of unquestionably or presumptively material events
                                                                                                   8–K, which currently requires this real-              that must be disclosed currently.’’
                                           documents provide information about                                                                              208 See, e.g., comment letters on Additional Form
                                                                                                   time disclosure about an Exchange Act                 8–K Disclosure Requirements and Acceleration of
                                             203 Proposed amendments to: Instruction 2 to          reporting company’s entry into a                      Filing Date, Release No. 33–8106 (June 17, 2002) [67
                                           paragraph (d) of Item 201 of Regulation S–B;            material definitive agreement outside of              FR 42913] in File No. S7–22–02 from the
                                           Instruction 2 to paragraph (d) of Item 201 of           the ordinary course of the company’s                  Committee on Federal Regulation of Securities,
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                                           Regulation S–K; Exchange Act Rules 14a–6(a)(4)                                                                Section of Business Law of the American Bar
                                           and 14c–5(a)(4); and Instruction 1 to Item 10(c) of     business, as well as any material                     Association; Cleary, Gottlieb, Steen & Hamilton;
                                           Schedule 14A.                                           amendment to such an agreement. Our                   Intel Corporation; Professor Joseph A. Grundfest, et
                                             204 Proposed amendment to Item                                                                              al.; Perkins Coie LLP; Sherman & Sterling; and
                                           601(b)(10)(iii)(C)(5).                                    206 Additional Form 8–K Disclosure Requirements     Sullivan & Cromwell.
                                             205 Proposed amendments to Item 10(b)(1)(ii) and      and Acceleration of Filing Date, Release No. 33–         209 See e.g., comment letter in File No. S7–22–02

                                           the Instruction following Item 10(c) of Schedule        8400 (Mar. 16, 2004) [69 FR 15593] (the ‘‘Form 8–     from the Section of Business Law of the American
                                           14A.                                                    K Adopting Release’’).                                Bar Association.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                              6569

                                           standards of Item 601(b)(10) to                          Therefore, entry into these types of                     a more balanced approach to this aspect
                                           determine the types of agreements that                   contracts triggers the filing of a Form 8–               of Form 8–K that is designed to elicit
                                           are material to a company and not in the                 K within four business days.                             unquestionably or presumptively
                                           ordinary course of business. Item                        Importantly, the requirement for                         material information on a real-time
                                           601(b)(10) of Regulation S–K requires a                  directors and named executive officers                   basis, but seeks to limit Form 8–K
                                           company to file, as an exhibit to                        does not include an exception for those                  disclosure of information below that
                                           Securities Act and Exchange Act filings,                 that are ‘‘immaterial in amount or                       threshold. Accordingly, we propose to
                                           material contracts that are not made in                  significance.’’                                          amend Item 1.01 of Form 8–K to
                                           the ordinary course of business and are                     The incorporation of the Item                         eliminate employment compensation
                                           to be performed in whole or part at or                   601(b)(10) standards into Item 1.01 of                   arrangements and to cover such
                                           after the filing of the registration                     Form 8–K has therefore significantly                     arrangements under a modified broader
                                           statement or report, or were entered into                affected executive compensation                          Item 5.02.213
                                           not more than two years before the                       disclosure practices. Prior to the Form                     Item 5.02 of Form 8–K currently
                                           filing. The item refers specifically to                  8–K amendments, it was customary for                     generally requires disclosure within
                                           employment compensation                                  a company’s annual proxy statement to                    four business days of the appointment
                                           arrangements and establishes a                           be the primary vehicle for disclosure of                 or departure of directors and specified
                                           company’s obligation to file the                         executive and director compensation                      officers. In particular, Item 5.02 requires
                                           following as exhibits:                                   information. However, Item 1.01 of                       disclosure if a company’s principal
                                              • Any management contract or any                      amended Form 8–K has resulted in                         executive officer, president, principal
                                           compensatory plan, contract or                           executive compensation disclosures that                  financial officer, principal accounting
                                           arrangement, including but not limited                   are much more frequent and accelerated                   officer, principal operating officer, or
                                           to plans relating to options, warrants or                than those included in a company’s                       any person performing similar
                                           rights, pension, retirement or deferred                  proxy statement. In addition,                            functions, retires, resigns or is
                                           compensation or bonus, incentive or                      particularly because of the terms of Item                terminated from that position 214 or if a
                                           profit sharing (or if not set forth in any               601(b)(10), Item 1.01 of Form 8–K has                    company appoints a new principal
                                           formal document, a written description                   triggered compensation disclosure of the                 executive officer, president, principal
                                           thereof) in which any director or any                    types of matters that, in some cases,                    financial officer, principal accounting
                                           named executive officer (as defined by                   appear to fall short of the                              officer, principal operating officer, or
                                           Item 402(a)(3) of Regulation S–K)                        ‘‘unquestionably or presumptively                        any person performing similar
                                           participates;                                            material’’ standard associated with the                  functions.215 Item 5.02 also requires
                                              • Any other management contract or                    expanded Form 8–K disclosure items.                      disclosure if a director retires, resigns, is
                                           any other compensatory plan, contract,                   Companies and their counsel have                         removed, or declines to stand for re-
                                           or arrangement in which any other                        raised concerns that the new Form 8–K                    election.216 The required disclosure
                                           executive officer of the registrant                      requirements have resulted in real-time                  currently includes a brief description of
                                           participates, unless immaterial in                       disclosure of compensation events that                   the material terms of any employment
                                           amount or significance; and                              should be disclosed, if at all, in a                     agreement between the registrant and
                                              • Any compensation plan, contract or                  company’s proxy statement for its                        the officer and a description of
                                           arrangement adopted without the                          annual meeting or as an exhibit to the                   disagreements, if any.
                                           approval of security holders pursuant to                 company’s next periodic report, such as                     We propose to modify Item 5.02 to
                                           which equity may be awarded,                             the Form 10–Q or Form 10–K.211                           capture generally the currently required
                                           including, but not limited to, options,                     We believe that much of the                           information under that item, as well as
                                           warrants or rights in which any                          disclosure regarding employment                          additional information regarding
                                           employee (whether or not an executive                    compensation matters required in real-                   material employment compensation
                                           officer of the company) participates                     time under the new Form 8–K                              arrangements involving named
                                           unless immaterial in amount or                           requirements is viewed by investors as                   executive officers that currently fall
                                           significance.210                                         material.212 However, we also believe                    under Item 1.01. Our proposal will both
                                                                                                    that it would be appropriate to restore                  modify the overall requirements for
                                              210 Item 601(b)(10)(iii) of Regulation S-K. We note                                                            disclosure of employment compensation
                                           the provision in Item 601(b)(10)(iii)(A) that carves     Regarding Exhibit Requirement, Release No. 33–           arrangements on Form 8–K and locate
                                           out any plan, contract or arrangement in which           6287 (Feb. 6, 1981) 46 FR 11952], at Section I.
                                           named executive officers and directors do not
                                                                                                                                                             all such disclosure under a single item.
                                                                                                    Therefore, in February 1981, the Commission added
                                           participate that is ‘‘immaterial in amount or            ‘‘unless immaterial in amount or significance’’ to
                                                                                                                                                               213 We propose deleting the last sentence of
                                           significance.’’ In 1980, the Commission adopted          the definition of ‘‘material contracts’’ as applied to
                                           amendments to Regulation S–K that consolidated           remunerative plans, contracts or arrangements            current Instruction 1 to Item 1.01 of Form 8–K,
                                           all of the exhibit requirements of various disclosure    participated in by executives that are not named         which references the portions of Item 601(b)(10)
                                           forms into a single item in Regulation S–K.              executive officers. Id. We reiterate that this phrase    that specifically relate to management
                                           Amendments Regarding Exhibit Requirements,               was intended to indicate that whether plans,             compensation and compensatory plans. In place of
                                           Release No. 33–6230 (Aug. 27, 1980) [45 FR 58822],       contracts or arrangements which executive officers       the deleted sentence, we propose to add a sentence
                                           at Section II.B. This item was a forerunner of the       other than named executive officers participate are      specifying that agreements involving the subject
                                           current Item 601. As part of that 1980 adopting          to be included in the requirements of 601(b)(10)         matter identified in Item 601(b)(10)(iii)(A) or (B) of
                                           release, the definition of material contract             must be determined on the basis of materiality.          Regulation S–K need not be disclosed under Item
                                           contained in the new item was also revised in an            211 See, e.g., Melissa Klein Aguilar, This Side of    1.01 of Form 8–K. This change also will apply to
                                           effort to reduce the number of remunerative plans        Caution: New Regs. Prompt 8–K Increases,                 disclosure of terminations of material definitive
                                           or arrangements that must be filed. Not long after,      Compliance Week, Aug. 23, 2005; Scott S. Cohen,          agreements under Item 1.02 of Form 8–K, which
                                           though, the staff discovered that rather than reduce     Editorial: Debating the Materiality of ‘‘Material        references the definition of ‘‘material definitive
                                           the number of exhibits filed, the provision actually     Definitive Agreements,’’ Compliance Week, Feb. 8,        agreement’’ in Item 1.01 of Form 8–K. Instead of
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                                           had the opposite effect. The staff found that the        2005; and Patrick McGeehan, Now, an Advance              being required to be disclosed based on the general
                                           revised definition of material contract ‘‘has resulted   Look at Those Big Paychecks, N.Y. Times, Sept. 26,       requirements with regard to material definitive
                                           in registrants filing a large volume of varied           2004, at 36.                                             agreements in Item 1.01 and Item 1.02, employment
                                           remunerative contracts involving directors and              212 See, e.g., Jerry Knight, Tiny SEC Filing Gave     compensation arrangements would be covered
                                           executive officers, contracts which are not material     a Big Hint to Vastera’s Plans, Wash. Post, Jan. 24,      under Item 5.02 of Form 8–K.
                                                                                                                                                               214 Item 5.02(b) of Form 8–K.
                                           and which would not have been filed under the            2005, at E1; and Alex Berenson, Merck Offering Top
                                                                                                                                                               215 Item 5.02(c) of Form 8–K.
                                           previously existing ‘material in amount or               Executives Rich Way Out, N.Y. Times, Nov. 30,
                                           significance’ standard.’’ Technical Amendment            2004, at A1.                                               216 Item 5.02(a) of Form 8–K.




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                                           6570             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           We propose to accomplish this by taking                 brief description of the specified matter             that a company fails to timely file
                                           the following steps:                                    be included. We have observed that in                 reports required by Item 5.02(e) of Form
                                              • Expanding the information                          response to the current requirement                   8–K. In the final rules for the new Form
                                           regarding retirement, resignation or                    under Item 1.01, some companies have                  8–K requirements, we adopted a limited
                                           termination to include all persons                      included disclosure that resembles an                 safe harbor from liability under Section
                                           falling within the definition of named                  updating of the disclosure required                   10(b) of the Exchange Act and Rule 10b–
                                           executive officers for the company’s                    under current Item 402 of Regulation S–               5 thereunder for failure to timely file
                                           previous fiscal year, whether or not                    K. In the context of current disclosure               reports required by Form 8–K Items
                                           included in the list currently specified                under Form 8–K, we are seeking a                      1.01, 1.02, 2.03, 2.04, 2.05, 2.06 and
                                           in Item 5.02; 217                                       disclosure that informs investors of                  4.02(a). The safe harbor applies until the
                                              • Expanding the disclosure items                     specified material events and                         filing due date of the company’s
                                           covered under Item 5.02 beyond                          developments. However, the                            quarterly or annual report for the period
                                           employment agreements to require a                      information we are seeking does not                   in question. As we stated at the time, we
                                           brief description of any material plan,                 perforce extend to the information                    believe that these items may require
                                           contract or arrangement to which a                      necessary to comply with Item 402.                    management to make rapid materiality
                                           covered officer or director is a party or                                                                     and similar judgments within the
                                           in which he or she participates that is                 Request for Comment                                   timeframe required for filing of a Form
                                           entered into or materially amended in                      • Is there a particular benefit to                 8–K. Under those circumstances we
                                           connection with any of the triggering                   receiving information regarding                       concluded that the risk of liability under
                                           events specified in Item 5.02, or any                   employment compensation on a current                  these provisions was sufficiently
                                           grant or award to any such covered                      basis rather than annually or quarterly?              disproportionate to justify the limited
                                           person, or modification thereto, under                  What information is material in that                  safe harbor of fixed duration. For the
                                           any such plan, contract or arrangement                  regard?                                               same reasons, we believe that the safe
                                           in connection with any such event; 218                     • Is disclosure of material                        harbor should also extend to proposed
                                              • In respect of the principal executive              information about executive and                       Item 5.02(e) of Form 8–K. We therefore
                                           officer, the principal financial officer, or            director compensation and related                     propose to amend Exchange Act Rules
                                           persons falling within the definition of                person transactions avoided if                        13a–11(c) and 15d–11(c) accordingly.
                                           named executive officer for the                         comprehensive disclosure of                              In addition, under our current rules,
                                           company’s previous fiscal year,                         compensation and related party                        a company forfeits its eligibility to use
                                           expanding the disclosure items to                       transactions only occurs annually?                    Form S–3 if it fails to timely file all
                                           include a brief description of any                      Should we also require quarterly                      reports required under Exchange Act
                                           material new compensatory plan,                         disclosure of material changes to                     Sections 13(a) or 15(d) during the 12
                                           contract or arrangement, or new grant or                information required by Items 402 and                 months prior to filing of the registration
                                           award thereunder (whether or not                        404 in each company’s Form 10–Q?                      statement.220 For the same reasons,
                                           written), and any material amendment                       • Would a quarterly update of                      when adopting the new Form 8–K rules,
                                           to any compensatory plan, contract or                   material changes to Item 402 and Item                 we revised the Form S–3 eligibility
                                           arrangement (or any modification to a                   404 disclosure provide meaningful                     requirements so that a company would
                                           grant or award thereunder), whether or                  disclosure to investors that they cannot              not lose its eligibility to use Form S–3
                                           not such occurrence is in connection                    get through other sources? If not, why?               registration statements if it failed to
                                           with a triggering event specified in Item                  • Would quarterly updates eliminate                timely file reports required by the Form
                                           5.02. Grants or awards or modifications                 the need for most of the current                      8–K items to which the Section 10(b)
                                           thereto will not be required to be                      disclosure about executive and director               and Rule 10b–5 safe harbor applies.221
                                           disclosed if they are consistent with the               compensation transactions provided                    In particular, the burden resulting from
                                           terms of previously disclosed plans or                  under Item 1.01 of Form 8–K? Should                   a company’s sudden loss of eligibility to
                                           arrangements and they are disclosed the                 the information we propose to require                 use Form S–3 could be a
                                           next time the company is required to                    under Item 5.02(e) of Form 8–K only be                disproportionately large negative
                                           provide new disclosure under Item 402                   required quarterly?                                   consequence of an untimely Form 8–K
                                           of Regulation S–K; and                                     • Are the proposed revisions to Items              filing under one of the specified
                                              • Adding a requirement for disclosure                1.01 and 5.02 of Form 8–K the most                    items.222 We believe that this safe
                                           of salary and bonus for the most recent                 effective means to achieve an                         harbor should be extended to proposed
                                           fiscal year that was not available at the               appropriate balance regarding real-time               Item 5.02(e) of Form 8–K. Therefore, we
                                           latest practicable date in connection                   director and executive compensation                   propose to amend General Instruction
                                           with disclosure under Item 402 of                       disclosure? Please describe any                       I.4 of Form S–3, which pertains to the
                                           Regulation S–K.219                                      suggested alternatives in detail.                     eligibility requirements for use of Form
                                              In the case of each of these disclosure                 • Should we require disclosure of all              S–3 to reflect this position.223
                                           items proposed for Item 5.02, we                        amendments to the plans, contracts and
                                           emphasize that we are proposing that a                  arrangements encompassed by our                       Request for Comment
                                                                                                   proposed disclosure requirements under                  • Should we extend the Section 10(b)
                                             217 The Item would continue to cover the officers     Item 5.02(e) of Form 8–K? Only material               and Rule 10b–5 safe harbor and the
                                           specified therein, whether or not named executive       amendments?                                           Form S–3 safe harbor to all of Item 5.02
                                           officers for the previous or current years, and all
                                                                                                                                                         or just the provision proposed?
                                           directors.                                              B. Proposed Extension of Limited Safe
                                             218 Plans, contracts or arrangements (but not
                                                                                                   Harbor Under Section 10(b) and Rule                     220 General   Instruction I.A.3 to Form S–3.
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                                           material amendments or grants or awards or
                                           modifications thereto) may be denoted by reference
                                                                                                   10b–5 to Item 5.02(e) of Form 8–K and                   221 Form    8–K Adopting Release, at Section II.E.
                                           to the description in the company’s most recent         Exclusion of That Item From Form S–3                    222 Id.

                                           annual report on Form 10–K or proxy statement.          Eligibility Requirements                                 223 Because Form S–2 was eliminated effective
                                             219 See Section II.B.1.b. above for a discussion of                                                         December 1, 2005, a similar proposed change to the
                                           the reporting delay that exists under the current
                                                                                                     We propose to extend the safe harbors               eligibility rules of Form S–2 is unnecessary.
                                           disclosure rules when bonus and salary are not          regarding Section 10(b) and Rule 10b–5                Securities Offering Reform, Release No. 33–8591
                                           determinable at the most recent practicable date.       and Form S–3 eligibility in the event                 (July 19, 2005) [70 FR 44721], at Section V.B.3.c.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                          6571

                                           C. General Instruction D to Form 8–K                      matters that have not otherwise been                  IV. Beneficial Ownership Disclosure
                                              Frequently an event may trigger a                      disclosed.                                              We propose to amend Item 403(b) 227
                                           Form 8–K filing under multiple items,                        The proposed revision to the exhibit               by adding a requirement for footnote
                                           particularly under both Item 1.01 and                     instructions to Form 20–F 225 is                      disclosure of the number of shares
                                           another item. General Instruction D to                    intended to be consistent with the                    pledged as security by named executive
                                           Form 8–K currently permits a company                      existing disclosure requirements under                officers, directors and director
                                           to file a single Form 8–K to satisfy one                  Form 20–F relating to executive                       nominees. To the extent that shares
                                           or more disclosure items, provided that                   compensation matters for foreign private              beneficially owned by named executive
                                           the company identifies by item number                     issuers. In the same way that executive               officers, directors and director nominees
                                           and caption all applicable items being                    compensation disclosure under Form                    are used as collateral, these shares may
                                           satisfied and provides all of the                         20–F largely mirrors the disclosure that              be subject to material risk or
                                           substantive disclosure required by each                                                                         contingencies that do not apply to other
                                                                                                     a foreign private issuer makes under
                                           of the items. In order to promote prompt                                                                        shares beneficially owned by these
                                                                                                     home country requirements or                          persons. These circumstances have the
                                           filings on Form 8–K and avoid potential                   voluntarily, so too the public filing of
                                           non-compliance with Form 8–K due to                                                                             potential to influence management’s
                                                                                                     management employment agreements as                   performance and decisions.228 As a
                                           inadvertent exclusions of captions, we
                                                                                                     an exhibit to Form 20–F would under                   result, we believe that the existence of
                                           propose a revision to General
                                                                                                     our proposal mirror the public                        these securities pledges could be
                                           Instruction D to permit companies to
                                                                                                     availability of such agreements under                 material to shareholders.229 Because
                                           omit the Item 1.01 heading in a Form 8–
                                           K also disclosing any other Item, so long                 home country requirements or                          significant shareholders who are not
                                           as the substantive disclosure required                    otherwise. In addition, we believe that               members of management are in a
                                           by Item 1.01 is included in the Form 8–                   the proposed amendments may                           different relationship with other
                                           K. This would not extend to allowing a                    encourage foreign private issuers to                  shareholders and have different
                                           company to omit any other caption if                      provide more compensation disclosure                  obligations to them, the proposals
                                           the Item 1.01 caption is included.                        in their SEC filings by eliminating                   would not require disclosure of their
                                                                                                     privacy concerns associated with filing               pledges pursuant to Item 403(a), other
                                           Request for Comment                                       an individual’s employment agreement                  than pledges that may result in a change
                                             • Is it appropriate to allow a company                  when such agreement is not required to                of control currently required to be
                                           to omit the Item 1.01 heading in a Form                   be made public by a home country                      disclosed.230 The proposals also would
                                           8–K disclosing any other item?                            exchange or securities regulator. As                  specifically require disclosure of
                                                                                                     foreign disclosure related to executive               beneficial ownership of directors’
                                           D. Foreign Private Issuers                                                                                      qualifying shares, which is currently not
                                                                                                     remuneration varies in different
                                              We propose revising the exhibit                                                                              required, because the beneficial
                                                                                                     countries but continues to improve,226
                                           instructions to Form 20–F under which                                                                           ownership disclosure should include a
                                                                                                     the proposed revisions would recognize                complete tally of the securities
                                           foreign private issuers would be                          that trend and provide for greater
                                           required to file any employment or                                                                              beneficially owned by directors.
                                                                                                     harmonization of international
                                           compensatory plan with management or                      disclosure standards with respect to                  Request for Comment
                                           directors (or portion of such plan) only                  executive compensation in a manner                      • Should any specific categories of
                                           when the foreign private issuer either is
                                                                                                     consistent with other requirements of                 loans, such as margin loans, be treated
                                           required to publicly file the plan (or
                                                                                                     Form 20–F.                                            differently under the proposal to
                                           portion of it) in its home country or if
                                                                                                                                                           disclose management pledges of
                                           the foreign private issuer had otherwise                  Request for Comment                                   beneficially owned securities? If so,
                                           publicly disclosed the plan.224
                                                                                                        • Should we require the filing of                  please explain why.
                                              Under Item 6.B.1 of Form 20–F, a                                                                               • Should directors’ qualifying shares
                                           foreign private issuer must disclose the                  employment agreements by foreign
                                                                                                                                                           continue to be excluded? If so, explain
                                           compensation of directors and                             private issuers when individualized                   why that information is not material.
                                           management on an aggregate basis and,                     compensation information is disclosed?
                                           additionally, on an individual basis,                     Should we instead require the filing of               V. Certain Relationships and Related
                                           unless individual disclosure is not                       those portions of management                          Transactions Disclosure
                                           required in the issuer’s home country                     employment agreements and plans that                    We believe that, in addition to
                                           and is not otherwise publicly disclosed                   relate to the information that is                     disclosure regarding executive
                                           by the foreign private issuer. Under the                  disclosed on an individualized basis                  compensation, a materially complete
                                           exhibit instructions to Form 20–F,                        regardless of whether those portions are
                                           management contracts or compensatory                      required to be made public in the                       227 Item 403(b) of Regulation S–K and Item 403(b)

                                           plans in which directors or members of                                                                          of Regulation S–B are proposed to be revised in the
                                                                                                     issuer’s home country or otherwise?                   same manner.
                                           management participate generally must                                                                             228 See, e.g., Marianne M. Jennings, The
                                           be filed as exhibits, unless the foreign                                                                        Disconnect Between and Among Legal Ethics,
                                           private issuer provides compensation                                                                            Business Ethics, Law, and Virtue: Learning Not to
                                           information on an aggregate basis and                       225 Proposed Instruction 4(c) to Exhibits to Form   Make Ethics So Complex, 1 U. St. Thomas L.J. 995,
                                           not on an individual basis. Under these                   20–F.                                                 1010 (Spring 2004) (arguing that the extension of
                                                                                                                                                           loans to the CEO of WorldCom, which were
                                           rules, an issuer that provides any                          226 Many jurisdictions now require or encourage
                                                                                                                                                           collateralized by WorldCom shares owned by the
                                           individualized compensation disclosure                    disclosure of executive compensation information.
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                                                                                                                                                           CEO, contributed to WorldCom’s financial demise).
                                                                                                     For example, enhanced disclosure of executive
                                           is required to file as an exhibit to Form                                                                         229 This proposal is similar to a proposal the
                                                                                                     remuneration is included as part of he European       Commission made in 2002. See Form 8–K
                                           20–F management employment                                Commission’s 2003 Company Law Action Plan. See        Disclosure of Certain Management Transactions,
                                           agreements that potentially relate to                     Guido Ferrarini and Niamh Moloney, Executive          Release No. 33–8090 (Apr. 12, 2002) [67 FR 19914].
                                                                                                     Remuneration in the EU: The Context for Reform,         230 Current Item 403(c) of Regulation S–K. See
                                              224 We are also proposing a similar revision to        European Corporate Governance Institute, Law          also Items 6 and 7(3) of Schedule 13D [17 CFR
                                           Item 601(b)(10)(iii)(C)(5) of Regulation S–K.             Working Paper N. 32/2005 (April 2005).                240.13d–101].


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                                           6572             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           picture of financial relationships with a                considered when determining whether                     would state that a company must
                                           company involves disclosure regarding                    each director and nominee for director                  provide disclosure regarding:
                                           related party transactions. Therefore, we                is independent.                                            • Any transaction since the beginning
                                           are also proposing significant revisions                                                                         of the company’s last fiscal year, or any
                                                                                                    A. Transactions With Related Persons                    currently proposed transaction.
                                           to Item 404 of Regulation S–K ‘‘Certain
                                           Relationships and Related                                   We are proposing revisions to Item                      • In which the company was or is to
                                           Transactions.’’ In 1982, various                         404 to make the certain relationships                   be a participant;
                                           provisions that had been adopted in a                    and related transactions disclosure                        • In which the amount involved
                                           piecemeal fashion and had been subject                   requirements clearer and easier to                      exceeds $120,000; and
                                           to frequent amendment were                               follow. The proposals would retain the                     • In which any related person had, or
                                           consolidated into Item 404 of Regulation                 principles for disclosure of related                    will have, a direct or indirect material
                                           S–K.231 Today we propose to amend                        person transactions that are specified in               interest.
                                           Item 404 of Regulation S–K and S–B to                    current Item 404(a), but would no longer                   We propose to eliminate current
                                           streamline and modernize this                            include all of the instructions that serve              Instruction 1 to Item 404(a), which is
                                           disclosure requirement, while making it                  to delineate what transactions are                      repetitive of the general materiality
                                           more principles-based. Although the                      reportable or excludable from disclosure                standard applicable to the item. By
                                           proposals would significantly modify                     based on bright lines that can depart                   proposing to delete this instruction we
                                           this disclosure requirement, its                         from a more appropriate materiality                     do not intend to change the materiality
                                           purpose—to elicit disclosure regarding                   analysis. Instead, proposed Item 404(a)                 standard applicable to Item 404(a). The
                                           transactions and relationships,                          would consist of a general statement of                 ‘‘materiality’’ standard for disclosure
                                           including indebtedness, involving the                    the principle for disclosure, followed by               currently embodied in Item 404(a)
                                           company and related persons and the                      specific disclosure requirements and                    would be retained; a company would
                                           independence of directors and                            instructions. The instructions would                    disclose based on whether the related
                                           nominees for director and the interests                  explain the related persons covered by                  person had, or will have, a direct or
                                           of management—would remain                               the Item, the scope of transactions                     indirect material interest in the
                                           unchanged.                                               covered by the Item, the method for                     transaction. The materiality of any
                                              As discussed in greater detail below,                 computation of the amounts involved in                  interest would continue to be
                                           the proposal has four parts: 232                         the relationship or transaction, the                    determined on the basis of the
                                              • Item 404(a) would contain a general                 interaction with Item 402, special                      significance of the information to
                                           disclosure requirement for related                       requirements for indebtedness with                      investors in light of all the
                                           person transactions, including those                                                                             circumstances and the significance of
                                                                                                    banks, and the materiality of certain
                                           involving indebtedness.233                                                                                       the interest to the person having the
                                                                                                    ownership interests.
                                              • Item 404(b) would require                              The proposed Item would extend to                    interest.238 The relationship of the
                                           disclosure regarding the company’s                       disclosure of indebtedness. Currently,                  related persons to the transaction, and
                                           policies and procedures for the review,                  Item 404(a) requires disclosure                         with each other, and the amount
                                           approval or ratification of related person               regarding transactions involving the                    involved in the transaction would be
                                           transactions.                                            company and certain related persons,236                 among the factors to be considered in
                                              • Item 404(c) would require                           and Item 404(c) requires disclosure                     determining the materiality of the
                                           disclosure regarding promoters of a                                                                              information to investors.
                                                                                                    regarding indebtedness.237 We propose
                                           company.234                                                                                                         We propose to eliminate current
                                                                                                    to consolidate these two provisions in
                                              • New Item 407 would consolidate                                                                              Instruction 7 to Item 404(a), which
                                                                                                    order to eliminate confusion regarding                  establishes certain presumptions
                                           current corporate governance disclosure
                                                                                                    the circumstances in which each item                    regarding materiality and may operate to
                                           requirements.235 Proposed Item 407(a)
                                                                                                    applies and streamline duplicative                      exclude some transactions from
                                           would require disclosure regarding the
                                                                                                    portions of current paragraphs (a) and                  disclosure that might otherwise require
                                           independence of directors, including
                                                                                                    (c) of Item 404.                                        disclosure under the principles
                                           whether each director and nominee for
                                           director of the registrant is independent,               1. Broad Principle for Disclosure                       enunciated by the Item. We also propose
                                           as well as a description of any                             Proposed Item 404(a) would articulate                to eliminate current Instruction 9 to
                                           relationships not disclosed under                        a broad principle for disclosure; it                    Item 404(a), which indicates that the
                                           paragraph (a) of Item 404 that were                                                                              $60,000 threshold is not a bright line
                                                                                                      236 The related persons specified in current Item     materiality standard. We propose to
                                              231 See the 1982 Release. For a discussion of these
                                                                                                    404(a) are: (1) Any director or executive officer of    eliminate current Instruction 9 to Item
                                           provisions, see also Disclosure of Certain               the company; (2) any nominee for election as a          404(a) because it is repetitive of the
                                           Relationships and Transactions Involving                 director; (3) any security holder who is known to
                                           Management, Release No. 33–6416 (July 9, 1982)                                                                   general materiality standard applicable
                                                                                                    the company to own of record or beneficially more
                                           [47 FR 31394], at Section II.                            than five percent of any class of the company’s         to the Item.239 We believe that
                                              232 The discussion that follows focuses on
                                                                                                    voting securities; and (4) any member of the            application of the materiality principles
                                           changes to Regulation S–K, with Section V.E.1.           immediate family of any of the foregoing persons.       under the Item would be more
                                           explaining the modifications proposed for                  237 The related persons specified in current Item
                                           Regulation S–B. References throughout the
                                                                                                                                                            consistent with a principles-based
                                                                                                    404(c) are: (1) Any director or executive officer of
                                           following discussion are to current or proposed          the company; (2) any nominee for election as a
                                                                                                                                                            approach and would lead to more
                                           Items of Regulation S–K, unless otherwise                director; (3) any member of the immediate family
                                           indicated.                                               of any of the persons specified in (1) or (2) above;       238 See Basic v. Levinson and TSC Industries v.
                                              233 As previously noted, related party transactions
                                                                                                    (4) any corporation or organization (other than the     Northway.
                                           are currently disclosed under Item 404(a).               company or a majority-owned subsidiary of the              239 It is possible that some registrants have been
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                                           Indebtedness is currently disclosed under Item           company) of which any of the persons in (1) or (2)      operating under a misconception. The current
                                           404(c).                                                  above is an executive officer or partner or is,         $60,000 threshold is not, and the proposed
                                              234 Disclosure requiring promoters is currently
                                                                                                    directly or indirectly, the beneficial owner of ten     $120,000 threshold would not be, a bright line
                                           required under Item 404(d).                              percent or more of any class of equity securities;      materiality standard. The rule calls for, and would
                                              235 These matters are currently required pursuant     and (5) any trust or other estate in which any of the   continue to call for, a materiality analysis of
                                           to various provisions, including Item 7 of Schedule      persons in (1) or (2) above has a substantial           transactions above the threshold in order to
                                           14A and Items 306, 401(h), (i) and (j), 402(j) and       beneficial interest or as to which such person serves   determine if the related person has a direct or
                                           404(b).                                                  as a trustee or in a similar capacity.                  indirect material interest.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                            6573

                                           appropriate disclosure outcomes than                    should we provide further guidance or                  require disclosure of all material
                                           application of the instructions that we                 examples regarding the disclosure status               indirect interests in indebtedness
                                           propose to eliminate.                                   of particular types of direct or indirect              transactions of related persons,
                                              In addition, the proposals would:                    interests?                                             including significant shareholders and
                                              • Call for disclosure if a company is                   • Is it appropriate to adjust the                   immediate family members.246
                                           a ‘‘participant’’ in a transaction, rather              threshold for disclosure to $120,000?                  Disclosure of material indirect interests
                                           than if it is ‘‘a party’’ to the transaction,           Should there be no threshold? Should                   of these related persons in transactions
                                           as ‘‘participant’’ more accurately                      the threshold also operate on a sliding                involving the company currently is, and
                                           connotes the company’s involvement;                     scale (for example, the lower of                       would continue to be, required by Item
                                              • Modify the $60,000 threshold for                   $120,000 or 1% of the average of total                 404(a). Currently, Item 404(c) requires
                                           disclosure to $120,000 to adjust for                    assets for the last three completed fiscal             disclosure of specific indirect interests
                                           inflation;                                              years 243 or the lower of $120,000 or a                of directors, nominees for director, and
                                              • Include a defined term for                         percentage of annual corporate                         executive officers of the registrant in
                                           ‘‘transaction’’ to provide that it includes             expenses) to capture smaller                           indebtedness through corporations,
                                           a series of similar transactions and to                 transactions for smaller companies?
                                           make clear its broad scope; and                                                                                organizations, trusts, and estates.247 We
                                                                                                   Explain whether a higher or lower
                                              • Include a single defined term for                                                                         believe that disclosure requirements for
                                                                                                   threshold, or no threshold, would result
                                           ‘‘related persons.’’240                                                                                        indebtedness and for other related
                                                                                                   in more effective disclosure.
                                                                                                                                                          person transactions should be
                                              As is currently the case, disclosure                    • In Item 404(a), should we require a
                                           would be required for three years in                    company to be ‘‘involved’’ rather than to              congruent. In particular, we believe that
                                           registration statements filed pursuant to               be ‘‘a participant’’ in transactions                   loans by companies other than financial
                                           the Securities Act or the Exchange                      subject to disclosure?                                 institutions should be treated like any
                                           Act.241                                                                                                        other related person transactions, and,
                                              Finally, the rule proposals would                    a. Indebtedness                                        as discussed below, we propose to
                                           include a technical modification.                          Section 402 of the Sarbanes-Oxley Act               address certain ordinary course loans by
                                           Currently, Item 404(a) states that                      prohibits most personal loans by an                    financial institutions in an instruction
                                           disclosure must be provided regarding                   issuer to its officers and directors.244               to Item 404(a).
                                           situations involving ‘‘the registrant or                This development raises the issue of
                                           any of its subsidiaries.’’ Because                                                                             Request for Comment
                                                                                                   whether disclosure of indebtedness of
                                           companies must include subsidiaries in                  the sort required under our current rules                 • Is our proposal appropriate in light
                                           making materiality determinations in all                should be maintained. We believe that                  of the prohibition on personal loans to
                                           circumstances, the reference to                         the approach to disclosure of                          officers and directors in the Sarbanes-
                                           ‘‘subsidiaries’’ is superfluous, and we                 indebtedness involving related persons                 Oxley Act?
                                           propose to eliminate it. This proposal                  that we propose today would be
                                           would not change the scope of                           appropriate because of the scope of the                   • Should we combine the related
                                           disclosure required under the Item.242                  direct and indirect interests covered by               person and indebtedness disclosure
                                                                                                   our disclosure requirements, because                   requirements in paragraphs (a) and (c) of
                                           Request for Comment                                                                                            Item 404? As a result of combining these
                                                                                                   related persons include persons not
                                              • Should we recast Item 404(a) as a                  covered by the prohibitions, and                       disclosure requirements, would there be
                                           more principles-based disclosure                        because there are certain exceptions to                categories of indebtedness transactions
                                           requirement as proposed? Why or why                     the prohibitions. We propose, however,                 for which disclosure would be required
                                           not?                                                    to eliminate the current distinction                   that should not be required or for which
                                              • In recasting Item 404(a) as a more                 between indebtedness and other types                   disclosure would not be required that
                                           principles-based disclosure                             of related person transactions.                        should be disclosed?
                                           requirement, should we eliminate all of                    As a result of integrating paragraph (c)               • Should the disclosure requirements
                                           the current instructions, not only the                  of Item 404 into paragraph (a) of Item                 for indebtedness be extended to
                                           ones we propose eliminating? Are there                  404, the proposals would change some                   significant shareholders?
                                           any concepts in the instructions to Item                situations in which indebtedness
                                           404(a) that we propose to eliminate that                disclosure is required. First, disclosure              b. Definitions
                                           should be retained? As a result of                      of indebtedness transactions would be
                                           eliminating the instructions to Item                                                                              We propose to define the terms
                                                                                                   required with regard to all related
                                           404(a), would there be any categories of                persons covered by the related person                  ‘‘transaction,’’ ‘‘related person’’ and
                                           transactions which would have an                        transaction disclosure requirement,                    ‘‘amount involved’’ to streamline Item
                                           unclear disclosure status? Although the                 including significant shareholders.245                 404(a) and clarify the broad scope of
                                           analysis required for any particular                    Second, the rule proposals would                       financial transactions and relationships
                                           transaction would be fact-specific,                                                                            covered by the rule.
                                                                                                     243 This is the standard proposed for Item 404 of
                                             240 The  ‘‘related persons’’ covered by the rules     Regulation S–B, which is discussed in Section             246 As a result of integrating pragraph (c) of Item
                                           proposal are discussed below in Section V.A.1.b.        V.E.1. below.                                          404 into paragraph (a) of Item 404, the rule
                                             241 However, if the disclosure were being               244 Codified in Section 13(k) of the Exchange Act    proposals would set a $120,000 threshold and
                                           incorporated by reference into a registration           [15 U.S.C. 78m(k)].                                    require disclosure only if there is a direct or
                                           statement on Form S–4, the additional two years of        245 The related person transaction disclosure        indirect material interest in such an indebtedness
                                           disclosure would not be required. Proposed              requirement in current Item 404(a) covers              transaction, while Item 404(c) currently generally
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                                           Instruction 1 to Item 404.                              significant shareholders, while the indebtedness       requires disclosure of all indebtedness exceeding
                                             242 For the same reason, we are eliminating the       disclosure requirement in current Item 404(c) does     $60,000.
                                           references to ‘‘subsidiaries’’ in the ‘‘compensation    not. The significant shareholders covered would           247 Disclosure of these interests currently is

                                           committee interlocks and insider participation in       continue to be any security holder who is known        reuqired by subparagraphs (c)(4) and (c)(5) of Item
                                           compensation decisions’’ disclosure requirement in      to the registrant to own of record or beneficially     404. Under the rule proposals, these subparagraphs
                                           current Item 402(j). This proposal would not change     more than five percent of any class of the             would be eliminated. See note 237 for a full
                                           the scope of disclosure required under the rule. See    registrant’s voting securities. Proposed Instruction   description fo the related parties specified in these
                                           proposed Item 407(e)(4).                                1.b. to Item 404(a).                                   subparagraphs.


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                                           6574             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                              The term ‘‘transaction’’ would have a                 transaction with the registrant during                   stepparents, and any person (other than
                                           broad scope in proposed Item 404(a).248                  that year. Although current Item 404(a)                  a tenant or employee) sharing the
                                           As proposed, this term is not to be                      does not specifically indicate whether                   household of a related person.
                                           interpreted narrowly, but rather would                   disclosure is required for the transaction                  The proposed definition of ‘‘amount
                                           broadly include, but not be limited to,                  in this situation, the history of Item 404               involved’’ would incorporate two
                                           any financial transaction, arrangement                   suggests that disclosure would be                        concepts included in current Item 404
                                           or relationship or any series of similar                 required if the requisite relationship                   regarding how to determine the
                                           transactions, arrangements or                            existed at the time of the transaction,                  ‘‘amount involved’’ in transactions, and
                                           relationships. The proposals also would                  even if the person was no longer a                       to clarify that the amounts reported
                                           specifically note that the term                          related person at the end of the year.251                must be in dollars even if the amount
                                           ‘‘transactions’’ is defined to include                   We believe that, because of the potential                was set or expensed in a different
                                           indebtedness and guarantees of                           for abuse and the close proximity in                     currency.253 Under the proposals, the
                                           indebtedness.                                            time between the transaction and the                     term ‘‘amount involved’’ would mean
                                              The proposed definition of ‘‘related                  person’s status as a ‘‘related person,’’ it              the dollar value of the transaction, or
                                           person’’ would identify the persons                      is appropriate to require disclosure for                 series of similar transactions, and would
                                           covered, and clarify the time periods                    transactions in which the person had a                   include:
                                           during which they would be covered.                      material interest occurring at any time                     • In the case of any lease or other
                                           As proposed, the term ‘‘related                          during the fiscal year. For example, it is               transaction providing for periodic
                                           person’’ 249 would mean any person                       possible that a material interest of a                   payments or installments, the aggregate
                                           who was in any of the following                          person in a transaction during this                      amount of all periodic payments or
                                           categories at any time during the                        proximity in time could influence the                    installments due on or after the
                                           specified period for which disclosure                    person’s performance of his or her                       beginning of the company’s last fiscal
                                           under paragraph (a) of Item 404 would                    duties.                                                  year, including any required or optional
                                           be required:                                                We believe that transactions with                     payments due during or at the
                                              • Any director or executive officer of                persons who have been or who will                        conclusion of the lease; 254 and
                                           the registrant and his immediate family                  become significant shareholders (or                         • In the case of indebtedness, the
                                           members; and                                             their family members), but are not at the                largest aggregate principal amount of all
                                              • If disclosure were provided in a                    time of the transaction, raise different                 indebtedness outstanding at any time
                                           proxy or information statement                           considerations and are harder to track,                  since the beginning of the company’s
                                           involving the election of directors, any                 and thus we propose to exclude them.                     last fiscal year and all amounts of
                                           nominee for director and the immediate                   Disclosure would be required, however,                   interest payable on it during the last
                                           family members of any nominee for                        regarding a transaction that begins                      fiscal year.255
                                           director.                                                before a significant shareholder becomes                 Request for Comment
                                           In addition, a security holder known to                  a significant shareholder, and continues
                                                                                                                                                                • Does the definition of ‘‘transaction’’
                                           the registrant to own of record or                       (for example, through the on-going
                                                                                                                                                             make clear its broad scope? Are there
                                           beneficially more than five percent of                   receipt of payments) on or after the
                                                                                                                                                             any additional categories that it should
                                           any class of the company’s voting                        person becomes a significant
                                                                                                                                                             specifically identify? Alternatively, is it
                                           securities or any immediate family                       shareholder.
                                                                                                       Under the rule proposals, the term                    overly inclusive? If so, explain how.
                                           member of any such person, when a                                                                                    • Should the same categories of
                                           transaction in which such security                       ‘‘immediate family member’’ of a related
                                                                                                                                                             people be covered by the disclosure
                                           holder or family member had a direct or                  person would mean any child,
                                                                                                                                                             requirements currently in paragraphs (a)
                                           indirect material interest occurred or                   stepchild, parent, stepparent, spouse,
                                                                                                                                                             and (c) of Item 404? Specifically, are
                                           existed would also be a related person.                  sibling, mother-in-law, father-in-law,
                                                                                                                                                             there any persons who would be
                                              This is the same list of persons                      son-in-law, daughter-in-law, brother-in-
                                                                                                                                                             defined as ‘‘related persons’’ for whom
                                           covered by current Item 404(a). This                     law, or sister-in-law, and any person
                                                                                                                                                             indebtedness disclosure should not be
                                           proposed definition of ‘‘related person’’                (other than a tenant or employee)
                                                                                                                                                             required or are there any additional
                                           would result in requiring disclosure for                 sharing the household of any director,
                                                                                                                                                             persons who should be covered?
                                                                                                    nominee for director, executive officer,
                                           all transactions involving the company                                                                               • The proposed changes to Item 404
                                           and a person (other than a significant                   or significant shareholder of the
                                                                                                                                                             would require disclosure of indirect
                                           shareholder or family member of such                     registrant.252 The proposed definition
                                                                                                                                                             interests in indebtedness of related
                                           shareholder) that occurred during the                    would differ from the current definition
                                                                                                                                                             persons. Should they?
                                           last fiscal year, if the person was a                    in that it includes stepchildren,                           • Should disclosure be required
                                           ‘‘related person’’ during any part of that                                                                        regarding portions of a period during
                                                                                                       251 This position, which had been included in the
                                           year.250 A person who had such a                         proxy rule provisions that were the precursor to
                                                                                                                                                             which a person did not have the
                                           position or relationship giving rise to                  Item 404, was deleted from those provisions in 1967      relationship giving rise to the disclosure
                                           the person being a ‘‘related person’’                    as duplicative of a note that applied to all of the      requirement? Is it appropriate, as we
                                           during only part of the last fiscal year                 disclosure required in Schedule 14A (including the       propose, to exclude significant
                                                                                                    related party disclosure requirement in Schedule
                                           may have had a material interest in a                    14A). Adoption of Amendments to Proxy Rules and
                                                                                                                                                             shareholders and their immediate
                                                                                                    Information Rules, Release No. 34–8206 (Dec. 14,         family members from this approach?
                                             248 The definition of ‘‘transaction’’ is in proposed
                                                                                                    1967) [32 FR 20960], at ‘‘Schedule 14A—Item 7(f).’’         • Should we expand the definition of
                                           Instruction 2 to Item 404(a).                            Note C to Schedule 14A currently provides that           ‘‘immediate family member’’ as
                                             249 The definition of ‘‘related person’’ is in         ‘‘information need not be included for any portion
                                                                                                                                                             proposed? Specifically, are there any
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                                           proposed Instruction 1 to Item 404(a).                   of the period during which such person did not
                                             250 The principle for disclosure would only apply      hold any such position or relationship, provided a
                                                                                                                                                                253 The definition of ‘‘amount involved’’ is in
                                           to nominees for director if disclosure were being        statement to that effect is made.’’ The rule proposals
                                           provided in a proxy or information statement             would amend Note C to Schedule 14A so that it            proposed Instruction 3 to Item 404(a).
                                                                                                    would no longer apply to disclosure of related              254 This proposal is based on current Instruction
                                           involving the election of directors. Also, ongoing
                                           disclosure would not be required regarding               person transactions.                                     3 to Item 404(a).
                                           nominees for director who were not elected (unless          252 These definitions would replace current              255 This proposal is based on and clarifies current

                                           a nominee was nominated again for director).             instructions to paragraphs (a) and (c) of Item 404.      Item 404(c).


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                          6575

                                           categories of people that should be                        Registrants would also be required to              3. Exceptions
                                           added to, or removed from, the                          disclose any other information regarding                 The proposed rules would include
                                           proposed definition?                                    the transaction or the related person in              categories of transactions that do not fall
                                              • In 2002 we issued a release                        the context of the transaction that is                within the principle and therefore are
                                           regarding MD&A disclosure. At that                      material to investors in light of the                 subject to disclosure exceptions that we
                                           time, we noted the possible need for                    circumstances of the particular                       believe are consistent with our
                                           related party disclosure in                             transaction.                                          principles-based approach.260 The first
                                           circumstances additional to those                          Consistent with the principles-based               category of transactions involves
                                           specified in Item 404.256 Are there any                 approach that we propose to apply to                  compensation. Disclosure of
                                           circumstances that fall within the                      related person transaction disclosure,                compensation to an executive officer
                                           MD&A requirements that should also be                   we have, as noted above, eliminated                   would not be required if:
                                           covered by Item 404 where disclosure                    many of the instructions that provide                    • The compensation is reported
                                           currently is not required, or would not                 bright line tests that may be inconsistent            pursuant to Item 402 of Regulation S–
                                           be required under the rule proposals?                   with general materiality standards.                   K; or
                                              • Is there any reason to change the                  Similarly, we propose to eliminate a                     • The executive officer is not an
                                           current meaning of amount involved in                   current instruction that, in the case of a            immediate family member of a related
                                           transactions involving leases, which we                 related person transaction involving a                person and such compensation would
                                           propose to retain?                                      purchase of assets by the company or                  have been reported under Item 402 as
                                                                                                   sale of assets to the company, calls for              compensation earned for services to the
                                           2. Disclosure Requirements
                                                                                                   specific disclosure of the cost of the                company if the executive officer was a
                                              Proposed subparagraphs of Item                       assets if acquired within two years of                named executive officer, and such
                                           404(a) would provide the disclosure                     the transaction. We would note,                       compensation had been approved as
                                           requirements for related person                         however, that if such information was                 such by the compensation committee of
                                           transactions. The company would be                      material under the proposed standards                 the board of directors (or group of
                                           required to describe the transaction,                   of Item 404(a), because, for example, the             independent directors performing a
                                           including:                                              recent purchase price to the related                  similar function) of the company.
                                              • The person’s relationship to the                   person was materially less than the sale                 Disclosure of compensation to a
                                           company;                                                price to the company, or the sale price               director (or nominee for director) would
                                              • The person’s interest in the                       to the related person was materially                  not be required if:
                                           transaction with the company,                           more than the recent purchase price to                   • The compensation is reported
                                           including the related person’s position                 the company, disclosure of such prior                 pursuant to proposed Item 402(l).261
                                           or relationship with, or ownership in, a                purchase price could be required.258                     Since the disclosure either would be
                                           firm, corporation, or other entity that is                 Currently, disclosure must be                      reported under Item 402, or would not
                                           a party to or has an interest in the                    provided regarding amounts possibly                   be required under Item 402, we do not
                                           transaction; and                                        owed to the company under Section                     believe the transactions fall within our
                                              • The dollar value of the amount                     16(b) of the Exchange Act.259 The                     proposed principle or will have already
                                           involved in the transaction and of the                  purpose of related person transaction                 been disclosed. We believe the
                                           related person’s interest in the                        disclosure differs from the purpose of                transactions involving compensation
                                           transaction.257                                         Section 16(b). Accordingly, the rule                  that do not fall within these exceptions
                                                                                                   proposals eliminate this Section 16(b)-               would be within the scope of the
                                              256 The release stated that:
                                                                                                   related disclosure requirement.                       proposed Item 404(a) principle for
                                              Registrants should * * * consider the need for                                                             disclosure. These exceptions would
                                           [MD&A] disclosure about parties that fall outside       Request for Comment                                   clarify the limited situations in which
                                           the definition of ‘‘related parties,’’ but with whom
                                           the registrant or its related parties have a              • Should Item 404 require specific                  disclosure of compensation to related
                                           relationship that enables the parties to negotiate      disclosure of the person determining the              persons is not required under Item
                                           terms of material transactions that may not be          registrant’s purchase or sale price for               404.262
                                           available from other, more clearly independent,                                                                  The second category of transactions
                                           parties on an arm’s-length basis. For example, an       registrant purchases or sales of assets
                                                                                                                                                         involves three types of situations we
                                           entity may be established and operated by               not in the ordinary course of business?
                                                                                                                                                         believe do not raise the potential issues
                                           individuals that were former senior management of,        • Should Item 404 require disclosure
                                           or have some other current or former relationship                                                             underlying our principle for disclosure.
                                                                                                   of Section 16(b)-related indebtedness?
                                           with, a registrant. The purpose of the entity may be                                                          First, in the case of transactions
                                           to own assets used by the registrant or provide         Why or why not?
                                                                                                                                                         involving indebtedness, the following
                                           financing or services to the registrant. Although         • Consistent with our principles-
                                                                                                                                                         items of indebtedness would be
                                           former management or persons with other                 based approach, should we specify any
                                           relationships may not meet the definition of a                                                                excluded from the calculation of the
                                                                                                   other elements of the transaction for
                                           related party pursuant to FAS 57, the former                                                                  amount of indebtedness and need not be
                                           management positions may result in negotiation of       disclosure?
                                                                                                                                                         disclosed because they do not have the
                                           terms that are more or less favorable than those
                                           available on an arm’s-length basis from clearly         involved is calculated for indebtedness, as           potential to impact the parties as the
                                           independent third parties that are material to the      discussed above, disclosure with respect to           transactions for which disclosure is
                                           registrant’s financial position or results of           indebtedness would include the largest aggregate      required: amounts due from the related
                                           operations. In some cases, investors may be unable      amount of principal outstanding during the period     person for purchases of goods and
                                           to understand the registrant’s reported results of      for which disclosure is provided, as well as the
                                           operations without a clear explanation of these         amount of principal and interest paid during the      services subject to usual trade terms, for
                                           arrangements and relationships.                         period for which disclosure is provided, the
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                                              Commission Statement about Management’s              aggregate amount of principal outstanding as of the     260 Proposed Instructions 4, 5, 6, 7 and 8 to Item

                                           Discussion and Analysis of Financial Condition and      latest practicable date, and the rate or amount of    404(a).
                                           Results of Operations, Release No. 33–8056 (Jan. 22,    interest payable on the indebtedness.                   261 Proposed Instructions 5 and 6 to Item 404(a),

                                           2002) [67 FR 3746], at Section II.C.                       258 Section 10(b) of the Exchange Act [15 U.S.C.   which would replace current Instruction 1 to Item
                                              257 As is the case today, the dollar value would     78j(b)], Rules 10b–5 [17 CFR 249,19b–5] and 12b-20    404.
                                           be computed without regard to the amount of the         [17 CFR 240.12b–20] under the Exchange Act and          262 In particular, current Instruction 1 to Item 404

                                           profit or loss involved in the transaction. Because     Section 17 of the Securities Act [15 U.S.C. 77q].     covers the scope of Items 402 and 404. We propose
                                           of the manner in which the value of the amount             259 Current Instruction 4 to Item 404(c).          to eliminate this instruction.


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                                           6576             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           ordinary business travel and expense                    interest of less than ten percent, and the              and the transaction is not material to the
                                           payments and for other transactions in                  person is not a general partner of and                  other person) be retained or expanded?
                                           the ordinary course of business.263                     does not have another position in the
                                                                                                                                                           B. Procedures for Approval of Related
                                              Second, also in the case of a                        partnership.269
                                                                                                                                                           Person Transactions
                                           transaction involving indebtedness, if
                                                                                                   Request for Comment                                        We propose adopting a new
                                           the lender is a bank, savings and loan
                                           association, or broker-dealer extending                    • Does proposed Item 404(a) simplify                 requirement for disclosure of the
                                           credit under Federal Reserve Regulation                 and clarify the requirements currently                  policies and procedures established by
                                           T 264 and the loans are not disclosed as                contained in paragraphs (a) and (c) of                  the company and its board of directors
                                           nonaccrual, past due, restructured or                   Item 404?                                               regarding related person transactions.
                                           potential problems 265 disclosure under                    • Would the proposed rule clarify the                State corporate law and increasingly
                                           proposed paragraph (a) of Item 404 may                  situations in which compensation                        robust corporate governance practices
                                           consist of a statement, if correct, that the            would be reportable under Item 404?                     support or provide for such procedures
                                           loans to such persons satisfied the                     Are there any categories of                             in connection with transactions
                                           following conditions:                                   compensation for which it would be                      involving conflicts of interest.270 We
                                              • They were made in the ordinary                     unclear whether disclosure would be                     believe that this type of information is
                                           course of business;                                     required under proposed Item 404?                       material to investors, and our rule
                                              • They were made on substantially                       • We propose to exclude from the                     proposals would therefore require
                                           the same terms, including interest rates                ‘‘amount involved’’ disclosure                          disclosure of policies and procedures
                                           and collateral, as those prevailing at the              requirements indebtedness due for                       regarding related person transactions
                                           time for comparable loans with persons                  purchases subject to usual trade terms,                 under new paragraph (b) of Item 404.
                                           not related to the bank; and                            ordinary business travel and expense                       Specifically, the proposal would
                                              • They did not involve more than the                 payments, and ordinary course business                  require a description of the company’s
                                           normal risk of collectibility or present                transactions as is currently the case. Is               policies and procedures for the review,
                                           other unfavorable features.266                          this exclusion appropriate? Why or why                  approval or ratification of transactions
                                              This proposed exception is based on                  not?                                                    with related persons that would be
                                           a current instruction to Item 404(c),267                   • Do the current instructions that we                reportable under paragraph (a) of Item
                                           and is modified to be more consistent                   propose to modify or eliminate provide                  404. The description would include the
                                           with the prohibition of the Sarbanes-                   necessary guidance for determining if                   material features of these policies and
                                           Oxley Act on personal loans to officers                 disclosure is necessary? Should any of                  procedures that are necessary to
                                           and directors.268                                       these current instructions be retained?                 understand them. While the material
                                              Finally, we propose an instruction                   Should other instructions be added to                   features of such policies and procedures
                                           that indicates that a person who has a                  make the application of the principle for               would vary depending on the particular
                                           position or relationship with a firm,                   disclosure clearer?                                     circumstances, examples of such
                                           corporation, or other entity that engages                  • Does proposed Instruction 8 to Item                features may include, in given cases,
                                           in a transaction with the company shall                 404(a), which indicates that a person                   among other things:
                                           not be deemed to have an indirect                       having the specified positions or                          • The types of transactions that are
                                           ‘‘material’’ interest within the meaning                relationships with a person that engages                covered by such policies and
                                           of paragraph (a) of Item 404 if:                        in a transaction with the company shall                 procedures, and the standards to be
                                              • The interest arises only: (i) From                 not be deemed to have an indirect                       applied pursuant to such policies and
                                           the person’s position as a director of                  material interest in the transaction,                   procedures;
                                           another corporation or organization                     provide sufficient guidance for                            • The persons or groups of persons on
                                           which is a party to the transaction; or                 determining whether disclosure is                       the board of directors or otherwise who
                                           (ii) from the direct or indirect                        necessary in the circumstances                          are responsible for applying such
                                           ownership by such person and all other                  identified in the instruction? Should the               policies and procedures; and
                                                                                                   potential exclusions contemplated in                       • Whether such policies and
                                           related persons, in the aggregate, of less
                                                                                                   the current instructions to Item 404(a),                procedures are in writing and, if not,
                                           than a ten percent equity interest in
                                                                                                   including current Instruction 6                         how such policies and procedures are
                                           another person (other than a
                                                                                                   (excluding remuneration transactions                    evidenced.
                                           partnership) which is a party to the                                                                               The proposal would also require
                                           transaction; or (iii) from both such                    for services when the person’s interest
                                                                                                   arises solely from a ten percent equity                 identification of any transactions
                                           position and ownership; or                                                                                      required to be reported under paragraph
                                              • The interest arises only from the                  ownership interest) and current
                                                                                                   Instruction 8.C. (excluding transactions                (a) of Item 404 where the company’s
                                           person’s position as a limited partner in
                                                                                                   where the interest arises from an equity                policies and procedures did not require
                                           a partnership in which the person and
                                                                                                   or creditor interest in another person                  review, approval or ratification or where
                                           all other related persons, have an
                                                                                                                                                           such policies and procedures were not
                                              263 This proposal is based on current Instruction
                                                                                                      269 Proposed Instruction 8 to Item 404(a). This      followed.
                                           2 to Item 404(c).                                       proposal is based on parts A and B of current
                                                                                                   Instruction 8 to Item 404(a). This proposal would       Request for Comment
                                              264 12 CFR Part 220.
                                              265 See Item III.C.1. and 2. of Industry Guide 3,
                                                                                                   omit the portion of the current instruction                • Should we require disclosure
                                                                                                   (Instruction 8.C.) regarding interests arising solely
                                           Statistical Disclosure by Bank Holding Companies        from holding an equity or a creditor interest in a      regarding the review, approval or
                                           [17 CFR 229.802(c)].                                    person other than the company that is a party to the    ratification of related person
                                              266 Proposed Instruction 7 to Item 404(a).
                                                                                                   transaction, when the transaction is not material to    transactions? Should the rule include
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                                              267 Current Instruction 3 to Item 404(c), which
                                                                                                   the other person. This portion of the current           the proposed requirements? Are there
                                           would be eliminated.                                    instruction may result in inappropriate non-
                                              268 Specifically, the language of current            disclosure of transactions without regard to whether    other types of information that are
                                           Instruction 3 to paragraph (c) of Item 404 would be     they are material to the company. In addition, we
                                           modified to replace the reference ‘‘comparable          propose to eliminate current Instruction 6 to Item        270 Del. Code Ann. tit. 8, § 144 (2004). See also

                                           transactions with other persons’’ with the phase        404(a) that covers a subset of transactions covered     NYSE, Inc. Listed Company Manual Section 307.00
                                           ‘‘comparable loans with persons not related to the      by this proposed instruction, and therefore is          and NASD Manual, Marketplace Rules 4350(h) and
                                           lender.’’                                               duplicative.                                            4360(i).


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                              6577

                                           material that should be included in the                 is part of a group that acquired control,                   amendments to additional listing
                                           description of the approval process?                    of an issuer that is a shell company.272                    standards, including those of the New
                                              • Should we require disclosure of                                                                                York Stock Exchange and Nasdaq,276
                                                                                                   Request for Comment
                                           transactions required to be reported                                                                                that imposed specific additional
                                           under Item 404(a) where a company’s                       • Does the proposed requirement                           independence standards for boards of
                                           policies and procedures did not require                 cover the circumstances where promoter                      directors, and the compensation and
                                           review or were not followed?                            disclosure would be material to                             nominating committees or persons
                                                                                                   investors? If not, what other                               performing similar functions. Currently,
                                           C. Promoters                                            circumstances should be covered?                            each listed company determines
                                              The proposals would require a                          • Does the proposed requirement                           whether its directors and committee
                                           company to provide disclosure                           cover circumstances where the required                      members are independent based on
                                           regarding the identity of promoters and                 disclosure would not be material to                         definitions that it adopts which, at a
                                           its transactions with those promoters if                investors? If so, in what circumstance?                     minimum, are required to comply with
                                           the company had a promoter at any time                                                                              the listing standards applicable to the
                                                                                                   D. Corporate Governance Disclosure
                                           during the last five fiscal years. The                                                                              company.
                                           proposed disclosure would be required                      We propose to consolidate our                              The proposals would include a
                                           in Securities Act registration statements               disclosure requirements regarding                           disclosure requirement identifying the
                                           on Form S–1 (generally, the registration                director independence and related
                                           statement form for initial public                       corporate governance disclosure                                276 NASD and NYSE Listing Standards Release.

                                                                                                   requirements under a single disclosure                      The other exchanges have also adopted corporate
                                           offerings, offerings by unseasoned                                                                                  governance listing standards. See Order Granting
                                           issuers or those with less than $75                     item and to update such disclosure                          Approval of Proposed Rule Change by the American
                                           million public float and offerings by                   requirements regarding director                             Stock Exchange LLC and Notice of Filing and Order
                                           issuers otherwise ineligible to use Form                independence to reflect our current                         Granting Accelerated Approval of Amendment No.
                                                                                                                                                               2 Relating to Enhanced Corporate Governance
                                           S–3 or S–4) or on Form SB–2 (a                          requirements and current listing                            Requirements Applicable to Listed Companies,
                                           registration statement form that small                  standards.273                                               Release No. 34–48863 (Dec. 1, 2003) [68 FR 68432];
                                           business issuers may use) and Exchange                     Our current requirements provide for                     Notice of Filing and Order Granting Accelerated
                                                                                                   disclosure of business relationships                        Approval of Proposed Rule Change and
                                           Act Form 10 (used to register securities                                                                            Amendment Nos. 1 and 2 Thereto by the
                                           initially under the Exchange Act) or                    between a director or nominee for                           Philadelphia Stock Exchange, Inc. Relating to
                                           Form 10–SB (a registration form that                    director and the company that may bear                      Corporate Governance, Release No. 34–49881 (June
                                           small business issuers may use). The                    on the ability of directors and nominees                    17, 2004) [69 FR 35408]; Order Approving Proposed
                                                                                                                                                               Rule Change and Notice of Filing and Order
                                           proposed disclosure would include:                      for director to exercise independent                        Granting Accelerated Approval to Amendment Nos.
                                              • The names of the promoters;                        judgment in the performance of their                        2 and 3 to the Proposed Rule Change by the Chicago
                                              • The nature and amount of anything                  duties.274 In addition, as directed by the                  Stock Exchange, Inc. Relating to Governance of
                                                                                                   Sarbanes-Oxley Act of 2002, we adopted                      Issuers on the Exchange, Release No. 34–49911
                                           of value received by each promoter from                                                                             (June 24, 2004) [69 FR 39989]; Notice of Filing and
                                           the company and the nature and amount                   a rule requiring national securities                        Order Granting Accelerated Approval of Proposed
                                           of any consideration received by the                    exchanges to adopt listing standards                        Rule Change by the Boston Stock Exchange, Inc. to
                                           company; and                                            requiring independent audit committees                      Amend Chapter XXVII, Section 10 of the Rules of
                                                                                                                                                               the Board of Governors by Adding Requirements
                                              • Additional information regarding                   meeting the standards of our rule.275                       Concerning Corporate Governance Standards of
                                           any assets acquired by the company                      Further, in 2003 and 2004, we approved                      Exchange-Listed Companies, Release No. 34–49955
                                           from a promoter.                                                                                                    (July 1, 2004) [69 FR 41555]; Notice of Filing and
                                                                                                      272 Proposed Item 404(c)(2). The term ‘‘group’’          Order Granting Accelerated Approval of Proposed
                                              The proposed disclosure requirements                                                                             Rule Change and Amendment Nos. 1 and 2 Thereto
                                                                                                   would have the same meaning as in Exchange Act
                                           are consistent with those currently                     Rule 13d–5(b)(1) [17 CFR 240.13d–5(b)(1)], that is,         by the Chicago Board Options Exchange,
                                           required regarding promoters. However,                  any two or more persons that agree to act together          Incorporated, Relating to Enhanced Corporate
                                           this disclosure is not currently required               for the purpose of acquiring, holding, voting, or           Governance Requirements for Listed Companies,
                                                                                                   disposing of equity securities of an issuer.                Release No. 34–49995 (July 9, 2004) [69 FR 42476];
                                           if the company has been organized more                                                                              Notice of Filing and Order Granting Accelerated
                                                                                                      273 Proposed Item 407 of Regulations S–K and S–
                                           than five years ago, even if the company                                                                            Approval of Proposed Rule Change and
                                                                                                   B. As proposed, Item 407 would consolidate
                                           otherwise had a promoter within the                     corporate governance disclosure requirements
                                                                                                                                                               Amendment Nos. 1 and 2 Thereto by National
                                           last five years. Our staff’s experience in                                                                          Stock Exchange Relating to Corporate Governance,
                                                                                                   located in several places under our rules and the
                                                                                                                                                               Release No. 34–49998 (July 9, 2004) [69 FR 42788];
                                           reviewing registration statements,                      principal markets’ listing standards, including in          and Notice of Filing and Immediate Effectiveness of
                                           especially of smaller companies,                        particular our requirements under current Items             Proposed Rule Change by the Pacific Exchange, Inc.
                                                                                                   306, 401(h), (i) and (j), 402(j) and 404(b) of              to Amend the Corporate Governance Requirements
                                           suggests that the more appropriate five-                Regulation S–K and Item 7 of Schedule 14A under             for PCX Listed Companies, Release No. 34–50677
                                           year test would relate to the period of                 the Exchange Act. We are not proposing any                  (Nov. 16, 2004) [69 FR 68205].
                                           time during which the company had a                     changes to the substance of Item 306, Item 401(h),
                                                                                                                                                                  The Commission has previously received a
                                           promoter for which the disclosure                       (i) or (j), or Item 402(j) as part of this consolidation.
                                                                                                                                                               rulemaking petition submitted by the AFL/CIO,
                                                                                                   However, the proposed rules would reorder some
                                           should be provided, as our proposal                     provisions in Item 306 and reflect the relevant
                                                                                                                                                               which requested the Commission to amend Items
                                                                                                                                                               401 and 404 of Regulation S–K to require disclosure
                                           provides, rather than the date of                       Public Company Accounting Oversight Board rules.            about transactions with non-profit organizations
                                           organization of the company.271 We also                 See PCAOB Rulemaking: Public Company                        (letter dated Dec. 12, 2001 from Richard Trumka,
                                           are proposing to require the same                       Accounting Oversight Board; Order Approving                 Secretary-Treasurer, AFL/CIO, File No. 4–499,
                                                                                                   Proposed Technical Amendments to Interim                    available at www.sec.gov/rules/petitions/petn4–
                                           disclosure that is required for promoters               Standards Rules, Release No. 34–49624 (Apr. 28,             499.pdf) and a rulemaking petition submitted by the
                                           for any person who acquired control, or                 2004) [69 FR 24199]; and Order Regarding Section            Council of Institutional Investors, which requested
                                                                                                   101(d) of the Sarbanes-Oxley Act of 2002, Release           amendments to Item 401 of Regulation S–K to
                                              271 The proposed rules would similarly revise the    No. 33–8223 (Apr. 25, 2003) [68 FR 2336].                   require disclosure of certain transactions between
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                                                                                                      274 Current Item 404(b).
                                           disclosure requirement referencing promoters in                                                                     directors, executive officers and nominees (letter
                                           Item 401(g)(1) of Regulation S–K. In addition, our         275 Section 10A(m) of the Exchange Act [15 U.S.C.
                                                                                                                                                               dated Oct. 1, 1997, as amended Oct. 19, 1998, from
                                           proposal would add Form SB–2 to the list of             78j–1(m)], as added by Section 301of the Sarbanes-          Sarah A.B. Teslik, Executive Director, Council of
                                           registration statement forms in Item 404 for which      Oxley Act of 2002 (15 U.S.C. 7201 et seq.);                 Institutional Investors, File No. 4–404). We believe
                                           promoter disclosure would be required. While this       Exchange Act Rule 10A–3 [17 CFR 240.10A–3]; and             these requests have in large part been addressed by
                                           revision would update the registration statement        Standards Relating to Listed Company Audit                  revised listing standards instituted by the
                                           forms listed in Item 404, it would not change the       Committees, Release No. 33–8220 (Apr. 9, 2003) [68          exchanges, so that we are not now proposing
                                           promoter disclosure requirement of Form SB–2.           FR 18788].                                                  additional action under these petitions.


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                                           6578             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           independent directors of the company                       The proposals would require an issuer                 requirements.285 As a result, the audit
                                           (and, in the case of disclosure in proxy                that has adopted definitions of                          committee charter would no longer be
                                           or information statements, nominees for                 independence for directors and                           required to be delivered to security
                                           director) under the definition for                      committee members to disclose whether                    holders if it is posted on the company’s
                                           determining board independence                          those definitions are posted on the                      Web site.286 We also propose moving
                                           applicable to it. The proposals would                   company’s Web site, or include the                       the disclosure required by Section 407
                                           also require disclosure of any members                  definitions as an appendix to the                        of the Sarbanes-Oxley Act regarding
                                           of the compensation, nominating and                     company’s proxy materials at least once                  audit committee financial experts to
                                           audit committee that the company had                    every three years or if the policies have                Item 407, although we are not proposing
                                           not identified as independent under the                 been materially amended since the                        any substantive changes to that
                                           definition of independence for that                     beginning of the company’s last fiscal                   requirement.
                                           board committee applicable to it.                       year.281 Further, if the policies are not                   In addition to the disclosures
                                              More specifically, if the company is                 on the company’s Web site, or included                   currently required regarding audit and
                                           an issuer 277 with securities listed, or for            as an appendix to the company’s proxy                    nominating committees of the board of
                                           which it has applied for listing, on a                  statement, the company would have to                     directors, we propose requiring similar
                                           national securities exchange 278 or in an               disclose in which of the prior fiscal                    disclosure regarding compensation
                                           automated inter-dealer quotation system                 years the policies were included in the                  committees.287 The company would
                                           of a national securities association 279                company’s proxy statement.                               also be required to describe its processes
                                           which has requirements that a majority                     In addition, the proposals would                      and procedures for the consideration
                                           of the board of directors be                            require, for each director or director                   and determination of executive and
                                           independent, the proposal would                         nominee identified as independent, a                     director compensation including:
                                           require disclosure of those directors and               description of any transactions,                            • The scope of authority of the
                                           director nominees that the company                      relationships or arrangements not                        compensation committee (or persons
                                           identifies as independent (and                          disclosed pursuant to paragraph (a) of                   performing the equivalent functions);
                                           committee members not identified as                     Item 404 that were considered by the                        • The extent to which the
                                           independent), using a definition for                    board of directors of the company in                     compensation committee (or persons
                                           independence for directors (and for                     determining that the applicable                          performing the equivalent functions)
                                           committee members) that is in                           independence standards were met.                         may delegate any authority to other
                                           compliance with the applicable listing                                                                           persons, specifying what authority may
                                                                                                      This independence disclosure would
                                           standards. If the company is not a listed                                                                        be so delegated and to whom;
                                                                                                   be required for any person who served
                                           issuer, the proposals would require                                                                                 • Whether the compensation
                                                                                                   as a director of the company during any
                                           disclosure of those directors and                                                                                committee’s authority is set forth in a
                                                                                                   part of the year for which disclosure
                                           director nominees that the company                                                                               charter or other document, and if so, the
                                                                                                   must be provided,282 even if the person
                                           identifies as independent (and                                                                                   company’s Web site address at which a
                                                                                                   no longer serves as director at the time
                                           committee members not identified as                                                                              current copy is available if it is so
                                                                                                   of filing the registration statement or
                                           independent) using the definition for                                                                            posted, and if not so posted, attaching
                                                                                                   report or, if the information is in a proxy
                                           independence for directors (and for                                                                              the charter to the proxy statement once
                                                                                                   statement, if the director’s term of office
                                           committee members) of a national                                                                                 every three years;
                                                                                                   as a director will not continue after the
                                           securities exchange or a national                                                                                   • Any role of executive officers in
                                                                                                   meeting. In this regard, we believe that
                                           securities association, specified by the                                                                         determining or recommending the
                                                                                                   the independence status of a director is
                                           company. The company would be                                                                                    amount or form of executive and
                                                                                                   material while the person is serving as
                                           required to apply the same definition                                                                            director compensation; and
                                                                                                   director, and not just as a matter of
                                           consistently to all directors and also to                                                                           • Any role of compensation
                                                                                                   reelection.283
                                           use the independence standards of the                                                                            consultants in determining or
                                           same national securities exchange or                       The proposals also would revise the
                                                                                                                                                            recommending the amount or form of
                                           national securities association for                     current disclosure required regarding
                                                                                                                                                            executive and director compensation,
                                           purposes of determining the                             the audit committee and nominating
                                                                                                                                                            identifying such consultants, stating
                                           independence of members of the                          committee 284 to eliminate duplicative
                                                                                                                                                            whether such consultants are engaged
                                           compensation, nominating and audit                      committee member independence
                                                                                                                                                            directly by the compensation committee
                                           committees.280                                          disclosure and to update the required
                                                                                                                                                            (or persons performing the equivalent
                                                                                                   audit committee charter disclosure
                                                                                                                                                            functions) or any other person,
                                             277 Under the rule proposals, ‘‘listed issuer’’       requirement for consistency with the
                                                                                                                                                            describing the nature and scope of their
                                           would have the same meaning as in Exchange Act          more recently adopted nominating
                                           Rule 10A–3.                                                                                                      assignment, the material elements of the
                                                                                                   committee charter disclosure
                                             278 Under the rule proposals ‘‘national securities                                                             instructions or directions given to the
                                           exchange’’ means a national securities exchange
                                                                                                     281 Proposed
                                                                                                                                                            consultants with respect to the
                                           registered pursuant to Section 6(a) of Exchange Act                       Item 407(a)(2).
                                                                                                                                                            performance of their duties under the
                                           [15 U.S.C. 78f(a)].                                       282 However,    disclosure would not be required for
                                             279 Under the rule proposals ‘‘automated inter-       persons no longer serving as a director in               engagement and identifying any
                                           dealer quotation system of a national securities        registration statements under the Securities Act or      executive officer within the company
                                           association’’ means an automated inter-dealer           the Exchange Act filed at a time when the company        the consultants contacted in carrying
                                           quotation system of a national securities association   is not subject to the reporting requirements of          out their assignment.
                                           registered pursuant to Section 15A(a) of the            Exchange Act Sections 13(a) or 15(d). Disclosure
                                           Exchange Act [15 U.S.C. 78o–3(a)].                      would not be required of anyone who was a director
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                                             280 Similar disclosure is currently required          only during the time period before the company              285 However, we are not proposing to revise the

                                           pursuant to Item 7(d)(2)(ii)(C) and Item 7(d)(3)(iv)    made its initial public offering if he was no longer     provision that the audit committee report is
                                           of Schedule 14A. As part of our consolidation of        a director at the time of the offering. Proposed         furnished and not filed.
                                           these provisions into proposed Item 407, we             Instruction to Item 407(a).                                 286 Proposed Item 407(d)(1) and Instruction 2 to
                                                                                                      283 For this reason, we do not propose to             Item 407.
                                           propose to revise these provisions to reflect the
                                           general approach discussed above with regard to         incorporate the concept in current Instruction 4 to         287 Current Item 7(d) of Schedule 14A. These new

                                           disclosure of director independence for board and       Item 404(b) into proposed Item 407(a).                   proposed requirements also would be in proposed
                                           committee purposes.                                        284 Current Item 7 of Schedule 14A.                   Item 407(e).


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                           6579

                                             In addition, as noted above,                          under proposed Item 404(a)) when                       of the small business issuer’s total assets
                                           disclosure would be required regarding                  determining if the independence                        for the last three completed fiscal years,
                                           each member of the compensation                         standards were met?                                    to require disclosure for small business
                                           committee that the registrant has                          • Is there any reason why we should                 issuers that may have material related
                                           identified as not independent.                          not eliminate the requirement that                     person transactions even though smaller
                                             Further, the rule proposals would                     companies provide disclosure in their                  than the absolute dollar amount of
                                           consolidate into this compensation                      proxy statements regarding directors                   $120,000.
                                           committee disclosure requirement the                    who have resigned or declined to stand                    Both proposed items would consist of
                                           disclosure currently required in Item                   for re-election? 294                                   disclosure requirements regarding
                                           402 regarding compensation committee                       • Are there circumstances in which                  related person transactions and
                                           interlocks and insider participation in                 disclosure should not be required under                promoters. These provisions of Item 404
                                           compensation decisions.288                              proposed Item 407(a)? Should                           of Regulation S–B would be
                                             Finally, for registrants other than                   disclosure not be required for a director              substantially identical to those of Item
                                           registered investment companies, the                    who is no longer a director at the time                404 of Regulation S–K, except for
                                           rule proposals would eliminate an                       of filing any registration statement or                certain changes conforming proposed
                                           existing proxy disclosure requirement                   report? Should disclosure not be                       Item 404 of Regulation S–B to current
                                           regarding directors that have resigned or               required if information is being                       Item 404 of Regulation S–B. These
                                           declined to stand for re-election 289                   presented in a proxy or information                    changes consist of the following:
                                           which is no longer necessary since it                   statement for a director whose term of                    • Throughout proposed Item 404 of
                                           has been superseded by a disclosure                     officer as a director will not continue                Regulation S–B using the two year time
                                           requirement in Form 8–K.290 For                         after the meeting to which the statement               period for disclosure in current Item 404
                                           registered investment companies, which                  relates?                                               of Regulation S–B;
                                           do not file Form 8–K, the requirement                      • Given that registered investment                     • Retaining in proposed Item 404 of
                                           would be moved to Item 22(b) of                         companies do not file Form 8–K, should                 Regulation S–B an instruction in current
                                           Schedule 14A.291 Also, the rule                         we continue to require registered                      Item 404 of Regulation S–B regarding
                                           proposals would combine various proxy                   investment companies to make proxy                     underwriting discounts and
                                           disclosure requirements regarding board                 statement disclosures pursuant to                      commissions; 295 and
                                                                                                                                                             • Not including an instruction in
                                           meetings and committees into one                        current Item 7(g) of Schedule 14A
                                                                                                                                                          proposed Item 404 of Regulation S–B
                                           location.292 In addition, we propose two                regarding directors who have resigned
                                                                                                                                                          regarding the treatment of foreign
                                           instructions to Item 407 to combine                     or declined to stand for re-election?
                                                                                                                                                          private issuers that is included in
                                           repetitive provisions, one relating to                     • Should we also move the disclosure
                                                                                                                                                          proposed Item 404 of Regulation S–K.296
                                           independence disclosure, and the other                  required by Rule 10A–3(d) (under                          In addition, proposed Item 404 of
                                           relating to board committee charters.293                which companies must disclose                          Regulation S–B would retain a
                                                                                                   whether they have relied on an                         paragraph from current Item 404 of
                                           Request for Comment
                                                                                                   exemption from the audit committee                     Regulation S–B requiring disclosure of a
                                              • Should the disclosure requirements                 independence requirements of Rule                      list of all parents of the small business
                                           proposed to be consolidated in Item 407                 10A–3) to proposed Item 407?                           issuer showing the basis of control and
                                           continue to remain separate? If so, why?                   • Should the audit committee charter                as to each parent, the percentage of
                                           Is the proposed location of this                        disclosure requirement be changed to be                voting securities owned or other basis of
                                           consolidated disclosure appropriate,                    consistent with the nominating                         control by its immediate parent, if any.
                                           including the proposed options for                      committee charter disclosure                              One conforming change that we are
                                           disclosing adopted independence                         requirements? Should the compensation                  not making, however, concerns the
                                           definitions?                                            committee charter disclosure                           calculation of a related person’s interest
                                              • Are there independence standards                   requirement be the same? Should there                  in a given transaction. Current Item
                                           that would be preferable to the ones                    be any changes to the proposed                         404(a) of Regulation S–B differs from
                                           referenced in proposed new Item 407?                    compensation committee disclosure                      current Item 404(a) of S–K with respect
                                              • Should companies that are not                      requirements?                                          to, among other things, the calculation
                                           listed on a national securities exchange                   • Are there any disclosure                          of the dollar value of a person’s interest
                                           or on an inter-dealer quotation system of               requirements regarding compensation                    in a related transaction. Current
                                           a national securities association be able               consultants that we should add to or                   Instruction 4 to Item 404(a) of
                                           to reference their own standards of                     delete or change from the proposal?                    Regulation S–K specifically provides
                                           independence that they have adopted,                                                                           that the amount of such interest shall be
                                           or should those companies be required                   E. Treatment of Specific Types of
                                                                                                   Issuers                                                computed without regard to the amount
                                           to refer to established listing standards                                                                      of profit or loss involved in the
                                           as proposed?                                            1. Small Business Issuers                              transaction. In contrast, current Item
                                              • Should we require as proposed a                                                                           404(a) of Regulation S–B contains no
                                                                                                      Proposed Item 404 of Regulation S–B
                                           description of transactions considered                                                                         such instruction. We propose that the
                                                                                                   is substantially similar to proposed Item
                                           (other than those that would be reported                                                                       method of calculation of a related
                                                                                                   404 of Regulation S–K, except for the
                                             288 Current
                                                                                                   following two matters:                                 person’s interest in a transaction will be
                                                          Item 402(j).
                                             289 Item  7(g) of Schedule 14A.                          • Paragraph (b) relating to policies                the same for both Regulation S–B and
                                              290 Item 5.02(a) of Form 8–K.                        and procedures for reviewing related                   Regulation S–K. We believe that
                                                                                                   party transactions is proposed not to be               differences, if any, between the types of
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                                              291 Proposed Item 22(b)(17) of Schedule 14A.
                                              292 Current paragraphs (d)(1), (f), and (h)(3) of    included in Regulation S–B, and
                                           Item 7 of Schedule 14A would be included in                • Regulation S–B would provide for a                   295 This instruction, which is current Instruction

                                           proposed Item 407(b).                                                                                          2 to Item 404 of Regulation S–B, is proposed
                                              293 Proposed Instructions 1 and 2 to Item 407.
                                                                                                   disclosure threshold of the lesser of                  Instruction 9 to Item 404 of Regulation S–B.
                                           Proposed Instruction 2 also includes a requirement      $120,000 or one percent of the average                    296 This instruction, which is current Instruction

                                           that the charter be provided if it is materially                                                               3 to Item 404 of Regulation S–K, is not included in
                                           amended.                                                  294 Item   7(g) of Schedule 14A.                     current Item 404 of Regulation S–B.


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                                           6580             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           transactions that small business issuers                  Form 20–F. The proposals would retain                  of members of nominating and audit
                                           may engage in with related persons as                     this approach, but would require that if               committees that are similar to those
                                           compared to transactions of larger                        more detailed information is required to               contained in proposed Item 407(a) of
                                           issuers would not warrant a different                     be disclosed by the issuer’s home                      Regulation S–K and currently contained
                                           approach for calculating a related                        jurisdiction or a market in which its                  in Item 7.301
                                           person’s interest in a transaction.                       securities are listed or traded, that same                We are also proposing to raise from
                                              Proposed Item 407 of Regulation S–K                    information must also be disclosed                     $60,000 to $120,000 the threshold for
                                           is substantially identical to proposed                    pursuant to Item 404.                                  disclosure of certain interests,
                                           Item 407 of Regulation S–B,297 except                                                                            transactions, and relationships of each
                                                                                                     Request for Comment
                                           that it would it would not require                                                                               director or nominee for election as
                                           disclosure regarding compensation                           • Is there any reason to discontinue                 director who is not or would not be an
                                           committee interlocks and insider                          this treatment of foreign private issuers?             ‘‘interested person’’ of an investment
                                           participation in compensation                             Should a foreign private issuer that is                company within the meaning of Section
                                           decisions, since Regulation S–B                           required to comply with Item 404 (for                  2(a)(19) of the Investment Company
                                           currently does not require disclosure of                  example, by filing an annual report on                 Act.302 This disclosure is required in
                                           this information.298                                      Form 10–K) be required to provide all                  investment company proxy and
                                                                                                     of the information required under Item                 information statements and registration
                                           Request for Comment                                       404 instead of the information required                statements. The increase in the
                                              • Should small business issuers be                     under Form 20–F?                                       disclosure threshold would correspond
                                           categorically exempted from any                                                                                  to the proposal to increase the
                                                                                                     3. Registered Investment Companies
                                           additional aspect of the proposed Item                                                                           disclosure threshold for Item 404 from
                                           404 or Item 407 disclosure                                   We propose to revise Items 7 and
                                                                                                     22(b) of Schedule 14A to reflect the                   $60,000 to $120,000.
                                           requirements? If so, which requirements
                                           and why? Should any of the proposed                       reorganization that we have proposed                   Request for Comment
                                           exclusions not be excluded? If so, why?                   with respect to operating companies.
                                                                                                                                                               • Should we reorganize in the
                                              • Currently Item 404(a) of Regulation                  Under the proposals, information that is
                                                                                                                                                            manner proposed the disclosures that
                                           S–K states that companies are not to                      currently required to be provided by
                                                                                                     registered investment companies under                  registered investment companies are
                                           consider the amount of profit or loss                                                                            currently required to make under Item
                                           when computing the amount involved                        Item 7 would instead be required by
                                                                                                     Item 22(b).299 The requirements of Item                7 of Schedule 14A? If not, how should
                                           in a transaction, but Item 404 of                                                                                these disclosures be organized? Should
                                           Regulation S–B does not include this                      7 that are currently applicable to
                                                                                                     registered investment companies                        any substantive changes be made to the
                                           statement. We propose to provide the                                                                             proposed disclosures?
                                           same instruction in both Regulation S–                    regarding the nominating and audit
                                                                                                     committees, board meetings, the                           • Is it appropriate to adjust to
                                           K and Regulation S–B. Should Item
                                                                                                     nominating process, and shareholder                    $120,000 the threshold for disclosure of
                                           404(a) of Regulation S–B continue to
                                                                                                     communications generally would be                      certain interests, transactions, and
                                           omit this instruction? Why or why not?
                                                                                                     included in Item 22(b) by cross-                       relationships of each director or
                                              • Currently Item 404(a) of Regulation
                                                                                                     references to the appropriate paragraphs               nominee for election as director who is
                                           S–K specifically provides for using the
                                                                                                     of proposed Item 407 of Regulation S–                  not or would not be an ‘‘interested
                                           value of the aggregate amount of all
                                                                                                     K.300 The substance of these                           person’’ of an investment company?
                                           periodic payments or installments when
                                                                                                     requirements would not be altered. In                  Should there be no threshold? Should
                                           computing the amount involved in a
                                                                                                     addition, the proposed revisions to Item               the threshold also operate on a sliding
                                           transaction, but Item 404 of Regulation
                                                                                                     22(b) would directly incorporate                       scale (for example, the lower of
                                           S–B does not. Should Item 404(a) of
                                                                                                     disclosures relating to the independence               $120,000 or 1% of total or net assets for
                                           Regulation S–B, as does proposed
                                                                                                                                                            the last three completed fiscal years or
                                           Instruction 3 to Item 404(a) of
                                                                                                       299 Proposed amendments to Item 7(e) of              the lower of $120,000 or a percentage of
                                           Regulation S–B, provide for this?
                                              • Is the definition of ‘‘related person’’
                                                                                                     Schedule 14A. Business development companies           annual expenses) to capture smaller
                                                                                                     would furnish the information required by Item 7       transactions for smaller companies?
                                           in Item 404 of Regulation S–B                             of Schedule 14A, in addition to the information
                                           sufficiently broad? Should this                           required by Items 8 and 22(b) of Schedule 14A. See     Explain whether a higher or lower
                                           definition be expanded to include                         proposed amendments to Items 7, 8, and 22(b) of        threshold, or no threshold, would result
                                           consultants and advisors?
                                                                                                     Schedule 14A.                                          in more effective disclosure.
                                                                                                       300 Proposed Items 22(b)(15)(i) and (ii)(A) and
                                              • Should we use a different                            22(b)(16)(i) of Schedule 14A. Proposed Item            F. Conforming Amendments
                                           alternative threshold for disclosure in                   22(b)(15)(i) would require the information required
                                           proposed Item 404(a) of Regulation S–B?                   by Items 407(b)(1) and (2) and (f), corresponding to     The changes we propose to Item 404
                                           For example the lesser of $120,000 or a                   the information that registered investment             necessitate conforming amendments to
                                                                                                     companies are required to provide pursuant to
                                           percentage of annual corporate                            current Items 7(f) and 7(h). Proposed Item
                                                                                                                                                               301 Proposed Items 22(b)(15)(ii)(B) and (16)(ii) of
                                           expenses?                                                 22(b)(15)(ii)(A) would require the information
                                                                                                     required by proposed Items 407(c)(1) and (2),          Schedule 14A. Proposed Item 22(b)(15)(ii)(B)
                                           2. Foreign Private Issuers                                corresponding to the information that registered       requires disclosure about the independence of
                                                                                                     investment companies are required to provide           nominating committee members that is similar to
                                              Currently a foreign private issuer will                pursuant to current Items 7(d)(2)(i) and 7(d)(2)(ii)   those required by current Item 7(d)(2)(ii)(C) and
                                           be deemed to comply with Item 404 of                      (other than the nominating committee                   proposed Item 22(b)(16)(ii) requires disclosure
                                           Regulation S–K if it provides the                         independence disclosures required by current Item      about the independence of audit committee
                                                                                                     7(d)(2)(ii)(C)). Proposed Item 22(b)(16)(i) would      members that is similar to those required by current
                                           information required by Item 7.B. of
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                                                                                                     require closed-end investment companies to             Items 7(d)(3)(iv)(A)(1) and (B).
                                                                                                                                                               302 Proposed amendments to Items 22(b)(7),
                                                                                                     provide the information required by proposed Items
                                              297 Current paragraphs (e), (f), and (g) of Item 401
                                                                                                     407(d)(1) through (3), corresponding to the            22(b)(8), and 22(b)(9) of Schedule 14A; proposed
                                           of Regulation S–B would become paragraphs (d)(5),         information that closed-end investment companies       amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8)
                                           (d)(4) and (c)(3), respectively, of Item 407 of           are required to provide pursuant to current Item       of Form N–1A; proposed amendments to Items 18.9,
                                           Regulation S–B.                                           7(d)(3) (other than the audit committee                18.10, and 18.11 of Form N–2; proposed
                                              298 This disclosure is currently required under        independence disclosures required by Items             amendments to Items 20(h), 20(i), and 20(j) of Form
                                           Item 402(j) of Regulation S–K.                            7(d)(3)(iv)(A)(1) and (B)).                            N–3.


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                                                               Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                         6581

                                           other rules that refer specifically to Item               exempts transactions between issuers of                 under current Item 404(b), some current
                                           404.                                                      securities and their officers and                       Non-Employee Directors may become
                                                                                                     directors if specified conditions are met.              ineligible.
                                           1. Regulation Blackout Trading
                                                                                                     In particular, acquisitions from and
                                           Restriction                                                                                                       Request for Comment
                                                                                                     dispositions to the issuer are exempt if
                                              We are proposing conforming changes                    the transaction is approved in advance                     • Should the Rule 16b–3 Non-
                                           to Regulation Blackout Trading                            by the issuer’s board of directors, or                  Employee Director definition continue
                                           Restriction,303 also known as Regulation                  board committee composed solely of                      to permit consulting or similar
                                           BTR, which we adopted to clarify the                      two or more Non-Employee Directors.308                  arrangements with the issuer, as
                                           scope and operation of Section                               The definition of ‘‘Non-Employee                     proposed?
                                           306(a) 304 of the Sarbanes-Oxley Act of                   Director,’’ among other things, limits                     • Is the proposed Item 404(a)
                                           2002 and to prevent evasion of the                        these directors to those who:                           disclosure threshold an appropriate
                                           statutory trading restriction.305 Rule 100                   • Do not directly or indirectly receive              limit for permitting consulting or
                                           of Regulation BTR defines terms used in                   compensation from the issuer, its parent                similar arrangements? Instead, should
                                           Section 306(a) and Regulation BTR,                        or subsidiary for consulting or other                   the dollar limit be lower, such as the
                                           including the term ‘‘acquired in                          non-director services, except for an                    current $60,000 threshold? Explain the
                                           connection with service or employment                     amount that does not exceed the Item                    basis for recommending a different
                                           as a director or executive officer.’’ 306                 404(a) dollar disclosure threshold;                     dollar limit.
                                           Under this definition, one of the                            • Do not possess an interest in any                     • For business relationships for
                                           specified methods by which a director                     other transaction for which Item 404(a)                 which disclosure is not required by
                                           or executive officer directly or indirectly               disclosure would be required; and                       current Item 404(b), but would be under
                                           acquires equity securities in connection                     • Are not engaged in a business                      proposed Item 404(a), should there be a
                                           with such service is an acquisition ‘‘at                  relationship required to be disclosed                   different test? Are there any particular
                                           a time when he or she was a director or                   under Item 404(b).                                      transactions or relationships that would
                                           executive officer, as a result of any                        As described above, the Item 404                     become disclosable under proposed
                                           transaction or business relationship                      proposals would substantially revise or                 Item 404(a) that should not render a
                                           described in paragraph (a) or (b) of Item                 rescind the Item 404 provisions on                      director ineligible to be a Non-Employee
                                           404 of Regulation S–K.’’ 307 To conform                   which the Non-Employee Director                         Director? If so, explain why.
                                           this provision of Regulation BTR to the                   definition is based. To minimize                           • Would continued use of Item 404 as
                                           proposed Item 404 amendments, we                          potential disruptions and because no                    a measure for defining Non-Employee
                                           propose to amend Rule 100(a)(2) so that                   problems have been brought to our                       Directors place an undue burden on
                                           it references only transactions described                 attention regarding any aspect of the                   companies in forming their Non-
                                           in paragraph (a) of Item 404.                             current definition, the proposed                        Employee Director committees? Would
                                           2. Rule 16b–3 Non-Employee Director                       conforming amendment would continue                     reference to another disclosure
                                           Definition                                                to permit consulting and similar                        requirement or standard be better?
                                                                                                     arrangements subject to limits measured
                                              We also are proposing conforming                       by reference to the proposed Item 404(a)                3. Other Conforming Amendments
                                           amendments to the definition of Non-
                                                                                                     disclosure requirements.309 The                           The changes we propose to Item 404,
                                           Employee Director in Exchange Act
                                                                                                     amendment would delete the provision                    along with the consolidation of
                                           Rule 16b–3. Section 16(b) provides an
                                                                                                     referring to business relationships                     provisions into Item 407, necessitate
                                           issuer (or shareholders suing on its
                                                                                                     subject to disclosure under Item 404(b),                conforming amendments to various
                                           behalf) the right to recover from an
                                                                                                     without otherwise revising the text of                  forms and schedules under the
                                           officer, director, or ten percent
                                                                                                     the rule.310 Because the disclosure                     Securities Act and the Exchange Act.
                                           shareholder profits realized from a
                                                                                                     threshold of Item 404(a) would be raised                The rule proposals would amend:
                                           purchase and sale of issuer equity
                                           securities within a period of less than
                                                                                                     from $60,000 to $120,000, however, the                    • Forms that require disclosure of the
                                                                                                     effect in some cases may be to permit                   information required by Item 404 to
                                           six months. However, Rule 16b–3
                                                                                                     previously ineligible directors to be                   instead require disclosure of the
                                             303 17  CFR 245.100–104.
                                                                                                     Non-Employee Directors.311 In other                     information required by proposed Items
                                             304 15  U.S.C. 7244(a), entitled ‘‘Prohibition of       cases, where proposed Item 404(a) may                   404 and 407(a); 312
                                           Insider Trading During Pension Fund Blackout              require disclosure of business                            • Some forms that require disclosure
                                           Periods.’’                                                relationships not subject to disclosure                 of the information required by Item
                                              305 Insider Trades During Pension Fund Blackout

                                           Periods, Release No. 34–47225 (Jan. 22, 2003) [68
                                                                                                                                                             404(a) or by Items 404(a) and (c), to
                                           FR 4337]. Section 306(a) makes it unlawful for any
                                                                                                       308 Exchange    Act Rules 16b–3(d)(1) and 16b–3(e).   instead require disclosure of the
                                                                                                       309 Because   it appears appropriate that the
                                           director or executive officer of an issuer of any                                                                 information required by proposed Items
                                           equity security (other than an exempted security),        standards for an exemption from Section 16(b)
                                                                                                     liability be readily determinable by reference to the
                                                                                                                                                             404(a) and (b), or proposed Item 404(a),
                                           directly or indirectly, to purchase, sell, or otherwise
                                           acquire or transfer any equity security of the issuer     exemptive rule, and not variable depending upon         as appropriate; 313
                                           (other than an exempted security) during any              where the issuer’s securities are listed, we do not
                                           pension plan blackout period with respect to such         propose to base the amended definition on the              312 See proposed amendments to Item 15 of Form

                                           equity security, if the director or executive officer     listing standards for director independence             SB–2, Item 11(n) of Form S–1, Item 18(a)(7)(iii) and
                                           acquired the equity security in connection with his       applicable to the issuer.                               Item 19(a)(7)(iii) of Form S–4, Item 23 of Form S–
                                           or her service or employment as a director or                310 Exchange Act Rule 16b–3(b)(3)(ii), which         11, Item 7 of Form 10, Item 13 of Form 10–K, Item
                                           executive officer. This provision equalizes the           defines a Non-Employee Director of a closed-end         7 of Form 10–SB, and Item 12 of Form 10–KSB. The
                                           treatment of corporate executives and rank-and-file       investment company as ‘‘a director who is not an        proposed amendments to Forms SB–2, 10–SB and
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                                           employees with respect to their ability to engage in      ‘‘interested person’’ of the issuer, as that term is    10–KSB would require disclosure of the
                                           transactions involving issuer equity securities           defined in Section 2(a)(19) of the Investment           information required by proposed Items 404 and
                                           during a pension plan blackout period if the              Company Act of 1940,’’ would not be revised.            407(a) of Regulation S–B.
                                           securities were acquired in connection with their            311 As under the current rule, each test referring      313 See proposed amendments to Item 7(b) of
                                           service to, or employment with, the issuer.               to Item 404 will be measured by reference to the        Schedule 14A, which refers to proposed Items
                                              306 This term is defined in Rule 100(a) of
                                                                                                     Regulation S–K Item, even if the disclosure             404(a) and (b), and Item 22(b)(11) and the
                                           Regulation BTR.                                           requirements applicable to the company are              Instruction to Item 22(b)(11) of Schedule 14A, and
                                              307 Rule 100(a)(2) of Regulation BTR.                  governed by Regulation S–B.                                                                        Continued



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                                           6582             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                              • A form that cross-references an                    disclosure of the information required                     • Use descriptive headings and
                                           instruction in Item 404 which we                        by Items 401, 402 and 404, so that                      subheadings;
                                           propose to eliminate to instead include                 instead it would require disclosure of                     • Use a tabular presentation or bullet
                                           the text of this instruction; 314                       the information required by proposed                    lists for complex material, wherever
                                              • Item 7 of Schedule 14A to require                  Items 401, 402, 404 and paragraphs (a),                 possible;
                                           disclosure of the information required                  (c)(3), (d)(4), (d)(5) and (e)(4) of Item                  • Avoid legal jargon and highly
                                           by proposed Item 407(a) rather than                     407.318                                                 technical business and other
                                           current Item 404(b), and to eliminate                                                                           terminology;
                                           current paragraphs (d)–(h) which are                    VI. Plain English Disclosure
                                                                                                                                                              • Avoid frequent reliance on
                                           duplicative of proposed Item 407 and                       We are proposing that most of the                    glossaries or defined terms as the
                                           replace them with a requirement to                      disclosure required by proposed Items                   primary means of explaining
                                           disclose information specified by                       402, 403, 404 and 407 be provided in                    information, defining terms in the
                                           corresponding paragraphs of Item 407;                   plain English. We propose that this                     glossary or other section of the
                                              • Forms that require disclosure of the               plain English requirement apply when                    document only if the meaning is unclear
                                           information required by Item 402 to                     information responding to these items is                from the context and using a glossary
                                           instead require disclosure of the                       included (whether directly or through                   only if it facilitates understanding of the
                                           information required by proposed Item                   incorporation by reference) in reports                  disclosure; and
                                           402 and Item 407(e)(4); 315                             required to be filed under Exchange Act                    • In designing the presentation of the
                                              • Some forms that require disclosure                 Sections 13(a) or 15(d).                                information, include pictures, logos,
                                           of the information required by Item 401                    In 1998, we adopted rule changes                     charts, graphs, schedules, tables or other
                                           to instead require disclosure of the                    requiring issuers to write the cover page,              design elements so long as the design is
                                           information required by Item 401 and                    summary and risk factors section of                     not misleading and the required
                                           paragraphs (c)(3), (d)(4) and/or (d)(5) of              prospectuses in plain English and apply                 information is clear, understandable,
                                           proposed Item 407, as appropriate; 316                  plain English principles to other                       consistent with applicable disclosure
                                              • Forms that require disclosure of the               portions of the prospectus.319 These                    requirements and any other included
                                           information required by Item 401(j), to                 rules transformed the landscape of                      information, drawn to scale and not
                                           instead require disclosure of the                       public offering disclosure and made                     misleading.
                                           information required by proposed Item                   prospectuses more accessible to
                                           407(c)(3); 317 and                                                                                                 The proposed rule would also provide
                                                                                                   investors. We believe that plain English
                                              • Item 10 of Form N–CSR to include                                                                           additional guidance on drafting the
                                                                                                   principles should apply to the
                                           a cross reference to proposed Item                                                                              disclosure that would comply with
                                                                                                   disclosure requirements that we propose
                                           407(c)(2)(iv) of Regulation S–K and                                                                             plain English principles, including
                                                                                                   to revise, so disclosure provided in
                                           proposed Item 22(b)(15) of Schedule                                                                             guidance as to the following practices
                                                                                                   response to those requirements is easier
                                           14A, in lieu of the current reference to                                                                        that registrants should avoid:
                                                                                                   to read and understand. Clearer, more
                                           Item 7(d)(2)(ii)(G) of Schedule 14A.                    concise presentation of executive and                      • Legalistic or overly complex
                                              In addition, conforming amendments                   director compensation, related person                   presentations that make the substance of
                                           would be made to a provision in                         transactions, beneficial ownership and                  the disclosure difficult to understand;
                                           Regulation AB, which currently requires                 corporate governance matters can                           • Vague ‘‘boilerplate’’ explanations
                                                                                                   facilitate more informed investing and                  that are imprecise and readily subject to
                                           Item 5.02(c)(2) of Form 8–K, which refer to             voting decisions in the face of complex                 different interpretations;
                                           proposed Item 404(a). The proposed amendments to
                                                                                                   information about these important areas.                   • Complex information copied
                                           Form 8–K that reference paragraphs (a) and (b) of
                                           Item 404 of Regulation S–B would require                   We propose to add Exchange Act                       directly from legal documents without
                                           disclosure of the information required by proposed      Rules 13a–20 and 15d–20 to require that                 any clear and concise explanation of the
                                           Item 404(a) of Regulation S–B.                          companies prepare their executive and                   provision(s); and
                                              314 See proposed amendments to Item 23 of Form
                                                                                                   director compensation, related person                      • Disclosure repeated in different
                                           S–11.
                                              315 See proposed amendments to Item 8 of             transactions, beneficial ownership and                  sections of the document that increases
                                           Schedule 14A, Item 11(l) of Form S–1, General           corporate governance disclosures                        the size of the document but does not
                                           Instruction I.B.4.(c) to Form S–3, Items 18(a)(7)(ii)   included in Exchange Act reports using                  enhance the quality of the information.
                                           and 19(a)(7)(ii) of Form S–4, Item 22 of Form S–11,     plain English principles, including the                    Under the proposed rules, if the
                                           Item 6 of Form 10 and Item 11 of Form 10–K.
                                              316 See proposed amendments to General
                                                                                                   following standards:                                    executive compensation, beneficial
                                           Instruction I.B.4.(c) of Form S–3, and Item 10 of          • Present information in clear,                      ownership, related person transaction or
                                           Form 10–K, which refer to Item 401 and paragraphs       concise sections, paragraphs and                        corporate governance matters disclosure
                                           (c)(3), (d)(4) and (d)(5) of proposed Item 407, and     sentences;                                              were incorporated by reference into an
                                           Item 7(b) of Schedule 14A, which refers to Item 401
                                           and paragraphs (d)(4) and (d)(5) of proposed Item
                                                                                                      • Use short sentences;                               Exchange Act report from a company’s
                                           407.                                                       • Use definite, concrete, everyday                   proxy or information statement, the
                                              The proposed amendments to Forms SB–2, 10–           words;                                                  disclosure would be required to be in
                                           SB and 10–KSB would require disclosure of the              • Use the active voice;                              plain English in the proxy or
                                           information required by proposed Items 401 and             • Avoid multiple negatives;                          information statement.320 The plain
                                           407(c)(3), (d)(4) and (d)(5) of Regulation S–B. We
                                           are not proposing any changes to the reference to
                                                                                                                                                           English rules are proposed as part of the
                                           Item 401 in Note G to Form 10–K, however, because          318 See proposed amendments to Item 1107(e) of       disclosure rules applicable to filings
                                           the portion of Item 401 applicable in Note G            Regulation AB.                                          required under Sections 13(a) and 15(d)
                                           (certain disclosure regarding executive officers)          319 Plain English Disclosure, Release No. 33–7497
                                                                                                                                                           of the Exchange Act. We believe that
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                                           does not include the part of Item 401 that we           (Jan. 28, 1998) [63 FR 6369] (adopting revisions to
                                           propose to combine into proposed Item 407.
                                                                                                                                                           these plain English requirements are
                                                                                                   Securities Act Rule 421 [17 CFR 230.421]). We have
                                              317 See proposed amendments to Item 5 in Part II     also required that risk factor disclosure included in
                                           of Form 10–Q, and Item 5 in Part II of Form 10–         annual reports and Summary Term Sheets in                 320 See, e.g., General Instruction G(3) to Form 10–

                                           QSB. The proposed amendments to Item 5 in Part          business combination filings be in plain English.       K and General Instruction E.3. to Form 10–KSB
                                           II of Form 10–QSB would require disclosure of the       See General Instruction 1A. to Form 10–K and Item       (specifying information that may be incorporated by
                                           information required by proposed Item 407(c)(3) of      1001 of Regulation M–A 17 CFR 229.1001],                reference from a proxy or information statement in
                                           Regulation S–B.                                         respectively.                                           an annual report on Form 10–K or 10–KSB).


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                                                               Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                         6583

                                           best administered by the Commission                         • For Forms 8–K, for triggering events                on the amendments. We request
                                           under these rules.                                       that occur 60 days or more after                         comment from companies and all users
                                                                                                    publication;                                             of the executive compensation, related
                                           Request for Comment
                                                                                                       • For Securities Act and Investment                   party and corporate governance
                                             • Will the plain English requirements                  Company Act registration statements                      information required by Commission
                                           discussed above be sufficient to                         (including post-effective amendments)                    rules that may be affected by the
                                           discourage boilerplate and promote                       and Exchange Act registration                            proposals. With respect to any
                                           clear, more user-friendly Exchange Act                   statements that become effective 120                     comments, we note that they are of
                                           reports and proxy or information                         days or more after publication; and                      greatest assistance to our rulemaking
                                           statements? If not, how should we revise                    • For proxy statements that are filed                 initiative if accompanied by supporting
                                           the requirements?                                        90 days or more after publication.322                    data and analysis of the issues
                                             • Are there differences between proxy                     We do not propose to require                          addressed in those comments and by
                                           statements and Exchange Act reports                      companies to ‘‘restate’’ compensation or                 alternatives to our proposals where
                                           which would require different                            related person transaction disclosure for                appropriate.
                                           requirements in order to accomplish the                  fiscal years for which they previously
                                                                                                                                                             VIII. Paperwork Reduction Act
                                           objectives of plain English? If so, what                 were required to apply the current rules.
                                           are the different requirements and how                   Instead, the proposed Summary                            A. Background
                                           should the different requirements be                     Compensation Table and disclosure                          The proposed rules and amendments
                                           addressed?                                               required by proposed Item 404(a) would                   contain ‘‘collection of information’’
                                             • In addition to the proposal, should                  be required only for the most recent                     requirements within the meaning of the
                                           we require that information provided                     fiscal year.323 This would result in                     Paperwork Reduction Act of 1995.324
                                           under proposed Items 402, 403, 404 and                   phased-in implementation of the                          We are submitting these to the Office of
                                           407 in other filings, such as Form S–1,                  proposed Summary Compensation                            Management and Budget for review and
                                           be written in plain English?                             Table amendments and proposed Item                       approval in accordance with the
                                             • Since only portions of the                           404(a) disclosure over a three-year                      Paperwork Reduction Act.325 The titles
                                           disclosure under proposed Item 407                       period for Regulation S–K companies,                     for this information are: 326
                                           would be required to be included in                      and a two-year period for Regulation S–                    (1) ‘‘Regulation S–B’’ (OMB Control
                                           Exchange Act reports, should we                          B companies.                                             No. 3235–0417);
                                           specifically require that all Item 407                   Request for Comment                                        (2) ‘‘Regulation S–K’’ (OMB Control
                                           disclosure be in plain English? If so,                                                                            No. 3235–0071);
                                           how should we impose this                                  • Is the proposed effectiveness                          (3) ‘‘Form SB–2’’ (OMB Control No.
                                           requirement?                                             schedule workable?                                       3235–0418);
                                             • Should we require that all or                          • Is the proposed phased-in transition                   (4) ‘‘Form S–1’’ (OMB Control No.
                                           portions of proxy or information                         provision for the amended Summary                        3235–0065);
                                           statements be in plain English? If so,                   Compensation Table and proposed                            (5) ‘‘Form S–4’’ (OMB Control
                                           should a plain English requirement                       related person transaction disclosure                    Number 3235–0324);
                                           apply to disclosure provided by anyone                   necessary? Could companies revise the                      (6) ‘‘Form S–11’’ (OMB Control
                                           who solicits a proxy with a proxy                        previous years’ required disclosure to                   Number 3235–0067);
                                           statement, or should it be limited to just               conform to the amended requirements                        (7) ‘‘Regulation 14A and Schedule
                                           companies making a solicitation of their                 without incurring undue costs or                         14A’’ (OMB Control Number 3235–
                                           shareholders? Should shareholder                         burdens?                                                 0059);
                                           proposals under Exchange Act Rule                          • Are any special transition                             (8) ‘‘Regulation 14C and Schedule
                                           14a–8 321 or financial statements and                    provisions necessary for any other                       14C’’ (OMB Control Number 3235–
                                           related disclosures under Item 13 of                     aspects of the proposed amendments? If                   0057);
                                           Schedule 14A be excluded from any                        so, explain what would be needed and                       (9) ‘‘Form 10’’ (OMB Control No.
                                           plain English requirements applicable to                 why.                                                     3235–0064);
                                           proxy statements? Would a plain                          General Request for Comments                               (10) ‘‘Form 10–SB’’ (OMB Control No.
                                           English requirement under the proxy                                                                               3235–0419);
                                           rules have the potential to increase                       We request and encourage any                             (11) ‘‘Form 10–K’’ (OMB Control No.
                                           disputes, including possible litigation,                 interested person to submit comments                     3235–0063);
                                           that could inappropriately delay or                      on any aspect of our proposals and any                     (12) ‘‘Form 10–KSB’’ (OMB Control
                                           frustrate the conduct of solicitations and               other matters that might have an impact                  No. 3235–0420);
                                           shareholder meetings or otherwise                           322 The proposed amendments to the cross-
                                                                                                                                                               (13) ‘‘Form 8–K’’ (OMB Control No.
                                           interfere with the proper operation of                   references in Item 10 of Form N–CSR would appear
                                                                                                                                                             3235–0060); and
                                           the proxy rules?                                         in the Form concurrent with the effective date of          (14) ‘‘Form N–2’’ (OMB Control No.
                                                                                                    the amendments to our proxy rules, and would be          3235–0026).
                                           VII. Transition                                          effective for a particular registrant’s Forms N–CSR        We adopted all of the existing
                                                                                                    that are filed after the filing of any proxy statement
                                              We propose that, following their                      that includes a response to proposed Item
                                                                                                                                                             regulations and forms pursuant to the
                                           adoption, the proposed new rules and                     407(c)(2)(iv) of Regulation S–K (as required by
                                           amendments would become effective                        proposed Item 22(b)(15) of Schedule 14A). The              324 44 U.S.C. 3501 et seq.
                                           following publication of the adopting                    substance of the information required by the Item          325 44 U.S.C. 3507(d) and 5 CFR 1320.11.
                                                                                                    would not be changed.                                      326 The paperwork burden from Regulations S–K
                                           release in the Federal Register as
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                                                                                                       323 The other proposed executive and director         and S–B is imposed through the forms that are
                                           follows:                                                 compensation disclosure requirements which relate        subject to the requirements in those Regulations
                                              • For Forms 10–K and 10–KSB, for                      to the last completed fiscal year would not be           and is reflected in the analysis of those forms. To
                                           fiscal years ending 60 days or more after                affected by this proposed transition approach. The       avoid a Paperwork Reduction Act inventory
                                           publication;                                             Summary Compensation Table would be treated              reflecting duplicative burdens, for administrative
                                                                                                    differently because, as proposed, it would require       convenience we estimate the burdens imposed by
                                                                                                    disclosure of compensation to the named executive        each of Regulations S–K and S–B to be a total of
                                             321 17   CFR 240.14a–8.                                officers for the last three fiscal years.                one hour.


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                                           6584             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           Securities Act and the Exchange Act. In                 publicly available on the EDGAR filing                elements of compensation of named
                                           addition, we adopted Form N–2                           system.                                               executive officers;
                                           pursuant to the Investment Company                                                                               • Disclosure regarding up to three
                                                                                                   B. Summary of Information Collections                 employees who were not executive
                                           Act. These regulations and forms set
                                           forth the disclosure requirements for                      The proposals would increase existing              officers and whose total compensation
                                           annual 327 and current reports,                         disclosure burdens for annual reports on              for the last completed fiscal year was
                                           registration statements, proxy                          Form 10–K 328 and registration                        greater than that of any of the named
                                           statements and information statements                   statements on Forms 10, S–1, S–4 and                  executive officers;
                                           that are prepared by issuers to provide                 S–11 by requiring:                                       • New tables and narrative disclosure
                                           investors with the information they                        • An expanded and reorganized                      regarding retirement plans and
                                           need to make informed investment                        Summary Compensation Table, which                     nonqualified defined contribution and
                                           decisions in registered offerings and in                would require expanded disclosure of a                other deferred compensation plans;
                                           secondary market transactions, as well                  ‘‘total compensation’’ amount, and                       • Expanded disclosure regarding
                                           as informed voting decisions in the case                information necessary for computing the               post-employment payments other than
                                           of proxy statements.                                    total amount of compensation, such as                 pursuant to retirement and deferred
                                              Our proposed amendments to existing                  the grant date fair value of stock-based              compensation plans;
                                           forms and regulations are intended to:                  and option-based awards computed in                      • A new table and improved narrative
                                              • Provide investors with a clearer and               accordance with FAS 123R, and the                     disclosure for director compensation to
                                           more complete picture of compensation                   aggregate increase in actuarial value of              replace current disclosure requirements;
                                           awarded to, earned by or paid to                        defined benefit and actuarial pension                    • Disclosure regarding additional
                                           principal executive officers, principal                 plans;                                                related persons under the proposed
                                           financial officers, the highest paid                       • Disclosure at lower thresholds of                related person transaction disclosure
                                           executive officers other than the                       information regarding perquisites and                 requirement;
                                           principal executive officer and principal               other personal benefits;                                 • New disclosure regarding a
                                           financial officer and directors;                           • A more focused presentation of                   company’s policies and procedures for
                                                                                                   compensation plan awards in a Grants                  the review, approval or ratification of
                                              • Provide investors with better
                                                                                                   of Performance-Based Awards Table and                 transactions with related persons;
                                           information about key financial
                                                                                                   a Grants of All Other Equity Awards                      • New and reorganized disclosure
                                           relationships among companies and
                                                                                                   Table, which would build upon existing                regarding corporate governance matters
                                           their executive officers, directors,
                                                                                                   tabular disclosures regarding long term               such as the independence of directors
                                           significant shareholders and their
                                                                                                   incentive plans and awards of option                  and members of the nominating,
                                           respective immediate family members;
                                                                                                   and stock appreciation rights to                      compensation and audit committees of
                                              • Include more complete information                                                                        the board of directors; and
                                           about independence regarding members                    supplement the information proposed to
                                                                                                   be included in the Summary                               • Additional disclosure regarding
                                           of the board of directors and board                                                                           pledges of securities by officers and
                                           committees;                                             Compensation Table;
                                                                                                      • Expanded disclosure regarding                    directors and directors’ qualifying
                                              • Reorganize and modify the type of                                                                        shares.
                                           executive and director compensation                     holdings and exercises by named
                                                                                                   executive officers of outstanding                        At the same time, the proposals
                                           information that must be disclosed in                                                                         would decrease existing disclosure
                                           current reports; and                                    previously awarded stock, options and
                                                                                                   similar instruments which would                       burdens for annual reports on Form 10–
                                              • Require most of the disclosure                                                                           K and registration statements on Form
                                           required under these proposals to be                    include the grant date of the award, the
                                                                                                   vesting date of restricted stock and                  10, S–1, S–4 and S–11 by:
                                           provided in plain English.                                                                                       • Eliminating requirements to
                                              The hours and costs associated with                  similar instruments and amounts (both
                                                                                                                                                         provide a Compensation Committee
                                           preparing disclosure, filing forms, and                 number of shares and value) realized
                                                                                                                                                         Report and Performance Graph in proxy
                                           retaining records constitute reporting                  upon vesting and the previously
                                                                                                                                                         materials and information statements,
                                           and cost burdens imposed by the                         reported grant date fair value of awards
                                                                                                                                                         which would substantially offset the
                                           collection of information. An agency                    exercised or vested;
                                                                                                                                                         increased burdens regarding
                                           may not conduct or sponsor, and a                          • Improved narrative disclosure
                                                                                                                                                         Compensation Discussion and Analysis
                                           person is not required to respond to, a                 accompanying data presented in the
                                                                                                                                                         that would be required to be included
                                           collection of information unless it                     executive compensation tables and a
                                                                                                                                                         or incorporated by reference in annual
                                           displays a currently valid control                      new Compensation Discussion and
                                                                                                                                                         reports or registration statements;
                                           number.                                                 Analysis section to explain material                     • Eliminating tabular presentation
                                              The information collection                             328 The proposed disclosure requirements
                                                                                                                                                         regarding projected stock option values
                                           requirements related to annual and                      regarding executive and director compensation,        under alternative stock appreciation
                                           current reports, registration statements,               beneficial ownership, related person transactions     scenarios, which would substantially
                                           proxy statements and information                        and parts of the proposed corporate governance        offset the increased burdens regarding
                                           statements would be mandatory.                          disclosure requirements are in Form 10–K,             equity holdings and exercises;
                                                                                                   Schedule 14A and Schedule 14C. Form 10–K
                                           However, the information collection                     permits the incorporation by reference of                • Eliminating a generalized tabular
                                           requirements relating exclusively to                    information in Schedules 14A or 14C to satisfy the    presentation regarding defined benefit
                                           proxy and information statements                        disclosure requirements of Form 10–K. The analysis    plans, which would offset in part the
                                           would only apply to issuers subject to                  that follows assumes that companies would either      increased burdens regarding defined
                                                                                                   provide the proposed disclosure in a Form 10–K
                                           the proxy rules. There would be no                                                                            benefit plan disclosure;
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                                                                                                   only, if the company is not subject to the proxy
                                           mandatory retention period for the                      rules, or would incorporate the required disclosure      • Increasing the dollar value
                                           information disclosed, and the                          into the Form 10–K by reference to the proxy or       threshold for determining if related
                                           information disclosed would be made                     information statement if the company is subject to    person transaction disclosure is
                                                                                                   the proxy rules. This approach takes into account
                                                                                                   the burden from the proposed disclosure
                                                                                                                                                         required from $60,000 to $120,000; and
                                             327 The pertinent annual reports are those on         requirements that are included in both the Form          • Eliminating a current disclosure
                                           Form 10–K or 10–KSB.                                    10–K and in Schedule 14A or 14C.                      requirement regarding specific director

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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                6585

                                           relationships that could affect                         above, by the proposed Compensation                      • Reducing by two the number of
                                           independence.                                           Discussion and Analysis and narrative                 named executive officers for the
                                              In addition, the proposals may                       disclosure requirement regarding                      purposes of executive compensation
                                           increase or decrease existing disclosure                repricings and other modifications, both              disclosure, to include only the principal
                                           burdens, or not affect them at all, for                 of which would be required to be                      executive officer and the two most
                                           annual reports on Form 10–K and                         included or incorporated by reference in              highly compensated executive officers
                                           registration statements on Form 10, S–                  annual reports and registration                       other than the principal executive
                                           1, S–4 and S–11, depending on a                         statements. We estimate that, on                      officer;
                                           company’s particular circumstances, by:                 balance, the proposed changes that are                   • Reducing the required information
                                              • Eliminating the requirement to                     specific to proxy or information                      in the Summary Compensation Table
                                           include in proxy or information                         statements would not result in                        from three years to two years of data;
                                           statements a compensation committee                     incremental burdens on proxy or                          • Eliminating tabular disclosure of
                                           report on the repricing of options and                  information statement collections of                  grants of options and stock appreciation
                                           stock appreciation rights and a table                   information.                                          rights in the last fiscal year;
                                           reporting on the repricing of options                      The proposals would increase existing                 • Eliminating tabular disclosure
                                           and stock appreciation rights over the                  disclosure burdens for annual reports on              regarding exercises of options and stock
                                           past ten years, in favor of a narrative                 Form 10–KSB 329 and registration                      appreciation rights;
                                           discussion of repricings, if any occurred               statements on Forms 10–SB and SB–2                       • Eliminating tabular disclosure
                                           in the last fiscal year, which would be                 filed by small business issuers by                    regarding long term incentive plan
                                           required to be included or incorporated                 requiring:                                            awards in the last fiscal year; and
                                           by reference in annual reports and                         • An expanded and reorganized                         • Eliminating a current disclosure
                                           registration statements; and                            Summary Compensation Table, which                     requirement regarding specific director
                                              • Eliminating or reducing the scope                  would require expanded disclosure of a                relationships that could affect
                                           of instructions that provide bright line                ‘‘total compensation’’ amount, and                    independence.
                                           tests for determining whether                           information necessary for computing the                  In addition, the proposals may
                                           transactions with related persons are                   total amount of compensation, such as                 increase or decrease, or not affect,
                                           required to be disclosed in particular                  the grant date fair value of stock-based              existing disclosure burdens for annual
                                           circumstances.                                          and option-based awards computed in                   reports on Form 10–KSB or registration
                                              Specifically with respect to proxy and               accordance with FAS 123R and the                      statements on Form 10–SB and SB–2
                                           information statements, the proposals                   aggregate increase in actuarial value of              filed by small business issuers
                                           would impose a new disclosure                           defined benefit and actuarial pension                 depending on the small business
                                           requirement regarding the company’s                     plans;                                                issuer’s particular circumstances, by:
                                           processes and procedures for the                           • Disclosure at lower dollar                          • Eliminating the requirement to
                                           consideration and determination of                      thresholds for information regarding                  include a compensation committee
                                           executive and director compensation,                    perquisites and other personal benefits;              report on the repricing of options and
                                           and disclosure regarding the availability                  • Expanded disclosure regarding                    stock appreciation rights, in favor of a
                                           of the compensation committee’s charter                 holdings of previously awarded stock,                 narrative discussion of repricings, if any
                                           (if it has one), either as an appendix to               options and similar instruments, which                occurred in the last fiscal year;
                                           the proxy or information statement at                   would include the value of stock and                     • Changing the dollar value threshold
                                           least once every three fiscal years or on               other similar incentive plan awards that              used for determining if related person
                                           the company’s Web site. These                           had not vested;                                       transaction disclosure is required from
                                           proposals would not require a                              • A new table for director                         $60,000 to the lesser of $120,000 or one
                                           compensation committee to establish or                  compensation, to replace current                      percent of the average of the small
                                           maintain a charter. The proposed                        narrative disclosure requirements;                    business issuer’s total assets for the last
                                           disclosure that would be required                          • A narrative description of                       three completed fiscal years; and
                                           regarding compensation committees is                    retirement plans;                                        • Eliminating or reducing the scope
                                           similar to what is currently required for                  • Disclosure regarding additional                  of instructions that provide bright line
                                           audit committees and nominating                         related persons under the proposed                    tests for determining whether
                                           committees. The proposals would                         related person transaction disclosure                 transactions with related persons are
                                           decrease existing disclosure                            requirement;                                          required to be disclosed in particular
                                           requirements for proxy and information                     • New and reorganized disclosure                   circumstances.
                                           statements by eliminating a current                     regarding corporate governance matters                   The proposals would decrease
                                           disclosure requirement regarding the                    such as the independence of directors                 existing disclosure burdens for Forms
                                           resignation of directors, as well as                    and members of the nominating,                        N–1A, N–2, and N–3 by increasing to
                                           eliminating current requirements to                     compensation and audit committees of                  $120,000 the current $60,000 threshold
                                           provide a Compensation Committee                        the board of directors; and                           in such forms for disclosure of certain
                                           Report, Performance Graph and a                            • Additional disclosure regarding                  interests, transactions, and relationships
                                           compensation committee report on the                    pledges of securities by officers and                 of disinterested directors, although as
                                           repricing of options and stock                          directors, and director qualifying shares.            discussed below we do not believe the
                                           appreciation rights. However, the extent                   At the same time, the proposals                    increase in the disclosure threshold will
                                           to which eliminating current                            would decrease existing disclosure                    significantly impact the hours of
                                           requirements to provide a                               burdens for annual reports on Form 10–                company personnel time and cost of
                                           Compensation Committee Report,                          KSB and registration statements on                    outside professionals in responding to
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                                           Performance Graph and a compensation                    Form 10–SB and SB–2 filed by small                    these items. The proposals would
                                           committee report on the repricing of                    business issuers by:                                  increase the existing disclosure burdens
                                           options and stock appreciation rights                     329 The same analysis as discussed above with
                                                                                                                                                         for Form N–2 by requiring business
                                           reduces burdens for proxy and                           regard to the relationship of Form 10–K to the
                                                                                                                                                         development companies to provide
                                           information statements would be offset                  disclosure required in proxy or information           additional disclosure regarding
                                           to a substantial extent, as discussed                   statements is also applied to Form 10–KSB.            compensation. However, the proposals

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                                           6586             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           would decrease the existing disclosure                  K, we estimate that 75% of the burden                    an annual incremental disclosure
                                           burden by no longer requiring                           of preparation is carried by the company                 burden.
                                           compensation disclosure with respect to                 internally and that 25% of the burden                       These estimates were based on the
                                           certain affiliated persons and the                      is carried by outside professionals                      following assumptions:
                                           advisory board of business development                  retained by the issuer at an average cost                   • On an ongoing basis, the hours of
                                           companies and by no longer requiring                    of $300 per hour.332 For Securities Act                  company personnel time and outside
                                           business development companies to                       registration statements on Forms SB–2,                   professional time required to prepare
                                           disclose certain compensation from the                  S–1, S–4, S–11, or N–2 and Exchange                      the disclosure under proposed Item 402
                                           fund complex.                                           Act registration statements on Form 10                   of Regulation S–K (executive and
                                             The proposals would decrease the                      or 10–SB, we estimate that 25% of the                    director compensation) would increase
                                           Form 8–K disclosure burdens, by                         burden of preparation is carried by the                  in light of the expansion and
                                           limiting both the existing requirement to               company internally and that 75% of the                   reorganization of the proposed
                                           disclose a company’s entry into a                       burden is carried by outside                             disclosure requirements relative to the
                                           material definitive agreement outside of                professionals retained by the issuer at                  current disclosure requirements on
                                           the ordinary course of business or any                  an average cost of $300 per hour.333 The                 these topics, in particular the
                                           material amendment to such an                           portion of the burden carried by outside                 requirements regarding Compensation
                                           agreement and the requirement to                        professionals is reflected as a cost, while              Discussion and Analysis.
                                           collect information regarding directors,                the portion of the burden carried by the                    • Companies filing annual reports on
                                           executive officers other than named                     company internally is reflected in                       Form 10–K that would be required to
                                           executive officers and officers covered                 hours.                                                   include Item 402 of Regulation S–K, as
                                           by Item 5.02 of Form 8–K. By focusing                                                                            we propose to amend it, and proposed
                                           the Form 8–K disclosure requirement on                  1. Securities Act Registration                           Item 407(e)(4) of Regulation S–K
                                           more presumptively material                             Statements, Exchange Act Registration                    (regarding compensation committee
                                           employment agreements, plans or                         Statements and Exchange Act Annual                       interlocks and insider participation),
                                           arrangements of a narrower group of                     Reports                                                  would experience higher costs in
                                           executive officers, the number of Form                                                                           responding to these disclosure
                                           8–Ks filed each year relating to                           For the purposes of the Paperwork                     requirements in the first year of
                                           executive and director compensation                     Reduction Act, we estimate that, over a                  compliance with them, and, to a lesser
                                           matters should be reduced.                              three year period,334 the annual                         extent, in the second year, as systems
                                             We do not believe that our proposals                  incremental disclosure burden imposed                    are implemented to obtain the relevant
                                           regarding exhibit filing requirements for               by the proposed revisions would                          data and compliance efforts with respect
                                           Form 20–F and our proposed treatment                    average 67 hours per Form 10–K; 35                       to new or expanded disclosure
                                           for foreign private issuers under the                   hours per Form 10–KSB; 60 hours per                      requirements, with lower incremental
                                           revised rules would impose any                          Form 10; 30 hours per Forms 10–SB and                    costs expected in subsequent years.335
                                           incremental increase or decrease in the                 SB–2; 60 hours per Forms S–1, S–4 and                       • On an ongoing basis, the hours of
                                           disclosure burden for these issuers.                    S–11; and 1.675 hours per Form N–2. To                   company personnel time and outside
                                                                                                   the extent that companies incorporate                    professional time required to prepare
                                           C. Paperwork Reduction Act Burden                       information proposed to be required by                   the disclosure under proposed Item 404
                                           Estimates                                               reference to proxy or information                        (related person transactions), 407(a)
                                              For purposes of the Paperwork                        statements, the proposed plain English                   (director independence) and paragraphs
                                           Reduction Act, we estimate the annual                   requirements would apply to disclosure                   (e)(1) through (e)(3) of Item 407
                                           incremental increase in the paperwork                   in those statements, however the                         (compensation committee functions) of
                                           burden for companies to comply with                     incremental burden of preparing plain                    both Regulation S–K and Regulation S–
                                           our proposed collection of information                  English disclosure is factored into the                  B would be approximately the same as
                                           requirements to be approximately                        burden estimates for Forms 10–K and                      for compliance with the current related
                                           537,792 hours of in-house company                       10–KSB. We estimate that the proposed                    party transaction disclosure and
                                           personnel time and to be approximately                  amendments to Item 22(b) of Schedule                     disclosure about the board of directors
                                           $69,794,000 for the services of outside                 14A and the proposal to increase to                      required by existing Item 404 of
                                           professionals.330 These estimates                       $120,000 the current $60,000 threshold                   Regulations S–K and S–B and Item 7 of
                                           include the time and the cost of                        in Forms N–1A, N–2, and N–3 for                          Schedule 14A.336 Other revisions
                                           preparing and reviewing disclosure,                     disclosure of certain interests,                         proposed to be made by moving
                                           filing documents and retaining records.                 transactions, and relationships of
                                           Our methodologies for deriving the                      disinterested directors will not impose                     335 For Form 10–K, we estimate that it would take

                                                                                                                                                            issuers 120 additional hours to prepare the
                                           above estimates are discussed below.                                                                             proposed disclosure in year one, and 55 hours in
                                              Our estimates represent the average                     332 In connection with other recent rulemakings,
                                                                                                                                                            year two and 25 hours in year three and thereafter,
                                           burden for all issuers, both large and                  we have had discussions with several private law         which results in an average of 67 hours over the
                                                                                                   firms to estimate an hourly rate of $300 as the          three year period. This estimate takes into account
                                           small. As described below, we expect                    average cost of outside professionals that assist        that the burden would be incurred by either
                                           that the burdens and costs could be                     issuers in preparing disclosures and conducting          including the proposed disclosure in the report
                                           greater for larger issuers and lower for                registered offerings.                                    directly or incorporating by reference from a proxy
                                           smaller issuers. For Exchange Act                          333 As mentioned above, we do not believe that        or information statement.
                                           annual reports on Form 10–K or 10–                      the proposal to increase to $120,000 the current            336 Similarly, on an ongoing basis, the hours of
                                                                                                   $60,000 threshold in Forms N–1A, N–2, and N–3            company personnel time and outside professional
                                           KSB,331 or current reports on Form 8–                   for disclosure of certain interests, transactions, and   time required to prepare the disclosure required by
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                                                                                                   relationships of disinterested directors will            the proposed conforming revisions to Item 22(b)
                                             330 For administative convenience, the                significantly impact the hours of company                relating to the independence of members of
                                           presentation of the totals related to the paperwork     personnel time and cost of outside professionals in      nominating and audit committees of investment
                                           burden hours have been rounded to the nearest           responding to these items.                               companies would be approximately the same as for
                                           whole number and the cost totals have been                 334 We calculated an annual average over a three      compliance with the current requirements regarding
                                           rounded to the nearest thousand.                        year period because OMB approval of Paperwork            disclosure of the independence of nominating and
                                             331 We apply the same allocation of burden with       Reduction Act submissions covers a three year            audit committee members of investment companies
                                           regard to proxy or information statements.              period.                                                  required by existing Item 7 of Schedule 14A.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                          6587

                                           disclosure requirements relating to                     new or expanded disclosure                              of disinterested directors in Forms N–
                                           corporate governance to Item 407 of                     requirements are implemented, with                      1A, N–2, and N–3 and in proxy and
                                           Regulations S–K and S–B would not                       lower incremental costs in subsequent                   information statements would neither
                                           change the substance of existing                        years.338                                               increase nor decrease the annual
                                           disclosure and would therefore not                        • Small business issuers filing                       paperwork burden, because these forms
                                           increase burdens, particularly for proxy                registration statements on Forms 10–SB                  are already required to disclose these
                                           or information statements where much                    and SB–2 that are not already filing                    interests, transactions, and relationships
                                           of the disclosure is currently required.                periodic reports pursuant to Exchange                   in amounts exceeding $60,000, and we
                                              • Companies filing registration                      Act Sections 13(a) or 15(d) would not                   do not believe the increase in the
                                           statements on Forms 10, S–1, S–4 and                    have been required to comply with the                   disclosure threshold will significantly
                                           S–11 that are not already filing periodic               proposed disclosure requirements prior                  impact the hours of company personnel
                                           reports pursuant to Exchange Act                        to filing such registration statements,                 time and cost of outside professionals in
                                           Sections 13(a) or 15(d) would in many                   and would therefore take an estimated                   responding to these items.
                                           cases not have been required to comply                  30 additional hours to comply with the                     • Business development companies
                                           with the proposed disclosure                            proposed changes in the disclosure                      filing Form N–2 would be required to
                                           requirements prior to filing such                       requirements. The additional time                       include Item 402 of Regulation S–K, as
                                           registration statements, and would                      required by these registrants to obtain                 we propose to amend it, and would
                                           therefore take an estimated 60 hours to                 the relevant data and to compile the                    experience higher costs in responding to
                                           comply with the proposed changes in                     required information is offset to some                  these disclosure requirements in the
                                           the disclosure requirements. The                        extent by the fact that only one year of                first year of complying with them, and,
                                           additional time required by these                       compensation information would                          to a lesser extent, in the second year, as
                                           registrants to obtain the relevant data                 generally be required for presentation in               systems are implemented to obtain the
                                           and to compile the required information                 the Summary Compensation Table, as                      relevant data and compliance efforts
                                           is offset to some extent by the fact that               compared to two years for small                         with respect to new or expanded
                                           only one year of compensation                           business issuers already subject to                     disclosure requirements are
                                           information would generally be required                 Exchange Act reporting requirements.                    implemented, with lower incremental
                                           for presentation in the Summary                           • Based on our experience with the                    costs expected in subsequent years.339
                                           Compensation Table, as compared to                      requirement we adopted in 1998 for                         Tables 1 and 2 below illustrate the
                                           three years for issuers already subject to              companies to write certain sections of                  incremental annual compliance burden
                                           Exchange Act reporting requirements.337                 prospectuses in plain English, drafting                 in the collection of information in hours
                                              • Small business issuers filing annual               documents in plain English would                        and cost for Exchange Act periodic
                                           reports on Form 10–KSB would be                         result in an initial increase in time and               reports for companies other than
                                           subject to lower incremental costs than                 cost burdens in the first year of
                                                                                                                                                           registered investment companies,
                                           other issuers as a result of the proposals,             implementation, and to a lesser extent,
                                                                                                                                                           Securities Act registration statements
                                           given the reduced disclosure required                   the second year, with those time or cost
                                                                                                                                                           and Exchange Act registration
                                           by Item 402 of Regulation S–B relative                  burdens decreasing in the year
                                                                                                                                                           statements.
                                           to Item 402 of Regulation S–K, as                       following implementation of the new
                                           described above. As with companies                      rules. The plain English rule proposals                    339 For Form N–2, we estimate that it would take
                                           filing annual reports on Form 10–K, we                  would not affect the substance of the                   business development companies 100 additional
                                           expect that small business issuers                      required disclosure, and companies that                 hours to prepare the proposed disclosure in year
                                           would experience higher costs in                        have filed registration statements under                one, 50 hours in year two and 25 hours in year three
                                           responding to the proposed disclosure                   the Securities Act are already familiar                 and thereafter, which results in an average of 58
                                           requirements in the first year of                       with the requirements.                                  hours for each business development company to
                                           compliance with them, as systems are                      • We estimate that the proposals to                   comply with the proposed compensation
                                                                                                   increase to $120,000 the current $60,000                disclosures that would be required on Form N–2.
                                           implemented to obtain the relevant data                                                                         We estimate an average annual incremental
                                           and compliance efforts with respect to                  threshold for disclosure of certain
                                                                                                                                                           disclosure burden of 1.675 hours per Form N–2,
                                                                                                   interests, transactions, and relationships              based on 58 hours per Form N–2 filing by business
                                              337 Our estimates of the number of annual
                                                                                                                                                           development companies times 27 filings on Form
                                           responses to the collections of information are           338 For Form 10–KSB, we estimate that it would
                                                                                                                                                           N–2 by business development companies
                                           based on the number of filings made in the period       take issuers 70 additional hours to prepare the         (representing all Form N–2 and N–2/A filings by
                                           from October 1, 2004 through September 30, 2005.        proposed disclosure in year one, and 25 additional      business development companies during the year
                                           In order to factor in disclosure that may be            hours in year two and 10 additional hours in year
                                                                                                                                                           ended December 31, 2005) (58 hours times 27 Form
                                           incorporated by reference from other filings, we        three and thereafter, which results in an average of
                                           have estimated that 496 out of 619 registration         35 additional hours over the three year period. This    N–2 filings (including amendments) = 1,566 hours),
                                           statements on Form S–4 would include the required       estimate assumes that the burden would be               divided by 935 total annual filings on Form N–2
                                           information contemplated by these rule proposals        incurred by either including the proposed               (representing all Form N–2 and N–2/A filings
                                           through incorporation by reference to a Form 10–        disclosure in the report directly or incorporating by   during the year ended December 31, 2005) (1,566
                                           K or Form 10–KSB.                                       reference from a proxy or information statement.        hours divided by 935 filings on Form N–2
                                                                                                                                                           (including amendments) = 1.675 hours per Form N–
                                                                                                                                                           2 (including amendments)).
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                                           6588                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                                 TABLE 1.—CALCULATION OF INCREMENTAL PAPERWORK REDUCTION ACT BURDEN ESTIMATES FOR EXCHANGE ACT
                                                                                        PERIODIC REPORTS
                                                                                                                   Annual                  Incremental              Incremental                          25% Profes-               $300 Profes-
                                                                      Form                                                                                                           75% Issuer
                                                                                                                 responses                  hours/form                burden                               sional                   sional cost

                                                                                                                       (A)                        (B)               (C) = (A)*(B)   (D) = ( C)*0.75     (E) = (C)*0.25             (F) = (E)*$300

                                           10–K 340 ....................................................                     8,602                           67          576,334         432,250.5              144,083.5            $43,225,050
                                           10–KSB ....................................................                       3,504                           35          122,640          91,980.0               30,660.0              9,198,000

                                                 Total ..................................................     ........................   ........................        698,974         524,230.5      ........................      52,423,050


                                                 TABLE 2.—CALCULATION OF INCREMENTAL PAPERWORK REDUCTION ACT BURDEN ESTIMATES FOR SECURITIES ACT
                                                                REGISTRATION STATEMENTS AND EXCHANGE ACT REGISTRATION STATEMENTS
                                                                                                                                                                                                                                       $300
                                                                                                                   Annual                  Incremental              Incremental                               75%
                                                                      Form                                                                                                           75% Issuer                                     Professional
                                                                                                                 responses                  hours/form                burden                              Professional                  cost

                                                                                                                       (A)                        (B)               (C) = (A)*(B)   (D) = (C)*0.25      (E) = (C)*0.75             (F) = (E)*$300

                                           10 .............................................................                     72                         60               4,320          1,080.0                 3,240.0              $972,000
                                           10–SB ......................................................                        166                         30               4,980          1,245.0                 3,735.0             1,120,500
                                           SB–2 ........................................................                       885                         30              26,550          6,637.5                19,912.5             5,973,750
                                           S–1 ...........................................................                     528                         60              31,680          7,920.0                23,760.0             7,128,000
                                           S–4 ...........................................................                     123                         60               7,380          1,845.0                 5,535.0             1,660,500
                                           S–11 .........................................................                       60                         60               3,600            900.0                 2,700.0               810,000
                                           N–2 ...........................................................                     935                      1.675               1,566            391.5                 1,174.5               352,350

                                                 Total ..................................................     ........................   ........................          80,076         20,019.0      ........................      18,017,100



                                           2. Exchange Act Current Reports                                            would be filed pursuant to Item 1.01 of                         of the information to be collected; and
                                                                                                                      Form 8–K.                                                       (d) evaluate whether there are ways to
                                              For purposes of the Paperwork                                              • Based on a review of Item 1.01                             minimize the burden of the collections
                                           Reduction Act, we estimate that the                                        Form 8–K filings made in September                              of information on those who respond,
                                           proposals affecting the collection of                                      2005, we estimate that 6,625 of the                             including through the use of automated
                                           information requirements related to                                        22,083 current reports on Form 8–K                              collection techniques or other forms of
                                           current reports on Form 8–K would                                          filed under Item 1.01 would relate to                           information technology.343
                                           reduce the annual paperwork burden by                                      executive or director compensation                                Any member of the public may direct
                                           approximately 6,458 hours of company                                       matters.                                                        to us any comments concerning the
                                           personnel time and by a cost of                                               • Based on a review of Item 1.01                             accuracy of these burden estimates and
                                           approximately $645,750 for the services                                    Form 8–K filings made in September                              any suggestions for reducing these
                                           of outside professionals. This estimate                                    2005, we estimate that 1,722 fewer Form                         burdens. Persons who desire to submit
                                           reflects the reduction in the number of                                    8–Ks would be filed because of more                             comments on the collection of
                                           filings that could result from our                                         focused current reporting of executive                          information requirements should direct
                                           proposals. These estimates were based                                      officer and director compensation                               their comments to the OMB, Attention:
                                           on the following assumptions:                                              transactions under proposed Item                                Desk Officer for the Securities and
                                                                                                                      5.02(e) of Form 8–K.342                                         Exchange Commission, Office of
                                              • The number of annual responses for
                                                                                                                      D. Request for Comment                                          Information and Regulatory Affairs,
                                           Form 8–K is estimated to be 110,416.341                                                                                                    Washington, DC 20503, and should send
                                           Based on a study of current reports on                                       We request comment in order to: (a)                           a copy of the comments to Nancy M.
                                           Form 8–K filed in September 2005, we                                       Evaluate whether the collections of                             Morris, Secretary, Securities and
                                           estimate that approximately 22,083                                         information are necessary for the proper                        Exchange Commission, 100 F Street,
                                           current reports filed on Forms 8–K                                         performance of our functions, including                         NE., Washington, DC 20549–9303, with
                                                                                                                      whether the information will have                               reference to File No. S7–03–06.
                                             340 The burden estimates for Form 10–K and 10–                           practical utility; (b) evaluate the                             Requests for materials submitted to the
                                           KSB assume that the proposed requirements are                              accuracy of our estimate of the burden
                                           satisfied by either including information directly in
                                                                                                                                                                                      OMB by us with regard to this collection
                                                                                                                      of the collections of information; (c)                          of information should be in writing,
                                           the annual reports or incorporating the information
                                           by reference from the proxy statement or                                   determine whether there are ways to                             refer to File No. S7–03–06, and be
                                           information statement in Schedule 14A or Schedule                          enhance the quality, utility, and clarity                       submitted to the Securities and
                                           14C, respectively. As described above, we estimate
                                           that the proposed changes to executive
                                                                                                                                                                                      Exchange Commission, Office of Filings
                                                                                                                         342 For Form 8–K, the current burden estimate is
                                           compensation disclosure and corporate governance                                                                                           and Information Services, Branch of
                                                                                                                      5 hours per filing. We estimate that 75% of the
                                                                                                                                                                                      Records Management, 6432 General
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                                           matters that would be included only in proxy or                            burden of preparation is carried by the company
                                           information statements (and thus not in Securities                         internally and that 25% of the burden is carried by             Green Way, Alexandria, VA 22312.
                                           Act registration statements or Exchange Act reports                        outside professionals retained by the issuer at an
                                           or registration statement) would not, on balance,
                                                                                                                                                                                      Because the OMB is required to make a
                                                                                                                      average cost of $300 per hour. The computation of
                                           impose an incremental burden.                                              the reduction in burden is thus based on 1,722
                                                                                                                                                                                      decision concerning the collections of
                                             341 This is based on the number of responses                             fewer Form 8–Ks filed with a per filing burden of
                                           made in the period from October 1, 2004 through                            3.75 hours carried by the company and 1.25 hours                  343 Comments are requested pursuant to 44 U.S.C.

                                           September 30, 2005.                                                        at a cost of $300 per hour (or $375 per filing).                3506(c)(2)(B).


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                 6589

                                           information between 30 and 60 days                      Compensation Table, and reorganize the                     • Require a new Director
                                           after publication, your comments are                    compensation table to group together                    Compensation Table.
                                           best assured of having their full effect if             compensation elements that have                            Item 402 of Regulation S–B would not
                                           the OMB receives them within 30 days                    similar functions so that the quantitative              include the following disclosures that
                                           of publication.                                         disclosure is both more informative and                 would be required by proposed Item 402
                                                                                                   more easily understood. This improved                   of Regulation S–K:
                                           IX. Cost-Benefit Analysis                                                                                          • Compensation Discussion and
                                                                                                   quantitative disclosure would be
                                           A. Background                                           complemented by enhanced narrative                      Analysis;
                                                                                                   disclosure clearly and comprehensively                     • A third fiscal year of Summary
                                              We are proposing revisions to our                                                                            Compensation Table disclosure; and
                                           rules governing disclosure of executive                 describing the context in which
                                                                                                   compensation is paid and received. In                      • The supplementary Grants of
                                           and director compensation, related                                                                              Performance-Based Awards Table and
                                           person transactions, director                           particular, the narrative disclosure
                                                                                                   requirements would provide                              Grants of All Other Equity Awards
                                           independence and other corporate                                                                                Table, the Option Exercises and Stock
                                           governance matters and security                         transparency regarding company
                                                                                                   compensation policies and procedures,                   Vested Table, the Retirement Plan
                                           ownership of officers and directors. The                                                                        Potential Annual Payments and Benefits
                                           proposed revisions to the executive and                 and be sufficiently flexible to operate
                                                                                                   effectively as new forms of                             Table, and the Nonqualified Defined
                                           director compensation disclosure rules                                                                          Contribution and Other Deferred
                                           are intended to provide investors with                  compensation continue to evolve.
                                                                                                                                                           Compensation Plans Table and the
                                           a clearer and more complete picture of                     Under the proposals, the scope and
                                                                                                                                                           separate Potential Payments Upon
                                           compensation to principal executive                     presentation of information in Item 402
                                                                                                                                                           Termination or Change-in-Control
                                           officers, principal financial officers, the             of Regulation S–B would differ in a
                                                                                                                                                           narrative section, while providing a
                                           highest paid executive officers and                     number of significant ways from Item
                                                                                                                                                           general requirement to discuss the
                                           directors. We also propose to revise our                402 of Regulation S–K. Item 402 of
                                                                                                                                                           material terms of retirement plans and
                                           rules relating to current reports on Form               Regulation S–B would:
                                                                                                                                                           the material terms of contracts
                                           8–K to require real-time disclosure of                     • Limit the named executive officers
                                                                                                                                                           providing for payment upon a
                                           only executive and director                             for whom disclosure would be required
                                                                                                                                                           termination or change in control.
                                           compensation events that are                            to a smaller group, consisting of the                      The application of Item 1.01 of Form
                                           unquestionably or presumptively                         principal executive officer and the two                 8–K to compensatory arrangements has
                                           material, thereby reducing the number                   other highest paid executive officers; 344              raised concerns that real-time disclosure
                                           of filings for events relating to executive                • Require a revised Summary                          may be required for executive
                                           officers other than named executive                     Compensation Table to disclose                          compensation events that are not
                                           officers and those officers specified in                compensation information for the small                  unquestionably or presumptively
                                           Item 5.02. We also propose to revise our                business issuer’s two most recent fiscal                material, and that are more
                                           closely related rules requiring                         years, and to require that narrative                    appropriately disclosed, if at all, in the
                                           disclosure regarding the extent to which                disclosure accompany the Summary                        company’s proxy statement for its
                                           executive officers, directors, significant              Compensation Table; 345                                 annual meeting of shareholders. The
                                           shareholders and other related persons                     • Provide a higher threshold for                     proposed amendments to Items 1.01 and
                                           participate in financial transactions and               separate identification of categories of                5.02 of Form 8–K would focus real-time
                                           relationships with the issuer. We are                   ‘‘All Other Compensation’’ in the                       disclosure on compensation
                                           proposing to amend our beneficial                       Summary Compensation Table;                             arrangements with executives and
                                           ownership disclosure requirement to                        • Require a new Outstanding Equity                   directors that we believe are
                                           require disclosure regarding pledges of                 Awards at Fiscal Year-End Table that                    unquestionably or presumptively
                                           securities by management and directors’                 would include expanded disclosure                       material, and eliminate the obligation to
                                           qualifying shares. Finally, we are                      regarding holdings of previously                        file Form 8–K with respect to other
                                           proposing that most of the disclosure                   awarded stock, options and similar                      compensatory arrangements.
                                           that would be required under the                        instruments, which would include the                       Current Item 404 of Regulation S–K
                                           proposed amendments be provided in                      value of stock and other similar                        was adopted to consolidate various
                                           plain English, so that investors can more               incentive plan awards that had not                      provisions previously adopted in a
                                           easily understand this information                      vested;                                                 piecemeal fashion. The proposals would
                                           when it is required to be included in                      • Require additional narrative                       revise Item 404 of Regulation S–K to
                                           Exchange Act reports or it is                           disclosure addressing the material terms                streamline and modernize it, while
                                           incorporated by reference from proxy or                 of defined benefit and defined                          making it more principles-based.
                                           information statements.                                 contribution plans and other post-                      Indebtedness of related persons is
                                                                                                   termination compensation                                limited by the Sarbanes-Oxley Act, and
                                           B. Summary of Proposals                                 arrangements; and                                       the disclosure requirement regarding
                                              In light of the complexity of, and                                                                           indebtedness of related persons would
                                                                                                     344 Current Item 402(a)(2) of Regulation S–B
                                           variations in, compensation programs,                                                                           be combined into the requirement
                                                                                                   requires compensation disclosure for all individuals
                                           the sometimes inflexible and highly                     serving as the small business issuer’s chief            regarding other transactions with related
                                           formatted nature of current Item 402 of                 executive officer and the small business issuer’s       persons. This consolidated disclosure
                                           Regulation S–K and S–B has resulted, in                 four other highest paid officers other than the chief   requirement would apply to an
                                           some cases, in disclosure that does not                 executive officer.                                      expanded group of related persons.
                                                                                                     345 Current Item 402(b)(1) of Regulation S–B
                                           clearly inform investors as to all                                                                              While the current principles for
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                                                                                                   requires disclosure of compensation of the named
                                           elements of compensation. The                           executive officers for each of the last three fiscal    disclosure would be retained, the
                                           proposed changes to Item 402 would                      years, and narrative disclosure is not currently        proposal would increase the $60,000
                                           apply a broader approach that would                     required to accompany the Summary Compensation          threshold for disclosure currently in
                                                                                                   Table, however the proposed narrative disclosure
                                           eliminate some tables, simplify or                      would address some elements of compensation
                                                                                                                                                           paragraphs (a) and (c) of Item 404 to
                                           refocus other tables, reflect total current             currently required in tables in current Item 402 of     $120,000 and eliminate or reduce the
                                           compensation in the Summary                             Regulation S–B.                                         scope of certain instructions delineating

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                                           6590             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           what transactions are reportable or                     the last fiscal year, unless the                      companies, filing proxy or information
                                           excludable. Existing disclosure                         information is included in a Securities               statements with respect to the election
                                           requirements in Item 404 regarding                      Act or Exchange Act registration                      of directors. The proposed changes to
                                           transactions with promoters would                       statement, where information as to the                Items 402 and 404 of Regulation S–K
                                           slightly expanded to apply when a                       last three fiscal years is required.                  and Regulation S–B would also affect
                                           company had a promoter over the past                       We propose to adopt a new disclosure               additional companies filing Securities
                                           five years, as well as to require                       requirement in Item 407 of Regulations                Act and Exchange Act registration
                                           analogous disclosure regarding                          S–K and S–B that would consolidate                    statements. The proposed changes to
                                           transactions with control persons of a                  disclosures required in several places                Item 22(b) of Schedule 14A will affect
                                           shell company. With respect to                          throughout our rules addressing director              business development companies and
                                           registered investment companies and                     independence, board committee                         registered investment companies filing
                                           business development companies,                         functions and other related corporate                 proxy statements with respect to the
                                           proposed amendments to Items 22(b)(7),                  governance matters. This proposed Item,               election of directors. The proposed
                                           22(b)(8), and 22(b)(9) of Schedule 14A                  which would require new disclosure                    changes to Form N–1A will affect open-
                                           and to Forms N–1A, N–2, and N–3                         regarding independence of members of                  end investment companies registering
                                           would similarly increase to $120,000                    the board of directors and board                      with the Commission on Form N–1A.
                                           the current $60,000 threshold for                       committees, is intended to enhance                    The proposed changes to Form N–2 will
                                           disclosure of certain interests,                        disclosures regarding independence                    affect closed-end investment companies
                                           transactions, and relationships of each                 required by corporate governance listing              (including business development
                                           director (and, in the case of Items                     standards of the national securities                  companies) registering with the
                                           22(b)(7), 22(b)(8), and 22(b)(9) of                     exchanges and the inter-dealer                        Commission on Form N–2. The
                                           Schedule 14A, each nominee for                          quotation systems of a national                       proposed changes to Form N–3 will
                                           election as director) who is not or would               securities association.346                            affect separate accounts, organized as
                                           not be an ‘‘interested person’’ of the                     To the extent that shares beneficially             management investment companies and
                                           fund within the meaning of Section                      owned by named executive officers,                    offering variable annuities, registering
                                           2(a)(19) of the Investment Company Act                  directors and director nominees are                   with the Commission on Form N–3.
                                           (and their immediate family members).                   used as collateral for loans, these shares            C. Benefits
                                           In addition, Form N–2 would require                     are subject to risks or contingencies that
                                           business development companies to                       do not apply to other shares beneficially                As discussed, the overall goal of the
                                           include the compensation disclosure                     owned by these persons. These                         executive and director compensation
                                           required by Item 402 of Regulation S–                   circumstances have the potential to                   proposals would be to provide investors
                                           K, as we propose to amend it.                           influence management’s performance                    with clearer, better organized and more
                                              The proposals also would replace the                 and decisions. As a result, we believe                complete disclosure regarding the mix,
                                           disclosure requirement for certain                      that the existence of these securities                size and incentive components of
                                           business relationships currently in Item                pledges could be material to                          executive and director compensation.
                                           404(b) of Regulation S–K, which focuses                 shareholders and should be disclosed.                 This goal would be accomplished by
                                           on relationships relevant to director                                                                         eliminating some tables and other
                                                                                                   We therefore propose to amend Item 403
                                           independence, with requirements for                                                                           disclosures that we believe may no
                                                                                                   of Regulation S–K and Regulation S–B
                                           director independence disclosure                                                                              longer be useful to investors, revising
                                                                                                   to require this disclosure as well as
                                           discussed below. Under the proposals,                                                                         other tables so that they are more
                                                                                                   disclosure regarding directors’
                                           the disclosure currently required by the                                                                      informative, and requiring new tabular
                                                                                                   beneficial ownership of qualifying
                                           certain business relationship disclosure                                                                      and new quantitative estimate
                                                                                                   shares.
                                           requirement may be required by the                                                                            disclosure for retirement plans and
                                                                                                      We propose to require that most of the
                                           consolidated disclosure requirement                                                                           similar benefits and director
                                                                                                   information that is required by these
                                           regarding transactions and relationships                                                                      compensation. The proposals would
                                                                                                   amendments be provided in plain
                                           with related persons in Item 404(a) of                                                                        require enhanced narrative disclosure,
                                                                                                   English in Exchange Act reports or in
                                           Regulation S–K. Proposed Item 404(b) of                                                                       in the form of a Compensation
                                                                                                   proxy or information statements
                                           Regulation S–K would require                                                                                  Discussion and Analysis section and
                                                                                                   incorporated by reference into those
                                           disclosure regarding the company’s                                                                            narrative disclosure accompanying the
                                                                                                   reports. The plain English requirements
                                           policies for the review, approval or                                                                          tables, to explain the significant factors
                                                                                                   would make these documents easier to                  underlying the compensation decisions
                                           ratification of transactions with related               understand.
                                           persons.                                                                                                      reflected in the tabular data. The
                                                                                                      The proposed changes to Item 402 of
                                              We propose similar amendments to                                                                           proposals also would require companies
                                                                                                   Regulation S–K, Items 402 and 404 of                  to report the total amount of
                                           Item 404 of Regulation S–B, which
                                                                                                   Regulation S–B, and Form 8–K would                    compensation for named executive
                                           would result in a more detailed related
                                                                                                   affect all companies reporting under                  officers and directors, and provide
                                           person transaction disclosure
                                                                                                   Sections 13(a) and 15(d) of the Exchange              important context to the disclosure of
                                           requirement than currently exists in
                                           Item 404 of Regulation S–B. However,                    Act, other than registered investment                 total compensation.
                                           unlike Item 404 of Regulation S–K, Item                 companies. The proposed changes to                       Improved disclosure under the
                                           404 of Regulation S–B would not                         Item 404 of Regulation S–K would affect               proposals of certain forms of
                                           require disclosure regarding the                        all companies reporting under Sections                compensation, such as stock-, option-
                                           company’s policies for the review,                      13(a) and 15(d) of the Exchange Act,                  and incentive plan-based compensation,
                                           approval or ratification of transactions                other than registered investment                      as well as retirement and other post-
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                                           with related persons. We propose to                     companies, and all companies,                         employment compensation, combined
                                           retain the requirement that transactions                including registered investment                       with the ability of investors to track the
                                           occurring within the last two years must                  346 We also propose conforming revisions to Item
                                                                                                                                                         elements of executive and director
                                           be disclosed under Item 404 of                          22(b) relating to the independence of members of
                                                                                                                                                         compensation and the relative weights
                                           Regulation S–B, whereas Item 404 of                     nominating and audit committees of investment         of those elements over time (and the
                                           Regulation S–K requires disclosure for                  companies.                                            reasons why companies allocate

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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                         6591

                                           compensation in the manner that they                    alter existing policies or practices in               directors, including directors’ qualifying
                                           do), would enable investors to make                     these areas. We emphasize that we are                 shares.
                                           comparisons both within and across                      not seeking to foster any given                          Proposed changes to Items 22(b)(7),
                                           companies. A presentation facilitating                  directional or other impacts. Our                     22(b)(8) and 22(b)(9) of Schedule 14A
                                           the comparability and different                         objective is to increase transparency to              and to Forms N–1A, N–2, and N–3
                                           elements of compensation in different                   enable decision-makers to make more                   would decrease the disclosure burden
                                           companies should make it easier for                     informed decisions, which could result                imposed on registered investment
                                           investors to analyze both the manner of                 in different policies or practices or                 companies by increasing the threshold
                                           compensation across companies and the                   increase investor confidence in existing              for disclosure of certain interests,
                                           quality of disclosure of compensation                   policies or practices.                                transactions, and relationships of each
                                           across companies. Disclosure of total                      The proposed amendments to Form                    director (and, in the case of Items
                                           compensation would benefit investors                    8–K would facilitate shareholder and                  22(b)(7), 22(b)(8), and 22(b)(9) of
                                           by reducing the need to make individual                 investor access to real-time disclosure of            Schedule 14A, each nominee for
                                           computations in order to assess the size                public companies significant personnel                election as director) who is not or would
                                           of current compensation. Further,                       and compensation decisions by focusing                not be an ‘‘interested person’’ of the
                                           improved executive and director                         this disclosure only on what we believe               fund within the meaning of Section
                                           compensation disclosure would                           are the most important compensatory                   2(a)(19) of the Investment Company Act
                                           enhance investors’ understanding of this                arrangements with executive officers                  (and their immediate family members).
                                           use of corporate resources and the                      and directors. This information would                    Finally, presentation in plain English
                                           actions of boards of directors and                      be filed pursuant to Item 5.02(e) of Form             would facilitate investor understanding
                                           compensation committees in making                       8–K. To find this information,                        of most of the matters contemplated by
                                           decisions in this area.347 Particularly                 shareholders and investors no longer                  our proposals.
                                           with respect to the proxy statement for                 would need to examine multiple Item                      The benefits of clearer, more useful
                                           the annual meeting at which directors                   1.01 disclosures relating to other                    disclosure are difficult to quantify.
                                           are elected, this improved disclosure                   actions. Companies would also be                      D. Costs
                                           would provide better information to                     relieved of obligations to quickly report
                                           shareholders for purposes of evaluating                 arguably less important compensation                     In our view, the proposed revisions to
                                           the actions of the board of directors in                information on Form 8–K.                              the executive officer and director
                                           fulfilling its responsibilities to the                     The proposed amendments to Item                    compensation disclosure requirements
                                           company and its shareholders.                           404 would provide investors with more                 would increase the costs of complying
                                              We believe that the extent to which                  complete disclosure of related person                 with the Commission’s rules. The
                                           increased transparency and                              transactions and director independence,               proposed revisions to the related person
                                           completeness in executive and director                  and new disclosure regarding a                        transaction, director independence and
                                           compensation disclosure would result                    company’s policies and procedures for                 corporate governance disclosure
                                           in broader benefits depends at least in                 the review, approval or ratification of               requirements would generally not
                                           part on the extent to which current                     relationships with related persons.                   increase costs. We further believe that
                                           executive and director compensation                     These proposals would enhance                         the costs related to preparing required
                                           practices are aligned with the interests                investors understanding of how                        disclosure in plain English would be
                                           of investors as reflected in their                      corporate resources are used in related               short-term costs arising mainly in the
                                           investment and voting decisions. Any                    person transactions, and provide                      first two years of implementation.348
                                           changes to a company that might occur,                  improved information to shareholders                  Increased costs under the proposals
                                           including changes in corporate                          for purposes of better evaluating the                 would largely impact companies
                                           governance, changes in control, changes                 actions of the board of directors and                 required to comply with the proposals;
                                           in the employment of particular                         executive officers in fulfilling their                any net increase in costs would
                                           executives or other changes could                       responsibilities to the company and its               ultimately be borne by shareholders of
                                           depend to some extent on the degree to                  shareholders.                                         those companies. If our assumptions
                                           which improved transparency in                             In addition, by combining similar                  regarding these costs and current
                                           executive and director compensation                     provisions of current Item 404 into a                 practices are not correct or complete,
                                           would affect investors’ decision-making                 single combined disclosure                            then costs may prove to be higher.
                                           with respect to that company.                           requirement, the proposals would                         We believe that compliance with
                                              Improved transparency in executive                   reduce confusion regarding the                        these proposals would, on balance, be
                                           and director compensation under these                   disclosure required when more than one                more costly for companies than
                                           proposals could have other benefits in                  of the item’s current provisions applies              compliance with the existing disclosure
                                           terms of the allocative efficiency of                   to a relationship. Improved corporate                 requirements, with the highest
                                           affected corporations with regard to the                governance disclosure in proposed Item                incremental annual costs occurring
                                           use of resources for executive                          407 would provide investors with better               principally in the first two years as
                                           compensation relative to other corporate                organized and more complete                           companies and their advisors would
                                           needs, as well as improvements in                       information regarding the independence                determine how best to compile and
                                           efficiency of managerial labor markets.                 of members of the board of directors. In              report information in response to new or
                                           Benefits such as these depend on the                    addition, companies would benefit from                expanded disclosure requirements.
                                           extent to which the proposals, including                having one disclosure item to satisfy in                 The improved quantitative and
                                           requirements to disclose a total amount                 making required corporate governance                  textual disclosure regarding executive
                                           of compensation and more detail                         disclosures. The proposed amendments                  and director compensation that we are
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                                           regarding compensation policies, could                  to Item 403 of Regulation S–K and                     proposing would incrementally increase
                                                                                                   Regulation S–B would provide investors
                                                                                                                                                           348 The proposed plain English requirements
                                             347 For a discussion of the debate concerning
                                                                                                   with disclosure of pledges of the
                                           board of directors and managerial decision-making                                                             would require both the rewriting of existing
                                           in the area of executive compensation, see, e.g.,
                                                                                                   securities beneficially owned by                      disclosures in plain English, as well as drafting new
                                           Steven M. Bainbridge, Executive Compensation:           management and directors and full                     disclosures in plain English, such as Compensation
                                           Who Decides?, 83 Tex. L. Rev. 1615 (2005).              disclosure of beneficial ownership by                 Discussion and Analysis.


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                                           6592             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           costs for companies in several ways as                   Companies may incur additional costs,                 companies, proposed amendments to
                                           a result of the new or expanded                          however, in determining incremental                   Items 22(b)(7), 22(b)(8), and 22(b)(9) of
                                           requirements. First, we propose that                     changes in the actuarial value of                     Schedule 14A and to Forms N–1A, N–
                                           companies provide a Compensation                         retirement benefits for the purposes of               2, and N–3 would increase to $120,000
                                           Discussion and Analysis involving a                      reporting such compensation in the                    the current $60,000 threshold for
                                           discussion and analysis of material                      Summary Compensation Table. Costs                     disclosure of certain interests,
                                           factors underlying compensation                          may also arise from the reporting of                  transactions, and relationships of each
                                           decisions reflected in the tabular                       other compensation in the All Other                   director (and, in the case of Items
                                           presentations.349 Second, we propose to                  Compensation Column of the Summary                    22(b)(7), 22(b)(8), and 22(b)(9) of
                                           require narrative disclosure to                          Compensation Table. We do not believe                 Schedule 14A, each nominee for
                                           accompany tabular presentations so that                  that the addition of a ‘‘Total’’ column to            election as director) who is not or would
                                           the data included in the tables may be                   the Summary Compensation Table in                     not be an ‘‘interested person’’ of the
                                           understood in context. Third, we                         and of itself would increase costs,                   fund within the meaning of Section
                                           propose to expand disclosure regarding                   because existing disclosure                           2(a)(19) of the Investment Company Act
                                           compensation-related equity-based and                    requirements already mandate the                      (and their immediate family members).
                                           other plan-based holdings, as well as                    disclosure of all compensation, and the               Since these forms already require such
                                           retirement and similar plans. Finally,                   mechanical process of adding up                       disclosure using the $60,000 threshold,
                                           we propose a director compensation                       disclosure amounts would not be                       we do not believe the proposals would
                                           table that would require more detailed                   significant. Additional costs may be                  impose additional costs.
                                           information regarding director                           incurred in preparing and presenting                     Proposed Item 404(b) of Regulation S–
                                           compensation than is specified in the                    required disclosures regarding up to                  K would introduce new costs by
                                           current narrative disclosure                             three highly paid non-executive                       imposing new disclosure requirements
                                           requirement.350 Each of these proposed                   employees, retirement benefits, deferred              on companies regarding their policies
                                           revisions would seek to elicit more                      compensation and post-termination or                  for review, approval or ratification of
                                           complete and clearer information than                    change in control payments to the                     related person transactions. In order to
                                           is currently required under existing                     extent that information regarding these               comply with their policies for the
                                           rules.                                                   matters is not currently collected in a               review, approval or ratification of
                                              While the Summary Compensation                        way that would facilitate disclosure                  related person transactions or the
                                           Table as proposed to be revised would                    under the proposals. In addition,                     determination of executive and director
                                           require reporting of the grant date fair                 because named executive officers would                compensation we understand that
                                           value of stock-based and option-based                    be based on total compensation rather                 companies would incur costs of
                                           awards under the proposals, we do not                    than salary and bonus, some companies                 collecting the type of information that
                                           believe that this change would increase                  may need to track more employees to                   would be required to be disclosed.
                                           costs for companies, because the                         determine which are the most highly                   These costs would be higher to the
                                           computation of the grant date fair values                compensated.                                          extent companies do not already collect
                                           of stock, options and similar                               Under the proposals regarding Form                 this information either pursuant to their
                                           instruments already is required for                      8–K, disclosure regarding executive and               corporate governance policies or
                                           financial statement purposes as a result                 director arrangements and other plans                 through directors and officers’
                                           of the implementation of FAS 123R.                       that would no longer be required to be                questionnaires. The proposed rules
                                                                                                    reported within four days under Item                  would not require companies to create
                                              349 The Compensation Discussion and Analysis,         1.01 of Form 8–K would be required to                 new policies for review, approval or
                                           unlike the current Compensation Committee Report         be disclosed by way of the exhibit filing             ratification of relationships with related
                                           and the Performance Graph, but like all of the rest      requirements on at least a quarterly                  persons or the determination of
                                           of the current compensation disclosure, would be
                                           considered filed and as such would be part of the
                                                                                                    basis. To the extent that a reduction in              executive and director compensation;
                                           documents for which certifications apply. The            timeliness of this information would                  however, to the extent that companies
                                           release adopting our certification requirements          reduce its value to investors, the                    do create new policies that require the
                                           discussed the costs and benefits of the requirements     proposals may impose costs on                         collection of different or additional
                                           as follows:
                                                                                                    investors.                                            information, they may incur
                                              The new certification requirement may lead to
                                           some additional costs for issuers. The new rules
                                                                                                       We believe that there would not be a               incremental costs.
                                           require an issuer’s principal executive and financial    significant increase in the cost of                      The proposed disclosures regarding
                                           officers to review the issuer’s periodic reports and     complying with the related person                     director independence are similar to
                                           to make the required certification. To the extent that   transaction disclosure requirement. The               existing disclosure requirements under
                                           corporate officers would need to spend additional        proposals may increase the cost of                    the proxy rules regarding the
                                           time thinking critically about the overall context of
                                           their company’s disclosure, issuers would incur          complying with this disclosure                        independence of directors who are
                                           costs (although investors would benefit from             requirement by eliminating or reducing                members of the company’s audit and
                                           improved disclosure). The certification requirement      the scope of certain instructions and by              nominating committees. Thus, for
                                           creates a new legal obligation for an issuer’s           expanding the group of related persons                companies that are subject to the proxy
                                           principal executive and financial officers, but does
                                           not change the standard of legal liability * * *         covered to include additional                         rules, the task of complying with the
                                           [T]he new rules are likely to provide significant        ‘‘immediate family members’’ and also,                proposed disclosure requirement
                                           benefits by ensuring that information about an           in the case of indebtedness transactions,             regarding director independence could
                                           issuer’s business and financial condition is             significant shareholders.351 Similarly,               be performed by the same person or
                                           adequately reviewed by the issuer’s principal
                                           executive and financial officers * * * Conversely,       with respect to registered investment                 group of persons responsible for
                                                                                                    companies and business development                    compliance under the current rules.
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                                           the new rule are likely to provide significant
                                           benefits by ensuring that information about an                                                                 Because the current rules already
                                           issuer’s business and financial condition is               351 Significant shareholders are those identified   require companies subject to the proxy
                                           adequately reviewed by the issuer’s principal            under proposed Instruction 1.b.(i) to Item 404 of
                                           executive and financial officers.
                                                                                                                                                          rules to collect and disclose information
                                                                                                    Regulation S–K, that is, any security holder who is
                                              Certification Release, at Section VII.                known to the registrant to own of record or
                                                                                                                                                          about the independence of directors
                                              350 See current Item 402(f) of Regulation S–B and     beneficially more than five percent of any class of   who serve on the audit and nominating
                                           Item 402(g) of Regulation S–K.                           the registrant’s voting securities.                   committees, this proposed disclosure

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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                6593

                                           should not impose significant new costs                 shares. The company could inquire as to               eliminating the Compensation
                                           for the collection of information by                    this information in questionnaires it                 Committee Report and Performance
                                           companies that are subject to the proxy                 already circulates to the company’s                   Graph; (2) expanding disclosure, in a
                                           rules. The new disclosure requirement                   officers and directors.                               tabular format, of director
                                           regarding director and committee                           For purposes of the Paperwork                      compensation; and (3) requiring the
                                           member independence may require                         Reduction Act, we have estimated the                  more focused and in some cases
                                           disclosure of additional relationships                  annual incremental increase in the                    expanded tabular presentation of
                                           with related persons. Additional costs                  paperwork burden for companies to                     executive compensation. We also solicit
                                           may be incurred in seeking this                         comply with our proposed collection of                such data regarding the benefits and
                                           information. However, such costs are                    information requirements to be                        costs of any other aspects of the
                                           limited by the extent to which                          approximately 537,792 hours of in-                    executive compensation disclosure
                                           companies already identify and track                    house company personnel time and to                   proposals.
                                           the relationships that may be required to               be approximately $69,794,000 for the                     • We solicit quantitative data to assist
                                           be disclosed for the purposes of                        services of outside professionals. These              our assessment of the benefits and costs
                                           complying with existing disclosure                      costs are based on our estimates that the             of revising the requirements for current
                                           requirements or corporate governance                    annual incremental disclosure burden                  reporting of executive and director
                                           listing standards.                                      imposed by the revisions that we                      compensation arrangements on Form 8–
                                              We believe that, overall, the costs                  propose today would average 67 hours                  K to focus on those arrangements which
                                           noted above that are associated with the                per Form 10–K; 35 hours per Form 10–                  are unquestionably material.
                                           proposed disclosure requirements for                    KSB; 60 hours per Form 10; 30 hours                      • We solicit quantitative data to assist
                                           related person transactions and director                per Forms 10–SB and SB–2; 60 hours                    our assessment of the benefits and costs
                                           independence will be offset by cost                     per Forms S–1, S–4 and S–11; and 1.675                of increased disclosure resulting from:
                                           decreases associated with narrowing the                 hours per Form N–2. We estimate that                  (1) Expanding the group of related
                                           scope of other disclosure requirements                  the proposed amendments to Item 22(b)                 persons covered by current Item 404(a)
                                           under the proposal. In this regard, we                  of Schedule 14A and the proposal to                   to include additional ‘‘immediate family
                                           believe that companies will generally be                increase to $120,000 the current $60,000              members’’; (2) expanding the required
                                           required to provide an amount of                        threshold for disclosure of certain                   relationship disclosure to include
                                           information that is comparable to what                  interests, transactions, and relationships            significant shareholders as related
                                           is currently required by our rules, but                 of each director in Forms N–1A, N–2,                  persons who may have reportable
                                           under the proposals the information                     and N–3 will not impose an annual                     indebtedness relationships; and (3)
                                           regarding these matters would be                        incremental disclosure burden. These                  requiring disclosure of a registrant’s
                                           presented in a manner that recognizes                   estimated costs include an estimated                  policies for approval of relationships
                                           recent changes such as the imposition of                reduction in costs attributable to current            involving related persons and the
                                           corporate governance listing standards                  reports on Form 8–K of approximately                  independence of directors. We also
                                           at the major markets.                                   6,458 hours of company personnel time                 solicit such data regarding the benefits
                                              Our plain English proposal would                     and by a cost of approximately $645,750               and costs of any other aspects of the
                                           require that companies use a clear                      for the services of outside professionals,            related person transactions disclosure
                                           writing style to present the information                based on an estimate that 1,722 fewer                 requirements.
                                           about executive and director                            Form 8–Ks would be filed because of                      • Do companies currently have
                                           compensation, related person                            more focused current reporting of                     policies and procedures regarding the
                                           transactions, beneficial ownership and                  compensation transactions. Based on                   review, approval, authorization or
                                           some corporate governance matters that                  these estimates for the purposes of the               ratification of relationships with related
                                           would be required to be disclosed in                    Paperwork Reduction Act and assuming                  persons? If not, what cost would a
                                           Exchange Act reports such as annual                     that the cost of in-house company                     company incur to institute such
                                           reports on Forms 10–K or 10–KSB. We                     personnel time is $175, the total                     policies?
                                           believe the proposed rules, if adopted,                 estimated incremental costs of the                       • Are there any public companies
                                           would result in a short-term increase in                proposals would be approximately                      that currently provide information to
                                           costs for companies as they rewrite the                 $163,908,000. We have not quantified                  the public regarding their policies and
                                           information required to be included in                  other costs which might arise as a result             procedures related to the review,
                                           annual reports or incorporated by                       of implementation of the rules,                       approval, authorization or ratification of
                                           reference from proxy or information                     especially to the extent that such costs              relationships with related persons? If so,
                                           statements, but few additional costs                    could arise as a result of changes in                 is there any information available as to
                                           after the first year or two of                          policies, practices or other behavior                 whether investors find this information
                                           implementation, as companies become                     attributable to the proposed disclosure               to be useful?
                                           familiar with the organizational,                       requirements. These costs could be                       • We solicit quantitative data to assist
                                           language, and document structure                        more than those estimated for the                     our assessment of the benefits and costs
                                           changes necessary to comply with these                  purposes of the Paperwork Reduction                   associated with increased disclosure
                                           proposals. Additional costs, if any,                    Act.                                                  and the proposed application of plain
                                           should be one-time or otherwise short-                                                                        English principles to the disclosure
                                           term.                                                   E. Request for Comment
                                                                                                                                                         resulting from most of the proposed
                                              We believe that there would be little,                 • We solicit quantitative data to assist            requirements.
                                           if any, increase in the cost of complying               our assessment of the benefits and costs                 • What are the direct and indirect
                                           with the beneficial ownership rule                      of increased disclosure resulting from:               costs associated with the proposals?
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                                           proposals. A company would be                           (1) Requiring narrative disclosure                       • What are the costs in the first year
                                           required to disclose named executive                    regarding executive and director                      of compliance versus subsequent years?
                                           officer, director and director nominee                  compensation in the form of                              • We solicit comments on the degree
                                           pledges of securities, and directors’’ full             Compensation Discussion and Analysis                  to which companies already collect the
                                           beneficial ownership of equity                          and narrative disclosures accompanying                information that the proposed rules
                                           securities, including directors qualifying              the tabular presentations, and                        would require to be disclosed.

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                                           6594                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           X. Consideration of Burden on                           of directors and board committees.                    XI. Initial Regulatory Flexibility Act
                                           Competition and Promotion of                            Proposed amendments to beneficial                     Analysis
                                           Efficiency, Competition and Capital                     ownership reporting requiring                           This Initial Regulatory Flexibility Act
                                           Formation                                               disclosure of pledged securities and                  Analysis has been prepared in
                                              Exchange Act Section 23(a)(2) 352                    director qualifying shares are intended               accordance with 5 U.S.C. 603. It relates
                                           requires us, when adopting rules under                  to improve the disclosure regarding                   to proposed revisions to the rules and
                                           the Exchange Act, to consider the                       security holdings of directors and                    forms under the Securities Act and
                                           impact that any new rule would have on                  executive officers.                                   Exchange Act that seek to improve the
                                           competition. In addition, Section                          The proposal to require most of the                clarity and completeness of companies’
                                           23(a)(2) prohibits us from adopting any                 information required in these proposals               disclosure of the compensation earned
                                           rule that would impose a burden on                      to be written in plain English is                     by the principal executive officer,
                                           competition not necessary or                            intended to make Exchange Act reports                 principal financial officer,356 other
                                           appropriate in furtherance of the                       and proxy or information statements                   highly paid executive officers and all
                                           purposes of the Exchange Act.                           incorporated by reference in those                    members of the board of directors, and
                                           Furthermore, Securities Act Section                     reports easier to understand.                         of related person transactions. These
                                           2(b),353 Exchange Act Section 3(f) 354                     Thus, the proposed rules would                     proposed revisions include revising the
                                           and Investment Company Act Section                      enhance existing reporting requirements               executive and director compensation
                                           2(c) 355 require us, when engaging in                   by providing more effective material                  disclosure requirements, modifying our
                                           rulemaking where we are required to                     disclosure to investors in a timely                   rules so that only elements of
                                           consider or determine whether an action                                                                       compensation that are unquestionably
                                                                                                   manner. We anticipate that these
                                           is necessary or appropriate in the public                                                                     or presumptively material to investors
                                                                                                   proposals would improve investors’’
                                           interest, to consider, in addition to the                                                                     must be disclosed in current reports of
                                                                                                   ability to make informed investment
                                           protection of investors, whether the                                                                          Form 8–K, streamlining and
                                                                                                   and voting decisions and, therefore lead
                                           action will promote efficiency,                                                                               modernizing disclosure requirements
                                                                                                   to increased efficiency and
                                           competition, and capital formation.                                                                           regarding related person transactions,
                                              The proposed amendments to                           competitiveness of the U.S. capital
                                                                                                                                                         adding disclosure regarding pledges of
                                           Regulations S–K and S–B, to Items 8                     markets.
                                                                                                                                                         securities beneficially owned by
                                           and 22(b) of Schedule 14A, and to                          Because only companies subject to the              executive officers and directors and
                                           Forms N–1A, N–2, and N–3 are                            reporting requirements of Sections 13                 regarding directors’ qualifying shares,
                                           intended to improve the completeness                    and 15 of the Exchange Act, and                       consolidating corporate governance
                                           and clarity of executive compensation                   companies filing registration statements              disclosure requirements and expanding
                                           and related person transaction                          under the Securities Act, would be                    disclosure regarding the independence
                                           disclosure available to investors and the               required to make the proposed                         of the board of directors, as well as
                                           financial markets. These proposals                      disclosures required by Items 402, 404                requiring that all disclosure required by
                                           would enhance investors’                                and 407, competitors not in those                     the proposed items to be provided in
                                           understanding of how corporate                          categories could gain an informational                plain English.
                                           resources are used, and enable                          advantage. However, with respect to
                                           shareholders to better evaluate the                     executive compensation, as under                      A. Reasons for the Proposed Action
                                           actions of the board of directors and                   current Item 402, registrants would not                 Since the enactment of the Securities
                                           executive officers in fulfilling their                  be required to disclose target levels with            Act and the Exchange Act, the
                                           responsibilities.                                       respect to specific quantitative or                   Commission has on a number of
                                              The proposed amendments to Form                      qualitative performance-related factors,              occasions explored the best methods for
                                           8–K are intended to facilitate the ability              or any factors or criteria involving                  communicating clear, concise and
                                           of investors and shareholders to access                 confidential commercial or business                   meaningful material information about
                                           real-time disclosure of public                          information, the disclosure of which                  executive and director compensation
                                           companies’ employee compensation                        would have an adverse effect on the                   and relationships with the issuer. With
                                           events that are unquestionably or                       company. Notwithstanding this                         regard to compensation, at different
                                           presumptively material by requiring this                exception for competitively sensitive                 times, the Commission has adopted
                                           disclosure only for the compensatory                    information, competitors could                        rules mandating narrative, tabular, and
                                           agreements with specified executive                     potentially gain additional insight into              combinations of narrative and tabular
                                           officers. To find this information,                     the executive compensation policies of                disclosure as the best method for
                                           shareholders and investors no longer                    companies through disclosure required                 presenting compensation disclosure in a
                                           would need to examine multiple Form                     in Compensation Discussion and                        manner that is concise and useful to
                                           8–K disclosures relating to other                       Analysis and in other portions of the                 investors. From time to time, the
                                           executive officers or other material non-               required disclosure. Further, the                     Commission has reconsidered executive
                                           ordinary course definitive agreements.                  availability of more broad-based                      and director compensation information
                                              The proposals to expand and                          compensation disclosure may provide                   requirements in light of changing trends
                                           consolidate into one item the director                  additional information to be used by                  in executive compensation, or due to
                                           independence and related corporate                      competitors in recruiting executive                   concerns about the usefulness of
                                           governance disclosure requirements in                   talent.                                               disclosure elicited under then
                                           proposed Item 407 of Regulation S–K                                                                           applicable rules. Most recently, in 1992,
                                           would improve shareholders’ and                            We request comment on whether the
                                                                                                                                                         the Commission proposed and adopted
                                                                                                   proposals, if adopted, would promote
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                                           investors’ understanding of the                                                                               amendments to the disclosure rules that
                                           composition and functions of the board                  efficiency, competition, and capital
                                                                                                                                                         moved away from the mostly narrative
                                                                                                   formation or have an impact or burden
                                                                                                                                                         disclosure approach adopted in 1983 to
                                             352 15 U.S.C. 78w(a)(2).                              on competition. Commenters are
                                             353 15 U.S.C. 77b(b).                                 requested to provide empirical data and                 356 The principal financial officer is not specified
                                             354 15 U.S.C. 78c(f).                                 other factual support for their views, if             as a named executive officer in Item 402 of
                                             355 15 U.S.C. 80a–2(c).                               possible.                                             Regulation S–B.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                 6595

                                           formatted tables which sought to                        officers and directors. Further, this                 and most corporate governance matters
                                           capture the various elements of                         disclosure provides material                          be provided in plain English.
                                           compensation and promote                                information regarding the independence
                                                                                                                                                         B. Objectives
                                           comparability from year to year and                     of directors. The current related party
                                           from company to company.                                transaction disclosure requirements                      The overall goal of the rule proposals
                                              While this tabular approach remains a                were adopted piecemeal over the years                 is to provide investors with a clearer
                                           sound basis for disclosure, its                         and were combined in one disclosure                   and more complete picture of executive
                                           sometimes inflexible and formatted                      requirement beginning in 1982. In light               and director compensation, related
                                           nature has, especially in light of the                  of the many developments, including                   person transactions and corporate
                                           complexity of and variations in                         the increasing focus on corporate                     governance matters. We believe that the
                                           compensation programs, resulted in                      governance and director independence,                 proposals would:
                                           some cases in disclosure that does not                  we believe it is necessary to revise the                 • Confirm our current requirement
                                           clearly inform investors as to all                      rule. We propose to replace the current               that all elements of compensation must
                                           elements of compensation,                               requirement for disclosure about                      be disclosed;
                                           notwithstanding the express                             relationships that can affect director                   • Retain the comparability of
                                           requirement to do so in the rules.                      independence with a narrative                         executive and director compensation
                                           Accordingly, the proposals under                        explanation of the independence status                while also providing material
                                           current consideration seek a broader-                   of directors under a company’s                        qualitative information about the
                                           based approach to eliciting executive                   independence policies for the majority                context in which compensation is
                                           compensation disclosure while                           of the board and for the nominating,                  granted, awarded and earned;
                                           retaining comparability.                                audit and compensation committees.                       • Reorganize and modify the type of
                                              Form 8–K requires disclosure of the                  We also propose to consolidate this and               compensation information that must be
                                           entry into, amendment of and                            other requirements regarding director                 disclosed in current reports;
                                           termination of material definitive                      independence, board committees and
                                           agreements entered into outside the                                                                              • Streamline and modernize the
                                                                                                   other corporate governance matters in a               related person transaction disclosure
                                           ordinary course of business. Under our                  new disclosure Item. In addition, we are
                                           current definitions in Regulation S–K,                                                                        requirements, while making them more
                                                                                                   also proposing corresponding changes                  principles-based;
                                           many agreements regarding executive                     to items in our registration forms and
                                           compensation are deemed to be material                                                                           • Update the disclosure requirements
                                                                                                   proxy and information statements filed                regarding director independence to
                                           agreements entered into outside the                     by registered investment companies and
                                           ordinary course, and when for purposes                                                                        reflect current listing standards and
                                                                                                   business development companies that                   consolidate all such disclosure under a
                                           of consistency we adopted those                         impose requirements to disclose certain
                                           definitions for use in the expanded                                                                           single disclosure item so that it is easier
                                                                                                   interests, transactions, and relationships            to locate; and
                                           Form 8–K requirements, we
                                                                                                   of each director or nominee for election                 • Facilitate more informed voting
                                           incorporated all of these executive
                                                                                                   as director who is not or would not be                decisions in the face of complex
                                           compensation agreements into the
                                                                                                   an ‘‘interested person’’ of the fund                  information about directors, executive
                                           current Form 8–K disclosure
                                                                                                   within the meaning of Section 2(a)(19)                officers and corporate governance, by
                                           requirements. Therefore, many
                                                                                                   of the Investment Company Act (and                    requiring that most of the information
                                           agreements regarding executive
                                                                                                   their immediate family members).                      required by these proposals be written
                                           compensation are required to be
                                           disclosed within four business days of                     To the extent that shares beneficially             in plain English.
                                           the applicable triggering event. Because                owned by named executive officers,
                                                                                                   directors and director nominees are                   C. Legal Basis
                                           it was not our intent in adopting the
                                           expanded Form 8–K requirements to                       pledged, these shares are subject to risks              We are proposing the amendments
                                           make all elements of compensation for                   and contingencies that do not apply to                pursuant to Sections 3(b), 6, 7, 10 and
                                           all executive officers potential items of               other shares beneficially owned by these              19(a) of the Securities Act; Sections
                                           real-time disclosure, but only to capture               persons. These circumstances have the                 10(b), 12, 13, 14(a), 15(d), and 23(a) of
                                           in this area, as in others, events that are             potential to influence management’s                   the Exchange Act; Sections 8, 20(a),
                                           unquestionably or presumptively                         performance and decisions, and for this               24(a), 30, and 38 of the Investment
                                           material to investors, we believe it is                 reason, it appears that the existence of              Company Act; and Section 3(a) of the
                                           appropriate to modify our rules so that                 these securities pledges could be                     Sarbanes-Oxley Act of 2002.
                                           only those events must be disclosed on                  material to shareholders and should be
                                                                                                   disclosed under proposed revisions to                 D. Small Entities Subject to the
                                           Form 8–K.                                                                                                     Proposed Amendments
                                              We believe that disclosure of                        Item 403 of Regulations S–K and S–B.
                                           executive and director compensation is                  An exclusion from the beneficial                         The proposals would affect small
                                           closely related to disclosure regarding                 ownership disclosure requirement for                  entities, the securities of which are
                                           financial transactions and relationships                directors’’ qualifying shares is also                 registered under Section 12 of the
                                           involving companies and their directors,                proposed to be removed.                               Exchange Act or that are required to file
                                           executive officers, significant                            In order for most of these amended                 reports under Section 15(d) of the
                                           shareholders and respective immediate                   requirements to result in disclosure that             Exchange Act. The proposals also would
                                           family members. These disclosure                        is clear, concise and understandable for              affect small entities that file, or have
                                           requirements have historically been                     investors when responsive disclosure is               filed, a registration statement that has
                                           interconnected, given that relationships                included in Exchange Act reports or                   not yet become effective under the
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                                           among these persons and the company                     incorporated by reference from proxy or               Securities Act and that has not been
                                           can include transactions that involve                   information statements, we propose to                 withdrawn. Securities Act Rule 157 357
                                           compensation or analogous features.                     add Exchange Act rules to require that                and Exchange Act Rule 0–10(a) 358
                                           Such disclosure also represents material                the disclosure regarding executive and
                                           information in evaluating the overall                   director compensation, beneficial                       357 17   CFR 230.157.
                                           relationship with a company’s executive                 ownership, related person transactions                  358 17   CFR 240.0–10(a).


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                                           6596                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                           define an issuer to be a ‘‘small business’’                  Item 402 of Regulation S–B would not               related person transaction disclosure is
                                           or ‘‘small organization’’ for purposes of                 include the following disclosures that                required.
                                           the Regulatory Flexibility Act if it had                  would be required by proposed Item 402                   Unlike the proposed amendments to
                                           total assets of $5 million or less on the                 of Regulation S–K:                                    Item 404 of Regulation S–K, the
                                           last day of its most recent fiscal year.                     • Compensation Discussion and                      proposed amendments to Item 404 of
                                           We believe that the proposals would                       Analysis;                                             Regulations S–B would not impose an
                                           affect small entities that are operating                     • Information regarding two                        additional disclosure requirement for
                                           companies. We estimate that there are                     additional executives;                                small business issuers, including small
                                           approximately 2,500 issuers, other than                      • The third fiscal year of Summary                 entities, regarding their policies and
                                           investment companies, that may be                         Compensation Table disclosure; and                    procedures for the review, approval or
                                           considered small entities. An                                • The supplementary Grants of                      ratification of relationships with related
                                           investment company is considered to be                    Performance-Based Awards Table and                    persons. The proposed amendments to
                                           a ‘‘small business’’ if it, together with                 Grants of All Other Equity Awards                     Item 404 of Regulation S–B and
                                           other investment companies in the same                    Table, the Option Exercises and Stock                 proposed Item 407 of Regulation S–B
                                           group of related investment companies,                    Vested Table, the Retirement Plan                     would require, depending upon the
                                           has net assets of $50 million or less as                  Potential Annual Payments and Benefits                particular circumstances of a company,
                                           of the end of its most recent fiscal                      Table, and the Nonqualified Defined                   more or less disclosure by changing the
                                           year.359 We believe that the proposals                    Contribution and Other Deferred                       disclosure requirement regarding
                                           would affect small entities that are                      Compensation Plans Table and the                      director independence.361
                                           investment companies. We estimate that                                                                             Similar to proposed Item 404(a) of
                                                                                                     separate Potential Payments Upon
                                           there are approximately 240 investment                                                                          Regulation S–K, proposed amendments
                                                                                                     Termination or Change-in-Control
                                           companies that may be considered small                                                                          to Items 22(b)(7), 22(b)(8), and 22(b)(9)
                                                                                                     narrative section, while providing a                  of Schedule 14A and to Forms N–1A,
                                           entities.                                                 general requirement to discuss the                    N–2, and N–3 would decrease the scope
                                           E. Reporting, Recordkeeping and Other                     material terms of retirement plans and                of the requirement imposed on
                                           Compliance Requirements                                   the material terms of contracts                       registered investment companies and
                                                                                                     providing for payment upon a                          business development companies to
                                              The proposed amendments to Item                        termination or change in control.
                                           402 of Regulation S–K would expand                                                                              disclose certain interests, transactions,
                                                                                                        As a result, the proposed amendments               and relationships of each director (and,
                                           some existing disclosure requirements,                    to Item 402 of Regulation S–B would not
                                           and consolidate or eliminate others. The                                                                        in the case of Items 22(b)(7), 22(b)(8),
                                                                                                     result in the same level of incremental               and 22(b)(9) of Schedule 14A, each
                                           proposed amendments to Item 402 of                        increase in costs or burdens as would
                                           Regulation S–B would require less                                                                               nominee for election as director) who is
                                                                                                     the requirements of proposed                          not or would not be an ‘‘interested
                                           extensive disclosure for small business                   amendments to Item 402 of Regulation
                                           issuers than would be required for                                                                              person’’ of the fund within the meaning
                                                                                                     S–K.                                                  of Section 2(a)(19) of the Investment
                                           companies complying with Item 402 of                         The proposed amendments to Item
                                           Regulation S–K. Under the proposals,                                                                            Company Act (and their immediate
                                                                                                     404 of Regulation S–K and S–B would                   family members) by increasing to
                                           the scope and presentation of                             decrease the existing related person
                                           information in Item 402 of Regulation                                                                           $120,000 the current $60,000 threshold
                                                                                                     transaction disclosure requirement that               for disclosure of such interests,
                                           S–B would differ in a number of                           companies, including small entities,                  transactions, and relationships.
                                           significant ways from Item 402 of                         must comply with in some respects and                    The proposed amendments to Item
                                           Regulation S–K. Item 402 of Regulation                    expand it in other respects. The                      403 of Regulation S–K and S–B would
                                           S–B would:                                                proposed amendments to Item 404 of                    require footnote disclosure to the
                                              • Limit the named executive officers                   Regulation S–B would potentially                      beneficial ownership table of the
                                           for whom disclosure would be required                     decrease the scope of the related person              number of shares pledged by named
                                           to a smaller group, consisting of the                     transaction disclosure requirement by                 executive officers, directors and director
                                           principal executive officer and the two                   changing the $60,000 threshold for                    nominees and disclosure of directors’’
                                           other highest paid executive officers;                    disclosure of related person transactions             qualifying shares. This would impose an
                                              • Require that the Summary                             to the lesser of $120,000 or one percent              additional disclosure requirement on
                                           Compensation Table disclose the two                       of the average of the small business                  companies, including small entities.
                                           most recent fiscal years and that                         issuers’ total assets for the last three                 The proposed plain English rules
                                           narrative disclosure accompany the                        completed fiscal years.360 At the same                applicable to Exchange Act reports and
                                           Summary Compensation Table;                               time, the proposed amendments to Item                 proxy or information statements
                                              • Provide a higher threshold for                       404 of Regulation S–B would increase                  incorporated by reference into Exchange
                                           separate identification of categories of                  the scope of the related person                       Act reports would not affect the
                                           ‘‘All Other Compensation’’ in the                         transaction disclosure requirement by                 substance of disclosures that companies
                                           Summary Compensation Table;                               expanding the group of related persons                must make. The proposed plain English
                                              • Require the Outstanding Equity                       covered to include additional                         rules would also not impose any new
                                           Awards at Fiscal Year-End Table;                          ‘‘immediate family members,’’ and in                  recordkeeping requirements or require
                                              • Require additional narrative                         the case of indebtedness relationships,               reporting of additional information.
                                           disclosure addressing the material terms                  significant shareholders. In addition, the            Other proposed changes to our rules
                                           of defined benefit and defined                            proposals may decrease or increase the                would decrease the scope of the
                                           contribution plans and other post-                        scope of the related person transaction               disclosure requirements for Form 8–K,
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                                           termination compensation                                  disclosure requirement by eliminating
                                           arrangements; and                                         or reducing the scope of instructions                    361 As is the case currently, proposed Item 407 of

                                              • Require the Director Compensation                    that provide bright line tests for whether            Regulation S–B would not require compensation
                                           Table.                                                                                                          committee interlocks disclosure as would proposed
                                                                                                                                                           Item 407 of Regulation S–K. This retains a current
                                                                                                       360 Proposed Item 404(a) of Regulation S–K only     difference between Item 402 of Regulation S–B and
                                             359 17   CFR 270.0–10(a).                               includes $120,000 as the threshold.                   Item 402 of Regulation S–K.


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                6597

                                           and thereby result in a reduction in the                to preparation of information in the                  rules for small entities both individually
                                           number of current reports on Form 8–                    proxy or information statement that is                and as a group.
                                           K filed each year.                                      then incorporated by reference into the                 We encourage written comments
                                              Overall, the proposals are expected to               Form 10–KSB. With regard to persons                   regarding this analysis. We solicit
                                           result in increased costs to all subject                other than small business issuers who                 comments as to whether the proposed
                                           companies, large or small, as follows:                  would file a Form 10–K, we estimate for               amendments could have an effect that
                                              • Incremental increase in costs is                   purposes of the Paperwork Reduction                   we have not considered. We request that
                                           expected with proposed changes to                       Act that it would take issuers 120                    commenters describe the nature of any
                                           executive and director compensation                     additional hours to prepare the                       impact on small entities and provide
                                           disclosure requirements;                                proposed disclosure in year one, and 55               empirical data to support the extent of
                                              • No incremental increase in costs is                                                                      the impact.
                                                                                                   hours in year two, and 25 hours in year
                                           expected from the amendments to the
                                                                                                   three and thereafter, which results in an             F. Duplicative, Overlapping or
                                           related person transaction rules and
                                           corporate governance disclosures; and                   average of 67 hours over the three year               Conflicting Federal Rules
                                              • Decreased costs are expected as a                  period. If we assume that a small entity
                                                                                                                                                           We believe that there are no federal
                                           result of the proposed revisions to Form                complies with the disclosure provisions               rules that conflict with or completely
                                           8–K. Because the current proxy rules                    of Regulation S–B rather than                         duplicate the proposed rules.
                                           require a subject registrant to collect and             Regulation S–K and 75% of the burden
                                           disclose information about the                          would be performed by the company                     G. Significant Alternatives
                                           independence of its directors who serve                 internally at a cost of $175 per hour and                The Regulatory Flexibility Act directs
                                           on the audit or nominating committee of                 25% of the burden would be carried by                 us to consider significant alternatives
                                           its board, the proposed disclosure                      outside professionals retained by the                 that would accomplish the stated
                                           should not impose on companies                          company at a cost of $300 per hour, the               objectives, while minimizing any
                                           subject to the proxy rules significant                  average annual cost to comply with the                significant adverse impact on small
                                           new costs for the collection of                         proposed disclosure requirements in                   entities. In connection with the
                                           information regarding the independence                  periodic reports and/or proxy or                      proposals, we considered the following
                                           of directors. Thus, the task of complying               information statements would be                       alternatives:
                                           with the proposed expanded director                     approximately $7,219. The extent to                      1. Establishing different compliance
                                           independence disclosure in Item 407 of                  which an additional average compliance                or reporting requirements which take
                                           Regulation S–K or S–B could be                          cost of approximately $7,219 per small                into account the resources available to
                                           performed by the same person or group                   entity over a three year period would                 smaller entities;
                                           of persons responsible for compliance                   constitute a significant economic impact                 2. The clarification, consolidation or
                                           under the current rules at a minimal                    for small entities would depend on the                simplification of disclosure for small
                                           incremental cost.                                       relative revenues, costs and allocation of            entities;
                                              Our plain English proposal would                     resources toward compliance with the                     3. Use of performance standards
                                           require that companies use a clear                      Commission’s rules for small entities                 rather than design standards; and
                                           writing style to present the information                both individually and as a group.                        4. Exempting smaller entities from
                                           about executive and director                                                                                  coverage of the disclosure requirements,
                                           compensation, related person                               For purposes of the Paperwork                      or any part thereof.
                                           transactions, beneficial ownership and                  Reduction Act, we estimate that with                     With regard to Alternative 1, we have
                                           some corporate governance matters that                  respect to Form N–2, it would take                    proposed some different compliance or
                                           would be required to be disclosed in                    business development companies 100                    reporting requirements for small entities
                                           Exchange Act reports such as annual                     additional hours to prepare the                       and solicited comments on others. We
                                           reports on Forms 10–K or 10–KSB. We                     proposed disclosure in year one, 50                   nevertheless believe improving the
                                           believe the proposed rules, if adopted,                 hours in year two and 25 hours in year                clarity and completeness of disclosure
                                           would result in a short-term increase in                three and thereafter, which results in an             regarding executive and director
                                           costs for companies as they rewrite the                 average of 58 hours for each business                 compensation and related person
                                           information required to be included in                  development company to comply with                    transactions requires a high degree of
                                           annual reports or incorporated by                       the proposed compensation disclosures                 comparability between all issuers.
                                           reference from proxy or information                     that would be required on Form N–2. If                Regarding Alternative 2, the
                                           statements, but few additional costs                    we assume that 25% of the burden                      amendments would clarify, consolidate
                                           after the first year or two of                          would be borne internally at a cost of                and simplify the requirements for all
                                           implementation, as companies become                     $175 per hour and 75% of the burden                   public companies, and some especially
                                           familiar with the organizational,                       would be carried by outside                           for small entities. Regarding Alternative
                                           language, and document structure                        professionals retained by the company                 3, we believe that design rather than
                                           changes necessary to comply with these                  at a cost of $300 per hour, the average               performance standards are appropriate,
                                           proposals. Additional costs, if any,                    annual cost for business development                  because design standards for small
                                           should be one-time or otherwise short-                  companies to comply with the proposed                 entities would be necessary to promote
                                           term.                                                   disclosure requirements on Form N–2                   the goal of relatively uniform
                                              For purposes of the Paperwork                        would be approximately $15,588. The                   presentation of comparable information
                                           Reduction Act, we estimate that with                    extent to which an additional average                 for the benefit of investors. Finally,
                                           respect to Form 10–KSB, it would take                   compliance cost of approximately                      although we propose to exempt some
                                           issuers 70 additional hours to prepare                  $15,588 per small entity over a three                 information required of larger issuers, a
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                                           the proposed disclosure in year one, 25                 year period would constitute a                        wholesale exemption for small entities
                                           additional hours in year two, and 10                    significant economic impact for small                 would not be appropriate because the
                                           additional hours in year three and                      entities would depend on the relative                 proposals are designed to make uniform
                                           thereafter, which results in an average of              assets, income, operating expenses and                the application of the disclosure and
                                           35 additional hours over the three year                 the allocation of resources toward                    other requirements that would be
                                           period. The same estimates would apply                  compliance with the Commission’s                      amended.

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                                           6598             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                              We note that small business                          the most effective method of eliciting                     List of Subjects
                                           issuers,362 which is a broader category                 the disclosure.
                                                                                                                                                              17 CFR Part 228
                                           of issuers than small entities, in certain
                                           circumstances may provide the                           H. Solicitation of Comment                                   Reporting and recordkeeping
                                           executive compensation and                                                                                         requirements, Securities, Small
                                                                                                     We encourage the submission of
                                           relationships with related persons and                                                                             businesses.
                                                                                                   comments with respect to any aspect of
                                           promoters disclosure specified,                                                                                    17 CFR Parts 229, 239, 240, 245 and 249
                                                                                                   this Initial Regulatory Flexibility
                                           respectively, in Items 402 and 404 of
                                                                                                   Analysis. In particular, we request                          Reporting and recordkeeping
                                           Regulation S–B, rather than the
                                           corresponding disclosure specified in                   comments regarding: (i) The number of                      requirements, Securities.
                                           Items 402 and 404 of Regulation S–K.                    small entity issuers that may be affected
                                                                                                   by the proposed revisions; (ii) the                        17 CFR Part 274
                                           We have proposed disclosure
                                           amendments that would require clear                     existence or nature of the potential                         Investment companies, Reporting and
                                           and straightforward disclosure of                       impact of the proposed revisions on                        recordkeeping requirements, Securities.
                                           executive compensation, and                             small entity issuers discussed in the                        For the reasons set forth above, we
                                           relationships with related persons and                  analysis; and (iii) how to quantify the                    propose to amend Title 17, Chapter II of
                                           promoters, respectively. We have                        impact of the proposed revisions.                          the Code of Federal Regulations as
                                           proposed what we believe to be                          Commenters are asked to describe the                       follows:
                                           appropriate revisions to the small                      nature of any impact and provide
                                           business issuer reporting requirements                  empirical data supporting the extent of                    PART 228—INTEGRATED
                                           under Regulation S–B, given that small                  the impact. Such comments will be                          DISCLOSURE SYSTEM FOR SMALL
                                           business issuer compensation structures                 considered in the preparation of the                       BUSINESS ISSUERS
                                           are likely to be less complex than those                Final Regulatory Flexibility Analysis, if                    1. The authority citation for part 228
                                           of registrants that are not small business              the proposed revisions are adopted, and                    continues to read in part as follows:
                                           issuers. Separate disclosure                            will be placed in the same public file as
                                           requirements for small entities that                                                                                 Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
                                                                                                   comments on the proposed                                   77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
                                           would differ from the proposed                          amendments.                                                77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
                                           reporting requirements of Regulation S–
                                                                                                                                                              77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll,
                                           B would not yield the disclosure we                     XII. Small Business Regulatory                             78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b–
                                           believe to be necessary to achieve our                  Enforcement Fairness Act                                   11, and 7201 et seq.; and 18 U.S.C. 1350.
                                           disclosure objectives. In particular, we
                                                                                                      For purposes of the Small Business                      *     *    *     *     *
                                           believe the changes that are reflected in
                                                                                                   Regulatory Enforcement Fairness Act of                       2. Amend § 228.201 by revising
                                           the proposed amendments to Regulation
                                                                                                   1996,363 a rule is ‘‘major’’ if it has                     Instruction 2 to paragraph (d) to read as
                                           S–B would balance the informational
                                                                                                                                                              follows:
                                           needs of investors in smaller companies                 resulted, or is likely to result in:
                                           with the burdens imposed on such                           • An annual effect on the U.S.                          § 228.201 (Item 201) Market for Common
                                           companies by the disclosure                             economy of $100 million or more;                           Equity and Related Stockholder Matters.
                                           requirements.                                                                                                      *      *    *      *     *
                                              We have used design rather than                         • A major increase in costs or prices
                                                                                                                                                                 Instructions to paragraph (d). 1. * * *
                                           performance standards in connection                     for consumers or individual industries;                       2. For purposes of this paragraph, an
                                           with the proposals for two reasons.                     or                                                         ‘‘individual compensation arrangement’’
                                           First, based on our past experience, we                    • Significant adverse effects on                        includes, but is not limited to, the following:
                                           believe the proposed disclosure would                   competition, investment or innovation.                     A written compensation contract within the
                                           be more useful to investors if there were                                                                          meaning of ‘‘employee benefit plan’’ under
                                           specific informational requirements.                    We request comment on whether our                          § 230.405 of this chapter and a plan (whether
                                           The proposed mandated disclosures are                   proposals would be a ‘‘major rule’’ for                    or not set forth in any formal document)
                                                                                                   purposes of the Small Business                             applicable to one person as provided under
                                           intended to result in more focused and                                                                             Item 402(a)(5)(ii) of Regulation S–B
                                           comprehensive disclosure. Second, the                   Regulatory Enforcement Fairness Act.                       (§ 228.402(a)(5)(ii)).
                                           specific disclosure requirements in the                 We solicit comment and empirical data
                                                                                                   on: (a) the potential effect on the U.S.                   *      *    *      *     *
                                           proposals would promote more
                                           consistent disclosure among public                      economy on an annual basis; (b) any                        § 228.306   [Removed and Reserved]
                                           companies because they would provide                    potential increase in costs or prices for                      3. Remove and reserve § 228.306.
                                           greater certainty as to the scope of                    consumers or individual industries; and
                                           required disclosure. In addition, specific              (c) any potential effect on competition,                   § 228.401   [Amended]
                                           disclosure requirements would improve                   investment or innovation.                                    4. Amend § 228.401 by removing
                                           the Commission’s ability to enforce the                                                                            paragraphs (e), (f) and (g).
                                           proposed rules. Therefore, amending the                 XIII. Statutory Authority and Text of                        5. Revise § 228.402 to read as follows:
                                           disclosure requirements of Items 402                    the Proposed Amendments
                                           and 404 of Regulations S–K and                                                                                     § 228.402 (Item 402) Executive
                                                                                                      We are proposing new rules and                          compensation.
                                           Regulation S–B and Exchange Act Form
                                                                                                   amendments pursuant to Sections 3(b),                         (a) General. (1) All compensation
                                           8–K, and adopting Item 407 of
                                                                                                   6, 7, 10, and 19(a) of the Securities Act,                 covered. This Item requires clear,
                                           Regulation S–K and S–B, appears to be
                                                                                                   as amended, Sections 10(b), 12, 13, 14,                    concise and understandable disclosure
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                                              362 Item 10 of Regulation S–B (17 CFR 228.10)        15(d) and 23(a) of the Exchange Act, as                    of all plan and non-plan compensation
                                           defines a small business issuer as a registrant that    amended, and Sections 8, 20(a), 24(a),                     awarded to, earned by, or paid to the
                                           has revenues of less than $25 million, is a U.S. or     30 and 38 of the Investment Company                        named executive officers designated
                                           Canadian issuer, is not an investment company, and      Act of 1940, as amended.
                                           has a public float of less than $25 million. Also, if
                                                                                                                                                              under paragraph (a)(2) of this Item, and
                                           it is a majority owned subsidiary, the parent                                                                      directors covered by paragraph (f) of this
                                           corporation also must be a small business issuer.         363 Pub.   L. 104–121, Title II, 110 Stat. 857 (1996).   Item, by any person for all services

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                                                               Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                         6599

                                           rendered in all capacities to the small                           pursuant to paragraph (b)(2)(iii) of this Item),         business issuer or a named executive
                                           business issuer and its subsidiaries,                             provided, however, that no disclosure need               officer.
                                           unless otherwise specifically excluded                            be provided for any executive officer, other
                                                                                                             than the PEO, whose total compensation does                 (ii) The term plan includes, but is not
                                           from disclosure in this Item. All such                            not exceed $100,000.                                     limited to, the following: Any plan,
                                           compensation shall be reported                                      2. Inclusion of executive officer of                   contract, authorization or arrangement,
                                           pursuant to this Item, even if also called                        subsidiary. It may be appropriate for a small            whether or not set forth in any formal
                                           for by another requirement, including                             business issuer to include as named                      document, pursuant to which cash,
                                           transactions between the small business                           executive officers one or more executive                 securities, similar instruments or any
                                           issuer and a third party where a purpose                          officers of subsidiaries in the disclosure               other property may be received. A plan
                                           of the transaction is to furnish                                  required by this Item. See Rule 3b-7 under
                                                                                                             the Exchange Act (17 CFR 240.3b-7).
                                                                                                                                                                      may be applicable to one person. Small
                                           compensation to any such named                                                                                             business issuers may omit information
                                                                                                               3. Exclusion of executive officer due to
                                           executive officer or director. No amount                          overseas compensation. It may be                         regarding group life, health,
                                           reported as compensation for one fiscal                           appropriate in limited circumstances for a               hospitalization, or medical
                                           year need be reported in the same                                 small business issuer not to include in the              reimbursement plans that do not
                                           manner as compensation for a                                      disclosure required by this Item an                      discriminate in scope, terms or
                                           subsequent fiscal year; amounts                                   individual, other than its PEO, who is one of            operation, in favor of executive officers
                                           reported as compensation for one fiscal                           the small business issuer’s most highly                  or directors of the small business issuer
                                           year may be required to be reported in                            compensated executive officers due to the
                                                                                                             payment of amounts of cash compensation
                                                                                                                                                                      and that are available generally to all
                                           a different manner pursuant to this Item.                                                                                  salaried employees.
                                                                                                             relating to overseas assignments attributed
                                              (2) Persons covered. Disclosure shall                          predominantly to such assignments.                          (iii) The term incentive plan means
                                           be provided pursuant to this Item for                                                                                      any plan providing compensation
                                           each of the following (the ‘‘named                                   (3) Information for full fiscal year. If
                                                                                                             the PEO served in that capacity during                   intended to serve as incentive for
                                           executive officers’’):                                                                                                     performance to occur over a specified
                                              (i) All individuals serving as the small                       any part of a fiscal year with respect to
                                                                                                             which information is required,                           period, whether such performance is
                                           business issuer’s principal executive                                                                                      measured by reference to financial
                                           officer or acting in a similar capacity                           information should be provided as to all
                                                                                                             of his or her compensation for the full                  performance of the small business issuer
                                           during the last completed fiscal year                                                                                      or an affiliate, the small business
                                           (‘‘PEO’’), regardless of compensation                             fiscal year. If a named executive officer
                                                                                                             (other than the PEO) served as an                        issuer’s stock price, or any other
                                           level;                                                                                                                     measure. A non-stock incentive plan is
                                              (ii) The small business issuer’s two                           executive officer of the small business
                                                                                                             issuer (whether or not in the same                       an incentive plan or portion of an
                                           most highly compensated executive
                                                                                                             position) during any part of the fiscal                  incentive plan where the relevant
                                           officers other than the PEO who were
                                                                                                             year with respect to which information                   performance measure is not based on
                                           serving as executive officers at the end
                                                                                                             is required, information shall be                        the price of the small business issuer’s
                                           of the last completed fiscal year; and
                                                                                                             provided as to all compensation of that                  equity securities or the award does not
                                              (iii) Up to two additional individuals
                                                                                                             individual for the full fiscal year.                     permit settlement by issuance of the
                                           for whom disclosure would have been
                                                                                                                (4) Omission of table or column. A                    small business issuer’s equity securities.
                                           provided pursuant to paragraph (a)(2)(ii)
                                                                                                             table or column may be omitted, if there                 The term incentive plan award means
                                           of this Item but for the fact that the
                                                                                                             has been no compensation awarded to,                     an award provided under an incentive
                                           individual was not serving as an
                                                                                                             earned by, or paid to any of the named                   plan.
                                           executive officer of the small business
                                           issuer at the end of the last completed                           executive officers required to be                           (b) Summary compensation table. (1)
                                           fiscal year.                                                      reported in that table or column in any                  General. Provide the information
                                                                                                             fiscal year covered by that table.                       specified in paragraph (b)(2) of this
                                              Instructions to Item 402(a)(2). 1.                                                                                      Item, concerning the compensation of
                                           Determination of most highly compensated
                                                                                                                (5) Definitions. For purposes of this
                                           executive officers. The determination as to                       Item:                                                    the named executive officers for each of
                                           which executive officers are most highly                             (i) The term stock appreciation rights                the small business issuer’s last two
                                           compensated shall be made by reference to                         (‘‘SARs’’) refers to SARs payable in cash                completed fiscal years, in a Summary
                                           total compensation for the last completed                         or stock, including SARs payable in                      Compensation Table in the tabular
                                           fiscal year (as required to be disclosed                          cash or stock at the election of the small               format specified below.

                                                                                                                   SUMMARY COMPENSATION TABLE
                                                                                                                                                                                        Non-stock     All other
                                                                                                                                                              Stock          Option     incentive
                                                                                                           Total           Salary            Bonus                                                   compensa-
                                            Name and principal position                     Year                                                             awards          awards     plan com-
                                                                                                            ($)             ($)               ($)                                                        tion
                                                                                                                                                               ($)             ($)      pensation         ($)
                                                                                                                                                                                            ($)

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

                                           PEO ......................................              —
                                                                                                   —
                                           A ...........................................           —
                                                                                                   —
                                           B ...........................................           —
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                                           6600             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                              (2) The Table shall include:                         issuer applies for financial statement                business issuer could not properly
                                              (i) The name and principal position of               reporting purposes, and all earnings on               report in any other column of the
                                           the named executive officer (column                     any outstanding awards (column (f));                  Summary Compensation Table (column
                                           (a));                                                      (vii) For awards of stock options, with            (i)). Each compensation item that is not
                                              (ii) The fiscal year covered (column                 or without tandem SARs, freestanding                  properly reportable in columns (d)–(h)
                                           (b));                                                   SARs and other similar instruments                    must be reported in this column. Such
                                              (iii) The dollar value of total                      with option-like features (including                  compensation must include, but is not
                                           compensation for the covered fiscal year                awards that subsequently have been                    limited to:
                                           (column (c)). With respect to each                      transferred), the aggregate grant date fair              (A) Perquisites and other personal
                                           named executive officer, disclose the                   value computed in accordance with                     benefits, or property, unless the
                                           sum of all amounts reported in columns                  FAS 123R applying the same valuation                  aggregate amount of such compensation
                                           (d) through (i);                                        model and assumptions as the small                    is less than $10,000;
                                              (iv) The dollar value of base salary                 business issuer applies for financial                    (B) All earnings on compensation that
                                           (cash and non-cash) earned by the                       statement reporting purposes, and all                 is deferred on a basis that is not tax-
                                           named executive officer during the                      earnings on any outstanding awards                    qualified, including such earnings on
                                           fiscal year covered (column (d));                       (column (g));                                         non-qualified defined contribution
                                              (v) The dollar value of bonus (cash                                                                        plans;
                                           and non-cash) earned by the named                          Instructions to Item 402(b)(2)(vi) and (vii).
                                                                                                   1. For awards reported in columns (f) and (g),           (C) All ‘‘gross-ups’’ or other amounts
                                           executive officer during the fiscal year                include a footnote disclosing all assumptions         reimbursed during the fiscal year for the
                                           covered (column (e));                                   made in the valuation, by reference to a              payment of taxes;
                                              Instructions to Item 402(b)(2)(iv) and (v). 1.       discussion of those assumptions in the small             (D) For any security of the small
                                           If the amount of salary or bonus earned in a            business issuer’s financial statements,               business issuer or its subsidiaries
                                           given fiscal year is not calculable through the         footnotes to the financial statements, or             purchased from the small business
                                           latest practicable date, a footnote shall be            discussion in the Management’s Discussion             issuer or its subsidiaries (through
                                           included disclosing that the amount of salary           and Analysis. The sections so referenced are          deferral of salary or bonus, or otherwise)
                                           or bonus is not calculable through the latest           deemed part of the disclosure provided
                                                                                                   pursuant to this Item 402.                            at a discount from the market price of
                                           practicable date and providing the date that
                                           the amount of salary or bonus is expected to               2. If at any time during the last completed        such security at the date of purchase,
                                           be determined, and such amount must be                  fiscal year, the small business issuer has            unless that discount is available
                                           disclosed in a filing under Item 5.02(e) of             adjusted or amended the exercise price of             generally, either to all security holders
                                           Form 8–K (17 CFR 249.308).                              stock options or SARs previously awarded to           or to all salaried employees of the small
                                              2. Small business issuers need not include           a named executive officer, whether through            business issuer, the compensation cost
                                           in the salary column (column (d)) or bonus              amendment, cancellation or replacement                computed in accordance with FAS 123R
                                           column (column (e)) any amount of salary or             grants, or any other means (‘‘repriced’’), or         applying the same valuation model and
                                           bonus forgone at the election of a named                otherwise has materially modified such
                                                                                                   awards, the small business issuer shall               assumptions as the small business
                                           executive officer pursuant to a small business
                                           issuer’s program under which stock, stock-              include, as awards required to be reported in         issuer applies for financial statement
                                           based or other forms of non-cash                        column (g), the total fair value of options or        reporting purposes;
                                           compensation may be received by a named                 SARs as so repriced or modified, measured                (E) The amount paid or accrued to any
                                           executive officer instead of a portion of               as of the repricing or modification date.             named executive officer pursuant to a
                                           annual compensation earned in a covered                    3. All earnings on outstanding awards must         plan or arrangement in connection with:
                                           fiscal year. However, the receipt of any such           be identified and quantified in a footnote to            (1) Any termination, including
                                           form of non-cash compensation instead of                column (f) or (g), as applicable, whether the         without limitation through retirement,
                                           salary or bonus earned for a covered fiscal             earnings were paid during the fiscal year,            resignation, severance or constructive
                                           year must be disclosed in the appropriate               payable during the period but deferred, or
                                                                                                   payable by their terms at a later date.
                                                                                                                                                         termination (including a change in
                                           column of the Table corresponding to that
                                           fiscal year (e.g., stock awards (column (f));
                                                                                                                                                         responsibilities) of such executive
                                                                                                      (viii) The dollar value of all earnings            officer’s employment with the small
                                           option awards (column (g)); all other
                                                                                                   for services performed during the fiscal              business issuer and its subsidiaries; or
                                           compensation (column (i))); or if made
                                           pursuant to a non-stock incentive plan and              year pursuant to non-stock based                         (2) A change in control of the small
                                           therefore not reportable at grant in the                incentive plans as defined in paragraph               business issuer;
                                           Summary Compensation Table, a footnote                  (a)(5)(iii) of this Item, and all earnings               (F) Small business issuer
                                           must be added to the salary or bonus column             on any outstanding non-stock incentive                contributions or other allocations to
                                           so disclosing and referring to the Narrative            plan awards (column (h));                             vested and unvested defined
                                           Disclosure to the Summary Compensation                                                                        contribution plans;
                                                                                                      Instructions to Item 402(b)(2)(viii). 1. If the
                                           Table (required by paragraph (c) of this Item)                                                                   (G) The aggregate increase in actuarial
                                                                                                   relevant performance measure is satisfied
                                           where the material terms of the award are                                                                     value to the named executive officer of
                                                                                                   during the fiscal year (including for a single
                                           reported.
                                                                                                   year in a plan with a multi-year performance          all defined benefit and actuarial pension
                                             (vi) For awards of stock, including                   measure), the earnings are reportable for that        plans (including supplemental plans)
                                           restricted stock, restricted stock units,               fiscal year, even if not payable until a later        accrued during the small business
                                           phantom stock, phantom stock units,                     date, and are not reportable again in the fiscal      issuer’s covered fiscal year; and
                                           common stock equivalent units and                       year when amounts are paid to the named
                                                                                                                                                            (H) The dollar value of any insurance
                                                                                                   executive officer.
                                           other similar instruments that do not                      2. All earnings on non-stock incentive plan        premiums paid by, or on behalf of, the
                                           have option-like features, the aggregate                compensation must be identified and                   small business issuer during the covered
                                           grant date fair value computed in                       quantified in a footnote to column (h),               fiscal year with respect to life insurance
                                           accordance with Financial Accounting                    whether the earnings were paid during the             for the benefit of a named executive
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                                           Standards Board Statement of Financial                  fiscal year, payable during the period but            officer.
                                           Accounting Standards No. 123 (revised                   deferred at the election of the named
                                                                                                   executive officer, or payable by their terms at         Instructions to Item 402(b)(2)(ix). 1.
                                           2004), Share-Based Payment (‘‘FAS                                                                             Incentive plan awards and earnings and
                                           123R’’), as modified or supplemented,                   a later date.
                                                                                                                                                         earnings on restricted stock, options, SARs
                                           applying the same valuation model and                     (ix) All other compensation for the                 and similar awards are required to be
                                           assumptions as the small business                       covered fiscal year that the small                    reported elsewhere as provided herein. These


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                6601

                                           amounts and amounts received on exercise of             and describe the rate and methodology used            exercisability, any conditions to
                                           options and SARs are not reportable as All              to convert the payment amounts to dollars.            exercisability, any tandem feature, any
                                           Other Compensation in column (i).                          3. If a named executive officer is also a          reload feature, any tax-reimbursement
                                              2. Benefits paid pursuant to defined benefit         director who receives compensation for his
                                                                                                                                                         feature, and any provision that could
                                           and actuarial plans are reportable as All               or her services as a director, reflect that
                                           Other Compensation in column (i) if paid to             compensation in the Summary Compensation              cause the exercise price to be lowered.
                                           the named executive officer during the                  Table and provide a footnote identifying and             (v) The material terms of any non-
                                           period covered by the Table. Otherwise                  itemizing such compensation and amounts.              option and non-SAR award made to a
                                           information concerning these plans is                   Use the categories in the Director                    named executive officer during the last
                                           reportable pursuant to paragraph (e)(1) of this         Compensation Table required pursuant to               completed fiscal year, including a
                                           Item.                                                   paragraph (f) of this Item.                           general description of the formula or
                                              3. Reimbursements of taxes owed with                    4. Amounts deferred at the election of a
                                           respect to perquisites or other personal                                                                      criteria to be applied in determining the
                                                                                                   named executive officer or at the direction of
                                           benefits must be included in the columns as             the small business issuer, whether pursuant           amounts payable and vesting schedule.
                                           tax reimbursements (paragraph (b)(2)(ix)(C)             to a plan established under Section 401(k) of            (vi) The assumptions underlying any
                                           of this Item) even if the associated perquisites        the Internal Revenue Code (26 U.S.C. 401(k)),         determination of an increase in the
                                           or other personal benefits are not required to          or otherwise, shall be included in the                actuarial value of defined benefit and
                                           be included because the aggregate amount of             appropriate column for the fiscal year in             actuarial plans and the method of
                                           such compensation is less than $10,000.                 which earned. The amount so deferred must
                                              4. Perquisites and other personal benefits
                                                                                                                                                         calculating earnings on deferred
                                                                                                   be disclosed in a footnote to the applicable
                                           shall be valued on the basis of the aggregate                                                                 compensation plans including defined
                                                                                                   column.
                                           incremental cost to the small business issuer                                                                 contribution plans.
                                           and its subsidiaries.                                     (c) Narrative disclosure to summary                    (vii) An identification to the extent
                                              5. Regarding paragraph (b)(2)(ix)(B) of this         compensation table. (1) Provide a                     material of any item included under All
                                           Item, if the applicable interest rates vary             narrative description of any material                 Other Compensation (column (i)) in the
                                           depending upon conditions such as a                     factors necessary to an understanding of
                                           minimum period of continued service, the
                                                                                                                                                         Summary Compensation Table.
                                                                                                   the information disclosed in the Table                Identification of an item shall not be
                                           reported amount should be calculated                    required by paragraph (b) of this Item.
                                           assuming satisfaction of all conditions to                                                                    considered material if it does not exceed
                                                                                                   Examples of such factors may include,                 the greater of $25,000 or 10% of all
                                           receiving interest at the highest rate. Footnote
                                           disclosure may be provided disclosing the               in given cases, among other things:                   items included in the specified category
                                           portion of any earnings that the registrant               (i) The material terms of each named                in question set forth in paragraphs
                                           considers to be paid at an above-market rate,           executive officer’s employment                        (b)(2)(ix) of this Item. All items of
                                           provided that the footnote explains the small           agreement or arrangement, whether                     compensation are required to be
                                           business issuer’s criteria for determining the          written or unwritten.                                 included in the Summary Compensation
                                           portion considered to be above-market.                    (ii) If at any time during the last fiscal
                                              6. The disclosure required pursuant to                                                                     Table without regard to whether such
                                                                                                   year, any outstanding option, SAR or
                                           paragraph (b)(2)(ix)(G) of this Item applies to                                                               items are required to be identified.
                                                                                                   other equity-based award was repriced
                                           each plan that provides for the payment of              or otherwise materially modified (such                   (2) For up to three employees who
                                           retirement benefits, or benefits that will be                                                                 were not executive officers during the
                                           paid primarily following retirement,                    as by extension of exercise periods, the
                                                                                                   change of vesting or forfeiture                       last completed fiscal year and whose
                                           including but not limited to tax-qualified                                                                    total compensation for the last
                                           defined benefit plans and supplemental                  conditions, the change or elimination of
                                           employee retirement plans, but excluding                applicable performance criteria, or the               completed fiscal year was greater than
                                           tax-qualified defined contribution plans and            change of the bases upon which returns                that of any named executive officers,
                                           nonqualified defined contribution plans.                are determined), a description of each                disclose each of such employee’s total
                                              Instructions to Item 402(b). 1. Information          such repricing or other material                      compensation for that year and describe
                                           with respect to the fiscal year prior to the last       modification.                                         their job positions.
                                           completed fiscal year will not be required if                                                                    (d) Outstanding equity awards at
                                                                                                     (iii) The waiver or modification of any
                                           the small business issuer was not a reporting
                                           company pursuant to Section 13(a) or 15(d)              specified performance target, goal or                 fiscal year-end table. (1) Provide the
                                           of the Exchange Act (15 U.S.C. 78m(a),                  condition to payout with respect to any               information specified in paragraph
                                           78o(d)) at any time during that year, except            amount included in non-stock incentive                (d)(2) of this Item, concerning the
                                           that the small business issuer will be                  plan compensation or payouts reported                 number and value of unexercised
                                           required to provide information for such year           in column (h) to the Summary                          options, SARs and similar instruments
                                           if that information previously was required to          Compensation Table required by                        and nonvested stock (including
                                           be provided in response to a Commission                 paragraph (b) of this Item, stating                   restricted stock, restricted stock units or
                                           filing requirement.                                                                                           other similar instruments) and incentive
                                                                                                   whether the waiver or modification
                                              2. All compensation values reported in the
                                           Summary Compensation Table must be                      applied to one or more specified named                plan awards for each named executive
                                           reported in dollars. Where compensation was             executive officers or to all compensation             officer outstanding as of the end of the
                                           paid to or received by a named executive                subject to the target, goal or condition.             small business issuer’s last completed
                                           officer in a different currency, a footnote               (iv) The material terms of each grant,              fiscal year on an aggregated basis in the
                                           must be provided to identify that currency              including but not limited to date of                  following tabular format:
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                                           6602                Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                                                                                           OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
                                                                                                                                                                                                                           Incentive
                                                                                                                                                                                                           Incentive
                                                                                                                                      Number of                                                Market                    plans: mar-
                                                                                                                                                       In-the-money        Number of                      plans: num-
                                                                                                                                    securities un-                                            value of                   ket or pay-
                                                                                                                                                         amount of         shares or                      ber of non-
                                                                                                                                       derlying                                              shares or                   out value of
                                                                                                                                                        unexercised          units of                        vested
                                                                                                                                     unexercised                                               units of                   nonvested
                                                                                Name                                                                       option          stock held                       shares,
                                                                                                                                       options                                               stock held                     shares,
                                                                                                                                                             (#)           that have                        units or
                                                                                                                                         (#)                                                 that have                      units or
                                                                                                                                                        exercisable/       not vested                     other rights
                                                                                                                                     exercisable/                                            not vested                  other rights
                                                                                                                                                       unexercisable           (#)                            held
                                                                                                                                    unexercisable                                                ($)                         held
                                                                                                                                                                                                               (#)            ($)

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

                                           PEO .............................................................................
                                           A ..................................................................................
                                           B ..................................................................................



                                              (2) The Table shall include:                                              at the end of the fiscal year (column (f));                   of the last completed fiscal year by the
                                              (i) The name of the executive officer                                     and                                                           number of restricted stock or incentive plan
                                           (column (a));                                                                   (vii) The aggregate market or payout                       award holdings, respectively.
                                              (ii) The total number of securities                                       value of nonvested shares, units or other
                                                                                                                                                                                         (e) Additional narrative disclosure.
                                           underlying unexercised options, SARs                                         rights awarded under any incentive plan
                                                                                                                                                                                      Provide a narrative description of the
                                           and similar instruments with option-                                         held at the end of the fiscal year
                                                                                                                                                                                      following to the extent material:
                                           like features held at the end of the last                                    (column (g)).
                                           completed fiscal year, including awards                                                                                                       (1) The material terms of each plan
                                                                                                                           Instructions to Item 402(d)(2). 1. In the title
                                           that have been transferred, separately                                                                                                     that provides for the payment of
                                                                                                                        of the table, specify the applicable fiscal year
                                           identifying the exercisable and                                              of the small business issuer.                                 retirement benefits, or benefits that will
                                           unexercisable options, SARs and similar                                         2. Options, SARs or similar instruments are                be paid primarily following retirement,
                                           instruments (column (b));                                                    in-the-money if the market price of the                       including but not limited to tax-
                                                                                                                        underlying securities exceeds the exercise or                 qualified defined benefit plans,
                                              (iii) The aggregate in-the-money                                          base price of the option, SAR or similar                      supplemental employee retirement
                                           amount of unexercised options, SARs                                          instrument. Compute the amounts in column                     plans, tax-qualified defined contribution
                                           and similar instruments with option-                                         (c) by determining the difference between the                 plans and nonqualified defined
                                           like features held at the end of the fiscal                                  market price at fiscal year-end of the
                                                                                                                        securities underlying the options, SARs or                    contribution plans.
                                           year, including awards that have been
                                           transferred, separately identifying the                                      similar instruments and the exercise or base                     (2) The material terms of each
                                           exercisable and unexercisable options,                                       price of the options, SARs or similar                         contract, agreement, plan or
                                                                                                                        instruments.                                                  arrangement, whether written or
                                           SARs and similar instruments (column                                            3. The expiration dates of options, SARs
                                           (c));                                                                                                                                      unwritten, that provides for payment(s)
                                                                                                                        and similar instruments held at fiscal year-
                                              (iv) The total number of nonvested                                        end, separately identifying the exercisable
                                                                                                                                                                                      to a named executive officer at,
                                           shares of stock (including restricted                                        and unexercisable options, SARs and similar                   following, or in connection with the
                                           stock, restricted stock units or similar                                     instruments must be disclosed by footnote to                  resignation, retirement or other
                                           instruments that do not have option-like                                     column (b). If the expiration date of an                      termination of a named executive
                                           features) held at the end of the fiscal                                      option, SAR or similar instrument held at                     officer, or a change in control of the
                                                                                                                        fiscal year-end subsequently has occurred,                    small business issuer or a change in the
                                           year (column (d));
                                                                                                                        state whether it was exercised or expired                     named executive officer’s
                                              (v) The aggregate market value of                                         unexercised. The vesting dates of restricted
                                           nonvested shares of stock (including                                                                                                       responsibilities following a change in
                                                                                                                        stock shares and similar instruments and
                                           restricted stock, restricted stock units or                                  incentive plan awards held at fiscal-year end                 control, with respect to each named
                                           similar instruments that do not have                                         must be disclosed by footnotes to columns                     executive officer.
                                           option-like features) held at the end of                                     (d) and (f), respectively.                                       (f) Compensation of directors. (1)
                                           the fiscal year (column (e));                                                   4. Compute the market values of stock                      Provide the information specified in
                                              (vi) The total number of nonvested                                        (including restricted stock, restricted stock                 paragraph (f)(2) of this Item, concerning
                                                                                                                        units or similar instruments) holdings
                                           shares, units or other rights awarded                                        reported in column (e) and equity-based                       the compensation of the directors for the
                                           under any incentive plan, and, if                                            incentive plan awards reported in column (g)                  small business issuer’s last completed
                                           applicable the number of shares                                              by multiplying the closing market price of                    fiscal year, in the following tabular
                                           underlying any such unit or right, held                                      the small business issuer’s stock at the end                  format:

                                                                                                                                       DIRECTOR COMPENSATION
                                                                                                                                                                                                          Non-stock
                                                                                                                                                              Fees                                                        All other
                                                                                                                                                                              Stock           Option      incentive
                                                                                                                                           Total            earned or                                                    compensa-
                                                                                  Name                                                                                       awards           awards      plan com-
                                                                                                                                            ($)            paid in cash                                                      tion
                                                                                                                                                                               ($)              ($)       pensation
                                                                                                                                                                ($)                                                           ($)
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                                                                                                                                                                                                              ($)

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

                                           A .......................................................................................
                                           B .......................................................................................
                                           C .......................................................................................


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                                                               Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                                          6603

                                                                                                                        DIRECTOR COMPENSATION—Continued
                                                                                                                                                                                                       Non-stock
                                                                                                                                                           Fees                                                       All other
                                                                                                                                                                           Stock          Option       incentive
                                                                                                                                        Total            earned or                                                   compensa-
                                                                                  Name                                                                                    awards          awards       plan com-
                                                                                                                                         ($)            paid in cash                                                     tion
                                                                                                                                                                            ($)             ($)        pensation
                                                                                                                                                             ($)                                                          ($)
                                                                                                                                                                                                           ($)

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

                                           D .......................................................................................
                                           E .......................................................................................



                                              (2) The Table shall include:                                              incentive plans as defined in paragraph                       (G) Small business issuer
                                              (i) The name of each director, unless                                     (a)(5)(iii) of this Item, and all earnings                 contributions or other allocations to
                                           such director is also a named executive                                      on any outstanding awards (column (f));                    vested and unvested defined
                                           officer under Item 402(a) and his or her                                     and                                                        contribution plans;
                                           compensation for service as a director is                                       (vii) All other compensation for the                       (H) Consulting fees earned from, or
                                           fully reflected in the Summary                                               covered fiscal year that the small                         paid or payable by the small business
                                           Compensation Table pursuant to Item                                          business issuer could not properly                         issuer and/or its subsidiaries (including
                                           402(b) and otherwise as required                                             report in any other column of the                          joint ventures);
                                           pursuant to Items 402(c) and (e)                                             Director Compensation Table (column                           (I) The annual costs of payments and
                                           (column (a));                                                                (g)). Each compensation item for the last                  promises of payments pursuant to
                                              (ii) The dollar value of total                                            completed fiscal year that is not                          director legacy programs and similar
                                           compensation for the covered fiscal year                                     properly reportable in columns (c)–(f)                     charitable award programs; and
                                           (column (b)). With respect to each                                           must be reported in this column and                           (J) The dollar value of any insurance
                                           director, disclose the sum of all amounts                                    must be identified and quantified in a                     premiums paid by, or on behalf of, the
                                           reported in columns (c) through (g);                                         footnote if it is deemed material in                       small business issuer during the covered
                                              (iii) The aggregate dollar amount of all                                  accordance with paragraph (c)(6) of this                   fiscal year with respect to life insurance
                                           fees earned or paid in cash for services                                     Item. Such compensation must include,                      for the benefit of a director.
                                           as a director, including annual retainer                                     but is not limited to:                                       Instruction to Item 402(f)(2)(vii). Programs
                                           fees, committee and/or chairmanship                                             (A) All perquisites and other personal                  in which small business issuers agree to
                                           fees, and meeting fees (column (c));                                         benefits, or property, unless the                          make donations to one or more charitable
                                              (iv) For awards of stock, including                                       aggregate amount of such compensation                      institutions in a director’s name, payable by
                                           restricted stock, restricted stock units,                                    is less than $10,000;                                      the small business issuer currently or upon
                                           phantom stock, phantom stock units,                                             (B) All earnings on compensation that                   a designated event, such as the retirement or
                                           common stock equivalent units or other                                       is deferred on a basis that is not tax-                    death of the director, are charitable awards
                                           similar instruments that do not have                                         qualified;                                                 programs or director legacy programs for
                                           option-like features, the aggregate grant                                       (C) All amounts reimbursed during                       purposes of the disclosure required by
                                           date fair value computed in accordance                                                                                                  paragraph (f)(2)(vii)(I) of this Item. Provide
                                                                                                                        the fiscal year for the payment of taxes;                  footnote disclosure of the total dollar amount
                                           with FAS 123R, applying the same                                                (D) For any security of the small                       and other material terms of each such
                                           valuation model and assumptions as the                                       business issuer or its subsidiaries                        program for which tabular disclosure is
                                           small business issuer applies for                                            purchased from the small business                          provided.
                                           financial statement reporting purposes,                                      issuer or its subsidiaries (through                          Instruction to Item 402(f)(2). Two or more
                                           and all earnings on any outstanding                                          deferral of salary or bonus, or otherwise)                 directors may be grouped in a single row in
                                           awards (column (d));                                                         at a discount from the market price of                     the table if all of their elements of
                                              (v) For awards of stock options, with                                     such security at the date of purchase,                     compensation are identical. The names of the
                                           or without tandem SARs, freestanding                                         unless that discount is available                          directors for whom disclosure is presented
                                           SARs and other similar instruments                                           generally, either to all security holders                  on a group basis should be clear from the
                                           with option-like features (including                                                                                                    table.
                                                                                                                        or to all salaried employees of the small
                                           awards that subsequently have been                                           business issuer, the compensation cost                       (3) Narrative to director compensation
                                           transferred), the aggregate grant date fair                                  computed in accordance with FAS 123R                       table. Provide a narrative description of
                                           value computed in accordance with                                            applying the same valuation model and                      any factors necessary to an
                                           FAS 123R applying the same valuation                                         assumptions as the small business                          understanding of the director
                                           model and assumptions as the small                                           issuer applies for financial statement                     compensation disclosed in this Table.
                                           business issuer applies for financial                                        reporting purposes;                                        While material factors will vary
                                           statement reporting purposes, and all                                           (E) The amount paid or accrued to any                   depending upon the facts, examples of
                                           earnings on any outstanding awards                                           director pursuant to a plan or                             such factors may include, in given
                                           (column (e));                                                                arrangement in connection with:                            cases, among other things:
                                             Instruction to Item 402(f)(2)(iv) and (v).                                    (1) The resignation, retirement or any                    (i) A description of standard
                                           Disclose, for each director, by footnote to the                              other termination of such director; or                     compensation arrangements (such as
                                           appropriate column, the outstanding equity                                      (2) A change in control of the small                    fees for retainer, committee service,
                                           awards at fiscal year end as would be                                        business issuer;                                           service as chairman of the board or a
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                                           required if the tabular presentation for named                                  (F) The aggregate increase in actuarial                 committee, and meeting attendance);
                                           executive officers specified in paragraph (d)                                value to the director of all defined                       and
                                           of this Item were required for directors.                                    benefit and actuarial pension plans                          (ii) Whether any director has a
                                             (vi) The dollar value of all earnings                                      (including supplemental plans) accrued                     different compensation arrangement,
                                           for services performed during the fiscal                                     during the small business issuer’s                         identifying that director and describing
                                           year pursuant to non-stock-based                                             covered fiscal year;                                       the terms of that arrangement.

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                                           6604             Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules

                                              Instruction to Item 402(f). In addition to             6. Amend § 228.403 by revising                      them, each of the named executive
                                           the Instruction to paragraph (f)(2)(vii) of this        paragraph (b) to read as follows:                     officers as defined in Item 402(a)(2)
                                           Item, the following apply equally to
                                                                                                                                                         (§ 228.402(a)(2)), and directors and
                                           paragraph (f) of this Item: Instructions 2 and          § 228.403 (Item 403) Security Ownership of
                                           3 to paragraph (b) of this Item; the                    Certain Beneficial Owners and                         executive officers of the small business
                                           Instructions to paragraphs (b)(2)(iv) and (v) of        Management.                                           issuer as a group, without naming them.
                                           this Item; the Instructions to paragraphs               *      *    *     *     *                             Show in column (3) the total number of
                                           (b)(2)(vi) and (vii) of this Item; the                                                                        shares beneficially owned and in
                                           Instructions to paragraph (b)(2)(viii) of this             (b) Security ownership of                          column (4) the percent of the class so
                                           Item; the Instructions to paragraph (b)(2)(ix)          management. Furnish the following                     owned. Of the number of shares shown
                                           of this Item; and paragraph (c)(6) of this Item.        information, as of the most recent
                                           These Instructions apply to the columns in                                                                    in column (3), indicate, by footnote the
                                                                                                   practicable date, in substantially the
                                           the Director Compensation Table that are                                                                      amount of shares that are pledged as
                                                                                                   tabular form indicated, as to each class
                                           analogous to the columns in the Summary                                                                       security and the amount of shares with
                                           Compensation Table to which they refer and
                                                                                                   of equity securities of the small business
                                                                                                   issuer or any of its parents or                       respect to which such persons have the
                                           to disclosures under paragraph (f) of this Item                                                               right to acquire beneficial ownership as
                                           that correspond to analogous disclosures                subsidiaries, including directors’
                                                                                                   qualifying shares, beneficially owned by              specified in § 240.13d–3(d)(1) of this
                                           provided for in paragraph (b) of this Item to
                                           which they refer.                                       all directors and nominees, naming                    chapter.

                                                                                                                                (3) Amount of shares and nature
                                                     (1) Title of class                  (2) Name of beneficial owner                                                        (4) Percent of class
                                                                                                                                     of beneficial ownership




                                           *       *    *     *    *                               amount of interest paid during the                    limited to, any financial transaction,
                                               7. Revise § 228.404 to read as follows:             period for which disclosure is provided,              arrangement or relationship (including any
                                                                                                   and the rate or amount of interest                    indebtedness or guarantee of indebtedness)
                                           § 228.404 (Item 404) Transactions with                  payable on the indebtedness.                          or any series of similar transactions,
                                           related persons and promoters.                                                                                arrangements or relationships.
                                                                                                      (5) Any other information regarding
                                              (a) Transactions with related persons.                                                                        3. The amount involved in the transaction
                                                                                                   the transaction or the related person in              shall be computed by determining the dollar
                                           Describe any transaction during the last                the context of the transaction that is                value of the amount involved in the
                                           two years, or any currently proposed                    material to investors in light of the                 transaction in question, which shall include:
                                           transaction, in which the small business                circumstances of the particular                          a. In the case of any lease or other
                                           issuer was, or is to be, a participant and              transaction.                                          transaction providing for periodic payments
                                           the amount involved exceeds the lesser                                                                        or installments, the aggregate amount of all
                                                                                                      Instructions to Item 404(a). 1. For the
                                           of $120,000 or one percent of the                                                                             periodic payments or installments due on or
                                                                                                   purposes of paragraph (a) of this Item, the
                                           average of the small business issuer’s                                                                        after the beginning of the small business
                                                                                                   term related person means:
                                           total assets for the last three completed                                                                     issuer’s last fiscal year, including any
                                                                                                      a. Any person who was in any of the
                                                                                                                                                         required or optional payments due during or
                                           fiscal years and in which any related                   following categories at any time during the
                                                                                                                                                         at the conclusion of the lease.
                                           person had, or will have, a direct or                   specified period for which disclosure under
                                                                                                   paragraph (a) of this Item is required:                  b. In the case of indebtedness, the largest
                                           indirect material interest. Disclose the                                                                      aggregate amount of all indebtedness
                                           following information regarding the                        i. Any director or executive officer of the
                                                                                                   small business issuer;                                outstanding at any time since the beginning
                                           transaction:                                               ii. Any nominee for director, when the             of the small business issuer’s last fiscal year
                                              (1) The name of the related person                   information called for by paragraph (a) of this       and all amounts of interest payable on it
                                           and the basis on which the person is a                  Item is being presented in a proxy or                 during the last fiscal year.
                                           related person.                                         information statement relating to the election           4. In the case of transactions involving
                                              (2) The related person’s interest in the             of that nominee for director; or                      indebtedness, the following items of
                                                                                                      iii. Any immediate family member of any            indebtedness may be excluded from the
                                           transaction with the small business                                                                           calculation of the amount of indebtedness
                                           issuer, including the related person’s                  of the foregoing persons, which means any
                                                                                                   child, stepchild, parent, stepparent, spouse,         and need not be disclosed: amounts due from
                                           position(s) or relationship(s) with, or                                                                       the related person for purchases of goods and
                                                                                                   sibling, mother-in-law, father-in-law, son-in-
                                           ownership in, a firm, corporation, or                   law, daughter-in-law, brother-in-law, or              services subject to usual trade terms, for
                                           other entity that is a party to, or has an              sister-in-law, and any person (other than a           ordinary business travel and expense
                                           interest in, the transaction.                           tenant or employee) sharing the household of          payments and for other transactions in the
                                              (3) The approximate dollar value of                  a related person identified in paragraph 1.a.i.       ordinary course of business.
                                           the amount involved in each transaction                 or 1.a.ii. of this instruction; and                      5. Disclosure of an employment
                                                                                                      b. Any person who was in any of the                relationship or transaction involving an
                                           and of the amount of the related                                                                              executive officer and any related
                                           person’s interest in each transaction                   following categories when a transaction in
                                                                                                   which such person had a direct or indirect            compensation solely resulting from that
                                           each of which shall be computed                         material interest occurred or existed:                employment relationship or transaction need
                                           without regard to the amount of profit                     i. A security holder covered by Item 403(a)        not be provided pursuant to paragraph (a) of
                                           or loss.                                                (§ 228.403(a)); or                                    this Item if:
                                              (4) In the case of indebtedness,                        ii. Any immediate family member of any                a. The compensation arising from the
                                           disclosure of the amount involved in the                such security holder, which means any child,          relationship or transaction is reported
                                           transaction shall include the largest                   stepchild, parent, stepparent, spouse, sibling,       pursuant to Item 402 (§ 228.402); or
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                                                                                                   mother-in-law, father-in-law, son-in-law,                b. The executive officer is not an
                                           aggregate amount of principal
                                                                                                   daughter-in-law, brother-in-law, or sister-in-        immediate family member of a related person
                                           outstanding during the last two years,                                                                        (as specified in Instruction 1. to paragraph (a)
                                                                                                   law, of such security holder and any person
                                           the amount thereof outstanding as of the                (other than a tenant or employee) sharing the         of this Item) and such compensation would
                                           latest practicable date, the amount of                  household of such security holder.                    have been reported under Item 402
                                           principal paid during the periods for                      2. For purposes of paragraph (a) of this           (§ 228.402) as compensation earned for
                                           which disclosure is provided, the                       Item, a transaction includes, but is not              services to the small business issuer if the


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                                                            Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules                                                6605

                                           executive officer was a named executive                 percentage of voting securities owned or              committee performing similar functions,
                                           officer as that term is defined in Item                 other basis of control by its immediate               the small business issuer must provide
                                           402(a)(2) (§ 228.402(a)(2)), and such                   parent, if any.                                       the disclosure of directors that are not
                                           compensation had been approved as such by                  (c) Promoters. (1) Small business                  independent with respect to all
                                           the compensation committee of the board of
                                                                                                   issuers that had a promoter at any time               members of the board of directors
                                           directors (or group of independent directors
                                           performing a similar function) of the small             during the past five fiscal years shall:              applying such committee independence
                                           business issuer.                                           (i) State the names of the promoter(s),            standards.
                                              6. Disclosure of compensation to a director          the nature and amount of anything of                     (1) In determining whether or not the
                                           need not be provided pursuant to paragraph              value (including money, property,                     director or nominee for director is
                                           (a) of this Item if the compensation is                 contracts, options or rights of any kind)             independent for the purposes of
                                           reportable pursuant to Item 402(f)                      received or to be received by each                    paragraph (a) of this Item, the small
                                           (§ 228.402(f)).                                         promoter, directly or indirectly, from                business issuer shall use the applicable
                                              7. In the case of a transaction involving            the small business issuer and the nature
                                           indebtedness, if the lender is a bank, savings
                                                                                                                                                         definition of independence, as follows:
                                                                                                   and amount of any assets, services or                    (i) If the small business issuer is a
                                           and loan association, or broker-dealer
                                                                                                   other consideration therefor received or              listed issuer whose securities are listed
                                           extending credit under Federal Reserve
                                           Regulation T (12 CFR part 220) and the loans            to be received by the small business                  on a national securities exchange or in
                                           are not disclosed as nonaccrual, past due,              issuer; and                                           an inter-dealer quotation system which
                                           restructured or potential problems (see Item               (ii) As to any assets acquired or to be            has requirements that a majority of the
                                           III.C.1. and 2. of Industry Guide 3, Statistical        acquired by the small business issuer                 board of directors be independent, the
                                           Disclosure by Bank Holding Companies (17                from a promoter, state the amount at                  small business issuer’s definition of
                                           CFR 229.802(c))), disclosure under paragraph            which the assets were acquired or are to              independence that it uses for
                                           (a) of this Item may consist of a statement,            be acquired and the principle followed
                                           if such is the case, that the loans to such                                                                   determining if a majority of the board of
                                                                                                   or to be followed in determining such                 directors is independent in compliance
                                           persons:                                                amount, and identify the persons
                                              a. Were made in the ordinary course of                                                                     with the listing standards applicable to
                                           business;
                                                                                                   making the determination and their                    the small business issuer. When
                                              b. Were made on substantially the same               relationship, if any, with the small                  determining whether the members of a
                                           terms, including interest rates and collateral,         business issuer or any promoter. If the               committee of the board of directors are
                                           as those prevailing at the time for comparable          assets were acquired by the promoter                  independent, the small business issuer’s
                                           loans with persons not related to the lender;           within two years prior to their transfer              definition of independence that it uses
                                           and                                                     to the small business issuer, also state              for determining if the members of that
                                              c. Did not involve more than the normal              the cost thereof to the promoter.
                                           risk of collectibility or present other                                                                       specific committee are independent in
                                                                                                      (2) Small business issuers shall
                                           unfavorable features.                                                                                         compliance with the independence
                                                                                                   provide the disclosure required by
                                              8. A person who has a position or                                                                          standards applicable for the members of
                                                                                                   paragraphs (c)(1)(i) and (c)(1)(ii) of this
                                           relationship with a firm, corporation, or other                                                               the specific committee in the listing
                                                                                                   Item as to any person who acquired
                                           entity that engages in a transaction with the                                                                 standards of the national securities
                                           small business issuer shall not be deemed to            control of a small business issuer that is
                                                                                                                                                         exchange or inter-dealer quotation
                                           have an indirect ‘‘material’’ interest within           a shell company, or any person that is
                                                                                                                                                         system that the small business issuer
                                           the meaning of paragraph (a) of this Item               part of a group, consisting of two or
                                                                                                                                                         uses for determining if a majority of the
                                           where:                                                  more persons that agree to act together
                                                                                                                                                         board of directors are independent. If
                                              a. The interest arises only:                         for the purpose of acquiring, holding,
                                              i. From such person’s position as a director                                                               the small business issuer does not have
                                                                                                   voting or disposing of equity securities
                                           of another corporation or organization which                                                                  independence standards for a
                                                                                                   of a small business issuer, that acquired
                                           is a party to the transaction; or                                                                             committee, the independence standards
                                                                                                   control of a small business issuer that is
                                              ii. From the direct or indirect ownership by                                                               for that specific committee in the listing
                                                                                                   a shell company.
                                           such person and all other persons specified                                                                   standards of the national securities
                                           in Instruction 1 to paragraph (a) of this Item,
                                                                                                      8. Add § 228.407 to read as follows:
                                                                                                                                                         exchange or inter-dealer quotation
                                           in the aggregate, of less than a ten percent            § 228.407 (Item 407) Corporate