On December 16, 2009, the Securities and Exchange Commission (the “SEC”) adopted amendments to its current proxy disclosure rules to require additional disclosures regarding compensation and corporate governance policies.

The new rules require enhanced disclosure of:

1. compensation policies and their relation to risk management;
2. potential conflicts of interests with compensation consultants;
3. aggregate grant date fair value for equity awards;
4. director and director nominee qualifications and background;
5. diversity policies relating to board membership;
6. public company directorships and legal proceedings;
7. board leadership structure and rationale; and
8. shareholder voting results.

The rules become effective February 28, 2010 and are applicable to the 2010 proxy season.

COMPENSATION POLICIES AND THEIR RELATION TO RISK MANAGEMENT

The new rules require discussion of compensation policies for all employees, rather than just named executive officers, if those compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. The adopting release provides the following situations which could potentially trigger the enhanced disclosure:

• a particular business unit accounts for a significant portion of the company’s risk profile;
• the compensation of a particular business unit is structured significantly differently from that of other units;
• a particular business unit is significantly more profitable than other units;
• the compensation expense of a particular business unit represents a significant percentage of the company’s revenues; or
• compensation policies or practices vary significantly from the company’s overall risk and reward structure, such as when the timing for performance-based bonuses or incentive awards occurs significantly before receipt of anticipated income or expiration of associated risks to the company.

The new rules also provide examples of the types of issues that companies should discuss and analyze, such as:

• the general design philosophy, and manner of implementation, of the company’s compensation policies and practices for employees whose behavior would be most affected by the incentives established by the policies and practices, as these policies and practices relate to or affect risk taking by those employees on behalf of the company;
• the company’s risk assessment or incentive considerations, if any, in structuring its compensation policies and practices or in awarding and paying compensation;
• how the company’s compensation policies and practices relate to the realization of risks resulting from the actions of employees in both the short term and the long term, such as through policies requiring claw-backs or imposing holding periods;
• the company’s policies regarding adjustments to its compensation policies and practices to address changes in its risk profile;
• material adjustments the company has made to its compensation policies and practices as a result of changes in its risk profile; or
• the extent to which the company monitors its compensation policies and practices to determine whether its risk management objectives are being met with respect to incentivizing its employees.

These lists are not intended to be exhaustive and SEC staff has indicated that the nature and extent of the specific disclosures will vary, depending on the particular company and its compensation policies.

These disclosures are not required to be included in the Compensation Discussion and Analysis, but rather, in the appropriate disclosures in the compensation section of a company’s proxy statement and Form 10-K. Furthermore, there is no requirement to affirmatively state that compensation policies and practices do not create the types of risk covered by the new rule. In considering whether any disclosure is necessary, companies may take into account offsetting measures or controls.

POTENTIAL CONFLICTS OF INTEREST WITH COMPENSATION CONSULTANTS

In addition to the current rule requiring disclosure of the role of compensation consultants in recommending executive or director compensation, the new rules require expanded disclosure of the fees paid to compensation consultants.

• Consultant Hired by Board. If the board, compensation committee or its equivalent engaged a compensation consultant to provide recommendations regarding executive or director compensation, and the consultant also provided non-executive compensation consulting services, the company must provide fee and related disclosure where the fees for the non-executive compensation consulting services exceed $120,000 during the company’s fiscal year.
  • If the $120,000 threshold is met, disclosure of both the aggregate fees paid for the executive compensation consulting services and nonexecutive compensation consulting services is required.
  • Disclosure is also required as to whether management recommended or made the decision that the consultant provide the nonexecutive compensation consulting services and whether the board approved of these services.
• Consultant Hired by Management/Company. If the board has not engaged its own compensation consultant, but a compensation consultant is providing both executive compensation consulting services and non-executive compensation consulting services to management or the company, the company must provide fee and related disclosure where the fees for the nonexecutive compensation consulting services exceed $120,000 during the company’s fiscal year.
• Different Consultant for Board and Management Exception. If both the board and management have engaged different compensation consultants, then fee and related disclosure for consultants that work with management is not required.
• Broad-Based Plan or Non-Customized Survey Exception. Disclosure is not required where the compensation consultant provides services involving broad-based non-discriminatory plans or information, such as surveys, that are not customized for the company or are customized based on parameters that are not developed by the consultant.
  • This exception would not be available if the consultant provided advice in connection with the survey.

Due to competitive concerns stated in comments to the proposed rules issued by the SEC, the new rules, as adopted, do not require disclosure of the nature and extent of any additional services provided by the compensation consultant; however, companies may voluntarily provide this type of information.

AGGREGATE GRANT DATE FAIR VALUE FOR EQUITY GRANTS

Under the SEC’s new requirements, disclosure regarding stock and option awards included in the Summary Compensation Table and Director Compensation Table must be based on the aggregate grant date fair value of the awards under FASB ASC Topic 718 (formerly referred to as FAS 123(r)). This replaces currently mandated disclosure of the annual accounting expense of such equity awards. Companies will also be required to recalculate amounts included in each table for the prior fiscal years presented in the table based on the new standard.

With respect to performance-based awards, the new rules require that the value of such awards be calculated based on the probable outcome of the performance condition(s) determined as of the grant date. The Summary Compensation Table and Director Compensation Table must each include a footnote, if applicable, reporting the maximum value that can be earned under a performance award, assuming the highest level of the performance condition(s) is probable.

DIRECTOR AND DIRECTOR NOMINEE QUALIFICATIONS AND BACKGROUND

The new rules expand the disclosure with respect to the qualifications of directors and nominees to include the following:

• the qualifications, attributes or skills that make the individual eligible to serve as a director, in light of the company’s business and structure;
• a discussion regarding whether certain information led the board to conclude that the person should serve as a director; and
• disclosure about the person’s particular areas of expertise or other relevant qualifications (which may cover a period of more than the prior five years).

The rule complements the existing requirement to disclose any specific minimum qualifications that the nominating committee believes must be met by a nominating committee recommended nominee for the board as well as any specific qualities or skills that the nominating committee believes are necessary for one or more of the company’s directors to possess.

The new rules also require disclosure of other directorships held by any current director or nominee for director in any public company and registered investment company at any time during the past five years. This modifies the previous requirement for disclosure of only current directorships with public companies or registered investment companies. Furthermore, the new rules lengthen the period of time for which disclosure of legal proceedings is required from five to ten years, and expands the types of legal proceedings that must be disclosed to include disclosure regarding (a) involvement in mail or wire fraud or fraud, (b) violations of federal or state securities, commodities, banking or insurance laws and regulations and (c) disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.

DIVERSITY POLICIES RELATING TO BOARD MEMBERSHIP

In addition to disclosure of director and nominee qualifications, companies must also disclose whether and how their nominating committee considers diversity in identifying nominees for director. Companies must disclose how policies regarding the consideration of diversity in identifying director nominees are implemented and how the nominating committee (or the board) assesses the effectiveness of the policy.

BOARD LEADERSHIP STRUCTURE AND RISK OVERSIGHT

Under the new rules, companies are now required to discuss their board leadership structure and the reasons why they believe that it is an appropriate structure for their company. Companies must disclose whether and why they have chosen to combine or separate the principal executive officer and board chair positions. If the company has a lead independent director, it must disclose the rationale for this position and the specific role that the lead independent director plays.

Companies must also disclose the board’s role in the oversight of risk, (such as through the whole board, a separate risk committee or the audit committee), as well as the board’s role in risk management practices in such areas as credit risk, liquidity risk and operational risk. This disclosure may include, if relevant, how the board receives information from the individuals who supervise the day-to-day risk management of the company.

REPORTING OF SHAREHOLDER VOTING RESULTS

In addition to the rules summarized above, the new rules require preliminary or final shareholder voting results to be filed on Form 8-K within four business days following the end of the meeting at which the vote was held. If the final results cannot be reported in the original Form 8-K, the final results must be reported in an amendment to the original report within four business days after the final voting results are known.