that we propose today would be appropriate because of the scope of the
direct and indirect interests covered by our disclosure requirements,
because related persons include persons not covered by the
prohibitions, and because there are certain exceptions to the
prohibitions. We propose, however, to eliminate the current distinction
between indebtedness and other types of related person transactions.
---------------------------------------------------------------------------

    \244\ Codified in Section 13(k) of the Exchange Act [15 U.S.C.
78m(k)].
---------------------------------------------------------------------------

    As a result of integrating paragraph (c) of Item 404 into paragraph
(a) of Item 404, the proposals would change some situations in which
indebtedness disclosure is required. First, disclosure of indebtedness
transactions would be required with regard to all related persons
covered by the related person transaction disclosure requirement,
including significant shareholders.\245\ Second, the rule proposals
would require disclosure of all material indirect interests in
indebtedness transactions of related persons, including significant
shareholders and immediate family members.\246\ Disclosure of material
indirect interests of these related persons in transactions involving
the company currently is, and would continue to be, required by Item
404(a). Currently, Item 404(c) requires disclosure of specific indirect
interests of directors, nominees for director, and executive officers
of the registrant in indebtedness through corporations, organizations,
trusts, and estates.\247\ We believe that disclosure requirements for
indebtedness and for other related person transactions should be
congruent. In particular, we believe that loans by companies other than
financial institutions should be treated like any other related person
transactions, and, as discussed below, we propose to address certain
ordinary course loans by financial institutions in an instruction to
Item 404(a).
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    \245\ The related person transaction disclosure requirement in
current Item 404(a) covers significant shareholders, while the
indebtedness disclosure requirement in current Item 404(c) does not.
The significant shareholders covered would continue to be any
security holder who is known to the registrant to own of record or
beneficially more than five percent of any class of the registrant's
voting securities. Proposed Instruction 1.b. to Item 404(a).
    \246\ As a result of integrating pragraph (c) of Item 404 into
paragraph (a) of Item 404, the rule proposals would set a $120,000
threshold and require disclosure only if there is a direct or
indirect material interest in such an indebtedness transaction,
while Item 404(c) currently generally requires disclosure of all
indebtedness exceeding $60,000.
    \247\ Disclosure of these interests currently is reuqired by
subparagraphs (c)(4) and (c)(5) of Item 404. Under the rule
proposals, these subparagraphs would be eliminated. See note 237 for
a full description fo the related parties specified in these
subparagraphs.
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Request for Comment
     Is our proposal appropriate in light of the prohibition on
personal loans to officers and directors in the Sarbanes-Oxley Act?
     Should we combine the related person and indebtedness
disclosure requirements in paragraphs (a) and (c) of Item 404? As a
result of combining these disclosure requirements, would there be
categories of indebtedness transactions for which disclosure would be
required that should not be required or for which disclosure would not
be required that should be disclosed?
     Should the disclosure requirements for indebtedness be
extended to significant shareholders?
b. Definitions
    We propose to define the terms ``transaction,'' ``related person''
and ``amount involved'' to streamline Item 404(a) and clarify the broad
scope of financial transactions and relationships covered by the rule.

    The term ``transaction'' would have a broad scope in proposed Item
404(a).\248\ As proposed, this term is not to be interpreted narrowly,
but rather would broadly include, but not be limited to, any financial
transaction, arrangement or relationship or any series of similar
transactions, arrangements or relationships. The proposals also would
specifically note that the term ``transactions'' is defined to include
indebtedness and guarantees of indebtedness.
---------------------------------------------------------------------------

    \248\ The definition of ``transaction'' is in proposed
Instruction 2 to Item 404(a).
---------------------------------------------------------------------------

    The proposed definition of ``related person'' would identify the
persons covered, and clarify the time periods during which they would
be covered. As proposed, the term ``related person'' \249\ would mean
any person who was in any of the following categories at any time
during the specified period for which disclosure under paragraph (a) of
Item 404 would be required:
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    \249\ The definition of ``related person'' is in proposed
Instruction 1 to Item 404(a).
---------------------------------------------------------------------------

     Any director or executive officer of the registrant and
his immediate family members; and
     If disclosure were provided in a proxy or information
statement involving the election of directors, any nominee for director
and the immediate family members of any nominee for director.
In addition, a security holder known to the registrant to own of record
or beneficially more than five percent of any class of the company's
voting securities or any immediate family member of any such person,
when a transaction in which such security holder or family member had a
direct or indirect material interest occurred or existed would also be
a related person.

    This is the same list of persons covered by current Item 404(a).
This proposed definition of ``related person'' would result in
requiring disclosure for all transactions involving the company and a
person (other than a significant shareholder or family member of such
shareholder) that occurred during the last fiscal year, if the person
was a ``related person'' during any part of that year.\250\ A person
who had such a position or relationship giving rise to the person being
a ``related person'' during only part of the last fiscal year may have
had a material interest in a transaction with the registrant during
that year. Although current Item 404(a) does not specifically indicate
whether disclosure is required for the transaction in this situation,
the history of Item 404 suggests that disclosure would be required if
the requisite relationship existed at the time of the transaction, even
if the person was no longer a related person at the end of the
year.\251\ We believe that, because of the potential for abuse and the
close proximity in time between the transaction and the person's status
as a ``related person,'' it is appropriate to require disclosure for
transactions in which the person had a material interest occurring at
any time during the fiscal year. For example, it is possible that a
material interest of a person in a transaction during this proximity in
time could influence the person's performance of his or her duties.
---------------------------------------------------------------------------

    \250\ The principle for disclosure would only apply to nominees
for director if disclosure were being provided in a proxy or
information statement involving the election of directors. Also,
ongoing disclosure would not be required regarding nominees for
director who were not elected (unless a nominee was nominated again
for director).
    \251\ This position, which had been included in the proxy rule
provisions that were the precursor to Item 404, was deleted from
those provisions in 1967 as duplicative of a note that applied to
all of the disclosure required in Schedule 14A (including the
related party disclosure requirement in Schedule 14A). Adoption of
Amendments to Proxy Rules and Information Rules, Release No. 34-8206
(Dec. 14, 1967) [32 FR 20960], at ``Schedule 14A--Item 7(f).'' Note
C to Schedule 14A currently provides that ``information need not be
included for any portion of the period during which such person did
not hold any such position or relationship, provided a statement to
that effect is made.'' The rule proposals would amend Note C to
Schedule 14A so that it would no longer apply to disclosure of
related person transactions.
---------------------------------------------------------------------------

    We believe that transactions with persons who have been or who will
become significant shareholders (or their family members), but are not
at the time of the transaction, raise different considerations and are
harder to track, and thus we propose to exclude them. Disclosure would
be required, however, regarding a transaction that begins before a
significant shareholder becomes a significant shareholder, and
continues (for example, through the on-going receipt of payments) on or
after the person becomes a significant shareholder.
    Under the rule proposals, the term ``immediate family member'' of a
related person would mean any child, stepchild, parent, stepparent,
spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-
law, brother-in-law, or sister-in-law, and any person (other than a
tenant or employee) sharing the household of any director, nominee for
director, executive officer, or significant shareholder of the
registrant.\252\ The proposed definition would differ from the current
definition in that it includes stepchildren, stepparents, and any
person (other than a tenant or employee) sharing the household of a
related person.
---------------------------------------------------------------------------

    \252\ These definitions would replace current instructions to
paragraphs (a) and (c) of Item 404.
---------------------------------------------------------------------------

    The proposed definition of ``amount involved'' would incorporate
two concepts included in current Item 404 regarding how to determine
the ``amount involved'' in transactions, and to clarify that the
amounts reported must be in dollars even if the amount was set or
expensed in a different currency.\253\ Under the proposals, the term
``amount involved'' would mean the dollar value of the transaction, or
series of similar transactions, and would include:
---------------------------------------------------------------------------

    \253\ The definition of ``amount involved'' is in proposed
Instruction 3 to Item 404(a).
---------------------------------------------------------------------------

     In the case of any lease or other transaction providing
for periodic payments or installments, the aggregate amount of all
periodic payments or installments due on or after the beginning of the
company's last fiscal year, including any required or optional payments
due during or at the conclusion of the lease; \254\ and
---------------------------------------------------------------------------

    \254\ This proposal is based on current Instruction 3 to Item
404(a).
---------------------------------------------------------------------------

     In the case of indebtedness, the largest aggregate
principal amount of all indebtedness outstanding at any time since the
beginning of the company's last fiscal year and all amounts of interest
payable on it during the last fiscal year.\255\
---------------------------------------------------------------------------

    \255\ This proposal is based on and clarifies current Item
404(c).
---------------------------------------------------------------------------

Request for Comment
     Does the definition of ``transaction'' make clear its
broad scope? Are there any additional categories that it should
specifically identify? Alternatively, is it overly inclusive? If so,
explain how.
     Should the same categories of people be covered by the
disclosure requirements currently in paragraphs (a) and (c) of Item
404? Specifically, are there any persons who would be defined as
``related persons'' for whom indebtedness disclosure should not be
required or are there any additional persons who should be covered?
     The proposed changes to Item 404 would require disclosure
of indirect interests in indebtedness of related persons. Should they?
     Should disclosure be required regarding portions of a
period during which a person did not have the relationship giving rise
to the disclosure requirement? Is it appropriate, as we propose, to
exclude significant shareholders and their immediate family members
from this approach?
     Should we expand the definition of ``immediate family
member'' as proposed? Specifically, are there any

categories of people that should be added to, or removed from, the
proposed definition?
     In 2002 we issued a release regarding MD&A disclosure. At
that time, we noted the possible need for related party disclosure in
circumstances additional to those specified in Item 404.\256\ Are there
any circumstances that fall within the MD&A requirements that should
also be covered by Item 404 where disclosure currently is not required,
or would not be required under the rule proposals?
---------------------------------------------------------------------------

    \256\ The release stated that:
    Registrants should * * * consider the need for [MD&A] disclosure
about parties that fall outside the definition of ``related
parties,'' but with whom the registrant or its related parties have
a relationship that enables the parties to negotiate terms of
material transactions that may not be available from other, more
clearly independent, parties on an arm's-length basis. For example,
an entity may be established and operated by individuals that were
former senior management of, or have some other current or former
relationship with, a registrant. The purpose of the entity may be to
own assets used by the registrant or provide financing or services
to the registrant. Although former management or persons with other
relationships may not meet the definition of a related party
pursuant to FAS 57, the former management positions may result in
negotiation of terms that are more or less favorable than those
available on an arm's-length basis from clearly independent third
parties that are material to the registrant's financial position or
results of operations. In some cases, investors may be unable to
understand the registrant's reported results of operations without a
clear explanation of these arrangements and relationships.
    Commission Statement about Management's Discussion and Analysis
of Financial Condition and Results of Operations, Release No. 33-
8056 (Jan. 22, 2002) [67 FR 3746], at Section II.C.
---------------------------------------------------------------------------

     Is there any reason to change the current meaning of
amount involved in transactions involving leases, which we propose to
retain?
2. Disclosure Requirements
    Proposed subparagraphs of Item 404(a) would provide the disclosure
requirements for related person transactions. The company would be
required to describe the transaction, including:
     The person's relationship to the company;
     The person's interest in the transaction with the company,
including the related person's position or relationship with, or
ownership in, a firm, corporation, or other entity that is a party to
or has an interest in the transaction; and
     The dollar value of the amount involved in the transaction
and of the related person's interest in the transaction.\257\
---------------------------------------------------------------------------

    \257\ As is the case today, the dollar value would be computed
without regard to the amount of the profit or loss involved in the
transaction. Because of the manner in which the value of the amount
involved is calculated for indebtedness, as discussed above,
disclosure with respect to indebtedness would include the largest
aggregate amount of principal outstanding during the period for
which disclosure is provided, as well as the amount of principal and
interest paid during the period for which disclosure is provided,
the aggregate amount of principal outstanding as of the latest
practicable date, and the rate or amount of interest payable on the
indebtedness.
---------------------------------------------------------------------------

    Registrants would also be required to disclose any other
information regarding the transaction or the related person in the
context of the transaction that is material to investors in light of
the circumstances of the particular transaction.
    Consistent with the principles-based approach that we propose to
apply to related person transaction disclosure, we have, as noted
above, eliminated many of the instructions that provide bright line
tests that may be inconsistent with general materiality standards.
Similarly, we propose to eliminate a current instruction that, in the
case of a related person transaction involving a purchase of assets by
the company or sale of assets to the company, calls for specific
disclosure of the cost of the assets if acquired within two years of
the transaction. We would note, however, that if such information was
material under the proposed standards of Item 404(a), because, for
example, the recent purchase price to the related person was materially
less than the sale price to the company, or the sale price to the
related person was materially more than the recent purchase price to
the company, disclosure of such prior purchase price could be
required.\258\
---------------------------------------------------------------------------

    \258\ Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)],
Rules 10b-5 [17 CFR 249,19b-5] and 12b[dash]20 [17 CFR 240.12b-20]
under the Exchange Act and Section 17 of the Securities Act [15
U.S.C. 77q].
---------------------------------------------------------------------------

    Currently, disclosure must be provided regarding amounts possibly
owed to the company under Section 16(b) of the Exchange Act.\259\ The
purpose of related person transaction disclosure differs from the
purpose of Section 16(b). Accordingly, the rule proposals eliminate
this Section 16(b)-related disclosure requirement.
---------------------------------------------------------------------------

    \259\ Current Instruction 4 to Item 404(c).
---------------------------------------------------------------------------

Request for Comment
     Should Item 404 require specific disclosure of the person
determining the registrant's purchase or sale price for registrant
purchases or sales of assets not in the ordinary course of business?
     Should Item 404 require disclosure of Section 16(b)-
related indebtedness? Why or why not?
     Consistent with our principles-based approach, should we
specify any other elements of the transaction for disclosure?
3. Exceptions
    The proposed rules would include categories of transactions that do
not fall within the principle and therefore are subject to disclosure
exceptions that we believe are consistent with our principles-based
approach.\260\ The first category of transactions involves
compensation. Disclosure of compensation to an executive officer would
not be required if:
---------------------------------------------------------------------------

    \260\ Proposed Instructions 4, 5, 6, 7 and 8 to Item 404(a).
---------------------------------------------------------------------------

     The compensation is reported pursuant to Item 402 of
Regulation S-K; or
     The executive officer is not an immediate family member of
a related person and such compensation would have been reported under
Item 402 as compensation earned for services to the company if the
executive officer was a named executive officer, and such compensation
had been approved as such by the compensation committee of the board of
directors (or group of independent directors performing a similar
function) of the company.
    Disclosure of compensation to a director (or nominee for director)
would not be required if:
     The compensation is reported pursuant to proposed Item
402(l).\261\
---------------------------------------------------------------------------

    \261\ Proposed Instructions 5 and 6 to Item 404(a), which would
replace current Instruction 1 to Item 404.
---------------------------------------------------------------------------

    Since the disclosure either would be reported under Item 402, or
would not be required under Item 402, we do not believe the
transactions fall within our proposed principle or will have already
been disclosed. We believe the transactions involving compensation that
do not fall within these exceptions would be within the scope of the
proposed Item 404(a) principle for disclosure. These exceptions would
clarify the limited situations in which disclosure of compensation to
related persons is not required under Item 404.\262\
---------------------------------------------------------------------------

    \262\ In particular, current Instruction 1 to Item 404 covers
the scope of Items 402 and 404. We propose to eliminate this
instruction.
---------------------------------------------------------------------------

    The second category of transactions involves three types of
situations we believe do not raise the potential issues underlying our
principle for disclosure. First, in the case of transactions involving
indebtedness, the following items of indebtedness would be excluded
from the calculation of the amount of indebtedness and need not be
disclosed because they do not have the potential to impact the parties
as the transactions for which disclosure is required: amounts due from
the related person for purchases of goods and services subject to usual
trade terms, for

ordinary business travel and expense payments and for other
transactions in the ordinary course of business.\263\
---------------------------------------------------------------------------

    \263\ This proposal is based on current Instruction 2 to Item
404(c).
---------------------------------------------------------------------------

    Second, also in the case of a transaction involving indebtedness,
if the lender is a bank, savings and loan association, or broker-dealer
extending credit under Federal Reserve Regulation T \264\ and the loans
are not disclosed as nonaccrual, past due, restructured or potential
problems \265\ disclosure under proposed paragraph (a) of Item 404 may
consist of a statement, if correct, that the loans to such persons
satisfied the following conditions:
---------------------------------------------------------------------------

    \264\ 12 CFR Part 220.
    \265\ See Item III.C.1. and 2. of Industry Guide 3, Statistical
Disclosure by Bank Holding Companies [17 CFR 229.802(c)].
---------------------------------------------------------------------------

     They were made in the ordinary course of business;
     They were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with persons not related to the bank; and
     They did not involve more than the normal risk of
collectibility or present other unfavorable features.\266\
---------------------------------------------------------------------------

    \266\ Proposed Instruction 7 to Item 404(a).
---------------------------------------------------------------------------

    This proposed exception is based on a current instruction to Item
404(c),\267\ and is modified to be more consistent with the prohibition
of the Sarbanes-Oxley Act on personal loans to officers and
directors.\268\
---------------------------------------------------------------------------

    \267\ Current Instruction 3 to Item 404(c), which would be
eliminated.
    \268\ Specifically, the language of current Instruction 3 to
paragraph (c) of Item 404 would be modified to replace the reference
``comparable transactions with other persons'' with the phase
``comparable loans with persons not related to the lender.''
---------------------------------------------------------------------------

    Finally, we propose an instruction that indicates that a person who
has a position or relationship with a firm, corporation, or other
entity that engages in a transaction with the company shall not be
deemed to have an indirect ``material'' interest within the meaning of
paragraph (a) of Item 404 if:
     The interest arises only: (i) From the person's position
as a director of another corporation or organization which is a party
to the transaction; or (ii) from the direct or indirect ownership by
such person and all other related persons, in the aggregate, of less
than a ten percent equity interest in another person (other than a
partnership) which is a party to the transaction; or (iii) from both
such position and ownership; or
     The interest arises only from the person's position as a
limited partner in a partnership in which the person and all other
related persons, have an interest of less than ten percent, and the
person is not a general partner of and does not have another position
in the partnership.\269\
---------------------------------------------------------------------------

    \269\ Proposed Instruction 8 to Item 404(a). This proposal is
based on parts A and B of current Instruction 8 to Item 404(a). This
proposal would omit the portion of the current instruction
(Instruction 8.C.) regarding interests arising solely from holding
an equity or a creditor interest in a person other than the company
that is a party to the transaction, when the transaction is not
material to the other person. This portion of the current
instruction may result in inappropriate non-disclosure of
transactions without regard to whether they are material to the
company. In addition, we propose to eliminate current Instruction 6
to Item 404(a) that covers a subset of transactions covered by this
proposed instruction, and therefore is duplicative.
---------------------------------------------------------------------------

Request for Comment
     Does proposed Item 404(a) simplify and clarify the
requirements currently contained in paragraphs (a) and (c) of Item 404?
     Would the proposed rule clarify the situations in which
compensation would be reportable under Item 404? Are there any
categories of compensation for which it would be unclear whether
disclosure would be required under proposed Item 404?
     We propose to exclude from the ``amount involved''
disclosure requirements indebtedness due for purchases subject to usual
trade terms, ordinary business travel and expense payments, and
ordinary course business transactions as is currently the case. Is this
exclusion appropriate? Why or why not?
     Do the current instructions that we propose to modify or
eliminate provide necessary guidance for determining if disclosure is
necessary? Should any of these current instructions be retained? Should
other instructions be added to make the application of the principle
for disclosure clearer?
     Does proposed Instruction 8 to Item 404(a), which
indicates that a person having the specified positions or relationships
with a person that engages in a transaction with the company shall not
be deemed to have an indirect material interest in the transaction,
provide sufficient guidance for determining whether disclosure is
necessary in the circumstances identified in the instruction? Should
the potential exclusions contemplated in the current instructions to
Item 404(a), including current Instruction 6 (excluding remuneration
transactions for services when the person's interest arises solely from
a ten percent equity ownership interest) and current Instruction 8.C.
(excluding transactions where the interest arises from an equity or
creditor interest in another person and the transaction is not material
to the other person) be retained or expanded?

B. Procedures for Approval of Related Person Transactions

    We propose adopting a new requirement for disclosure of the
policies and procedures established by the company and its board of
directors regarding related person transactions. State corporate law
and increasingly robust corporate governance practices support or
provide for such procedures in connection with transactions involving
conflicts of interest.\270\ We believe that this type of information is
material to investors, and our rule proposals would therefore require
disclosure of policies and procedures regarding related person
transactions under new paragraph (b) of Item 404.
---------------------------------------------------------------------------

    \270\ Del. Code Ann. tit. 8, Sec.  144 (2004). See also NYSE,
Inc. Listed Company Manual Section 307.00 and NASD Manual,
Marketplace Rules 4350(h) and 4360(i).
---------------------------------------------------------------------------

    Specifically, the proposal would require a description of the
company's policies and procedures for the review, approval or
ratification of transactions with related persons that would be
reportable under paragraph (a) of Item 404. The description would
include the material features of these policies and procedures that are
necessary to understand them. While the material features of such
policies and procedures would vary depending on the particular
circumstances, examples of such features may include, in given cases,
among other things:
     The types of transactions that are covered by such
policies and procedures, and the standards to be applied pursuant to
such policies and procedures;
     The persons or groups of persons on the board of directors
or otherwise who are responsible for applying such policies and
procedures; and
     Whether such policies and procedures are in writing and,
if not, how such policies and procedures are evidenced.
    The proposal would also require identification of any transactions
required to be reported under paragraph (a) of Item 404 where the
company's policies and procedures did not require review, approval or
ratification or where such policies and procedures were not followed.
Request for Comment
     Should we require disclosure regarding the review,
approval or ratification of related person transactions? Should the
rule include the proposed requirements? Are there other types of
information that are

material that should be included in the description of the approval
process?
     Should we require disclosure of transactions required to
be reported under Item 404(a) where a company's policies and procedures
did not require review or were not followed?

C. Promoters

    The proposals would require a company to provide disclosure
regarding the identity of promoters and its transactions with those
promoters if the company had a promoter at any time during the last
five fiscal years. The proposed disclosure would be required in
Securities Act registration statements on Form S-1 (generally, the
registration statement form for initial public offerings, offerings by
unseasoned issuers or those with less than $75 million public float and
offerings by issuers otherwise ineligible to use Form S-3 or S-4) or on
Form SB-2 (a registration statement form that small business issuers
may use) and Exchange Act Form 10 (used to register securities
initially under the Exchange Act) or Form 10-SB (a registration form
that small business issuers may use). The proposed disclosure would
include:
     The names of the promoters;
     The nature and amount of anything of value received by
each promoter from the company and the nature and amount of any
consideration received by the company; and
     Additional information regarding any assets acquired by
the company from a promoter.
    The proposed disclosure requirements are consistent with those
currently required regarding promoters. However, this disclosure is not
currently required if the company has been organized more than five
years ago, even if the company otherwise had a promoter within the last
five years. Our staff's experience in reviewing registration
statements, especially of smaller companies, suggests that the more
appropriate five-year test would relate to the period of time during
which the company had a promoter for which the disclosure should be
provided, as our proposal provides, rather than the date of
organization of the company.\271\ We also are proposing to require the
same disclosure that is required for promoters for any person who
acquired control, or is part of a group that acquired control, of an
issuer that is a shell company.\272\
---------------------------------------------------------------------------

    \271\ The proposed rules would similarly revise the disclosure
requirement referencing promoters in Item 401(g)(1) of Regulation S-
K. In addition, our proposal would add Form SB-2 to the list of
registration statement forms in Item 404 for which promoter
disclosure would be required. While this revision would update the
registration statement forms listed in Item 404, it would not change
the promoter disclosure requirement of Form SB-2.
    \272\ Proposed Item 404(c)(2). The term ``group'' would have the
same meaning as in Exchange Act Rule 13d-5(b)(1) [17 CFR 240.13d-
5(b)(1)], that is, any two or more persons that agree to act
together for the purpose of acquiring, holding, voting, or disposing
of equity securities of an issuer.
---------------------------------------------------------------------------

Request for Comment
     Does the proposed requirement cover the circumstances
where promoter disclosure would be material to investors? If not, what
other circumstances should be covered?
     Does the proposed requirement cover circumstances where
the required disclosure would not be material to investors? If so, in
what circumstance?

D. Corporate Governance Disclosure

    We propose to consolidate our disclosure requirements regarding
director independence and related corporate governance disclosure
requirements under a single disclosure item and to update such
disclosure requirements regarding director independence to reflect our
current requirements and current listing standards.\273\
---------------------------------------------------------------------------

    \273\ Proposed Item 407 of Regulations S-K and S-B. As proposed,
Item 407 would consolidate corporate governance disclosure
requirements located in several places under our rules and the
principal markets' listing standards, including in particular our
requirements under current Items 306, 401(h), (i) and (j), 402(j)
and 404(b) of Regulation S-K and Item 7 of Schedule 14A under the
Exchange Act. We are not proposing any changes to the substance of
Item 306, Item 401(h), (i) or (j), or Item 402(j) as part of this
consolidation. However, the proposed rules would reorder some
provisions in Item 306 and reflect the relevant Public Company
Accounting Oversight Board rules. See PCAOB Rulemaking: Public
Company Accounting Oversight Board; Order Approving Proposed
Technical Amendments to Interim Standards Rules, Release No. 34-
49624 (Apr. 28, 2004) [69 FR 24199]; and Order Regarding Section
101(d) of the Sarbanes-Oxley Act of 2002, Release No. 33-8223 (Apr.
25, 2003) [68 FR 2336].
---------------------------------------------------------------------------

    Our current requirements provide for disclosure of business
relationships between a director or nominee for director and the
company that may bear on the ability of directors and nominees for
director to exercise independent judgment in the performance of their
duties.\274\ In addition, as directed by the Sarbanes-Oxley Act of
2002, we adopted a rule requiring national securities exchanges to
adopt listing standards requiring independent audit committees meeting
the standards of our rule.\275\ Further, in 2003 and 2004, we approved
amendments to additional listing standards, including those of the New
York Stock Exchange and Nasdaq,\276\ that imposed specific additional
independence standards for boards of directors, and the compensation
and nominating committees or persons performing similar functions.
Currently, each listed company determines whether its directors and
committee members are independent based on definitions that it adopts
which, at a minimum, are required to comply with the listing standards
applicable to the company.
---------------------------------------------------------------------------

    \274\ Current Item 404(b).
    \275\ Section 10A(m) of the Exchange Act [15 U.S.C. 78j-1(m)],
as added by Section 301of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
7201 et seq.); Exchange Act Rule 10A-3 [17 CFR 240.10A-3]; and
Standards Relating to Listed Company Audit Committees, Release No.
33-8220 (Apr. 9, 2003) [68 FR 18788].
    \276\ NASD and NYSE Listing Standards Release. The other
exchanges have also adopted corporate governance listing standards.
See Order Granting Approval of Proposed Rule Change by the American
Stock Exchange LLC and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 2 Relating to Enhanced
Corporate Governance Requirements Applicable to Listed Companies,
Release No. 34-48863 (Dec. 1, 2003) [68 FR 68432]; Notice of Filing
and Order Granting Accelerated Approval of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock Exchange,
Inc. Relating to Corporate Governance, Release No. 34-49881 (June
17, 2004) [69 FR 35408]; Order Approving Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago
Stock Exchange, Inc. Relating to Governance of Issuers on the
Exchange, Release No. 34-49911 (June 24, 2004) [69 FR 39989]; Notice
of Filing and Order Granting Accelerated Approval of Proposed Rule
Change by the Boston Stock Exchange, Inc. to Amend Chapter XXVII,
Section 10 of the Rules of the Board of Governors by Adding
Requirements Concerning Corporate Governance Standards of Exchange-
Listed Companies, Release No. 34-49955 (July 1, 2004) [69 FR 41555];
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendment Nos. 1 and 2 Thereto by the Chicago Board
Options Exchange, Incorporated, Relating to Enhanced Corporate
Governance Requirements for Listed Companies, Release No. 34-49995
(July 9, 2004) [69 FR 42476]; Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change and Amendment Nos. 1
and 2 Thereto by National Stock Exchange Relating to Corporate
Governance, Release No. 34-49998 (July 9, 2004) [69 FR 42788]; and
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
by the Pacific Exchange, Inc. to Amend the Corporate Governance
Requirements for PCX Listed Companies, Release No. 34-50677 (Nov.
16, 2004) [69 FR 68205].
    The Commission has previously received a rulemaking petition
submitted by the AFL/CIO, which requested the Commission to amend
Items 401 and 404 of Regulation S-K to require disclosure about
transactions with non-profit organizations (letter dated Dec. 12,
2001 from Richard Trumka, Secretary-Treasurer, AFL/CIO, File No. 4-
499, available at http://www.sec.gov/rules/petitions/petn4-499.pdf) and a

rulemaking petition submitted by the Council of Institutional
Investors, which requested amendments to Item 401 of Regulation S-K
to require disclosure of certain transactions between directors,
executive officers and nominees (letter dated Oct. 1, 1997, as
amended Oct. 19, 1998, from Sarah A.B. Teslik, Executive Director,
Council of Institutional Investors, File No. 4-404). We believe
these requests have in large part been addressed by revised listing
standards instituted by the exchanges, so that we are not now
proposing additional action under these petitions.
---------------------------------------------------------------------------

    The proposals would include a disclosure requirement identifying
the

independent directors of the company (and, in the case of disclosure in
proxy or information statements, nominees for director) under the
definition for determining board independence applicable to it. The
proposals would also require disclosure of any members of the
compensation, nominating and audit committee that the company had not
identified as independent under the definition of independence for that
board committee applicable to it.
    More specifically, if the company is an issuer \277\ with
securities listed, or for which it has applied for listing, on a
national securities exchange \278\ or in an automated inter-dealer
quotation system of a national securities association \279\ which has
requirements that a majority of the board of directors be independent,
the proposal would require disclosure of those directors and director
nominees that the company identifies as independent (and committee
members not identified as independent), using a definition for
independence for directors (and for committee members) that is in
compliance with the applicable listing standards. If the company is not
a listed issuer, the proposals would require disclosure of those
directors and director nominees that the company identifies as
independent (and committee members not identified as independent) using
the definition for independence for directors (and for committee
members) of a national securities exchange or a national securities
association, specified by the company. The company would be required to
apply the same definition consistently to all directors and also to use
the independence standards of the same national securities exchange or
national securities association for purposes of determining the
independence of members of the compensation, nominating and audit
committees.\280\
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    \277\ Under the rule proposals, ``listed issuer'' would have the
same meaning as in Exchange Act Rule 10A-3.
    \278\ Under the rule proposals ``national securities exchange''
means a national securities exchange registered pursuant to Section
6(a) of Exchange Act [15 U.S.C. 78f(a)].
    \279\ Under the rule proposals ``automated inter-dealer
quotation system of a national securities association'' means an
automated inter-dealer quotation system of a national securities
association registered pursuant to Section 15A(a) of the Exchange
Act [15 U.S.C. 78o-3(a)].
    \280\ Similar disclosure is currently required pursuant to Item
7(d)(2)(ii)(C) and Item 7(d)(3)(iv) of Schedule 14A. As part of our
consolidation of these provisions into proposed Item 407, we propose
to revise these provisions to reflect the general approach discussed
above with regard to disclosure of director independence for board
and committee purposes.
---------------------------------------------------------------------------

    The proposals would require an issuer that has adopted definitions
of independence for directors and committee members to disclose whether
those definitions are posted on the company's Web site, or include the
definitions as an appendix to the company's proxy materials at least
once every three years or if the policies have been materially amended
since the beginning of the company's last fiscal year.\281\ Further, if
the policies are not on the company's Web site, or included as an
appendix to the company's proxy statement, the company would have to
disclose in which of the prior fiscal years the policies were included
in the company's proxy statement.
---------------------------------------------------------------------------

    \281\ Proposed Item 407(a)(2).
---------------------------------------------------------------------------

    In addition, the proposals would require, for each director or
director nominee identified as independent, a description of any
transactions, relationships or arrangements not disclosed pursuant to
paragraph (a) of Item 404 that were considered by the board of
directors of the company in determining that the applicable
independence standards were met.
    This independence disclosure would be required for any person who
served as a director of the company during any part of the year for
which disclosure must be provided,\282\ even if the person no longer
serves as director at the time of filing the registration statement or
report or, if the information is in a proxy statement, if the
director's term of office as a director will not continue after the
meeting. In this regard, we believe that the independence status of a
director is material while the person is serving as director, and not
just as a matter of reelection.\283\
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    \282\ However, disclosure would not be required for persons no
longer serving as a director in registration statements under the
Securities Act or the Exchange Act filed at a time when the company
is not subject to the reporting requirements of Exchange Act
Sections 13(a) or 15(d). Disclosure would not be required of anyone
who was a director only during the time period before the company
made its initial public offering if he was no longer a director at
the time of the offering. Proposed Instruction to Item 407(a).
    \283\ For this reason, we do not propose to incorporate the
concept in current Instruction 4 to Item 404(b) into proposed Item
407(a).
---------------------------------------------------------------------------

    The proposals also would revise the current disclosure required
regarding the audit committee and nominating committee \284\ to
eliminate duplicative committee member independence disclosure and to
update the required audit committee charter disclosure requirement for
consistency with the more recently adopted nominating committee charter
disclosure requirements.\285\ As a result, the audit committee charter
would no longer be required to be delivered to security holders if it
is posted on the company's Web site.\286\ We also propose moving the
disclosure required by Section 407 of the Sarbanes-Oxley Act regarding
audit committee financial experts to Item 407, although we are not
proposing any substantive changes to that requirement.
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    \284\ Current Item 7 of Schedule 14A.
    \285\ However, we are not proposing to revise the provision that
the audit committee report is furnished and not filed.
    \286\ Proposed Item 407(d)(1) and Instruction 2 to Item 407.
---------------------------------------------------------------------------

    In addition to the disclosures currently required regarding audit
and nominating committees of the board of directors, we propose
requiring similar disclosure regarding compensation committees.\287\
The company would also be required to describe its processes and
procedures for the consideration and determination of executive and
director compensation including:
---------------------------------------------------------------------------

    \287\ Current Item 7(d) of Schedule 14A. These new proposed
requirements also would be in proposed Item 407(e).
---------------------------------------------------------------------------

     The scope of authority of the compensation committee (or
persons performing the equivalent functions);
     The extent to which the compensation committee (or persons
performing the equivalent functions) may delegate any authority to
other persons, specifying what authority may be so delegated and to
whom;
     Whether the compensation committee's authority is set
forth in a charter or other document, and if so, the company's Web site
address at which a current copy is available if it is so posted, and if
not so posted, attaching the charter to the proxy statement once every
three years;
     Any role of executive officers in determining or
recommending the amount or form of executive and director compensation;
and
     Any role of compensation consultants in determining or
recommending the amount or form of executive and director compensation,
identifying such consultants, stating whether such consultants are
engaged directly by the compensation committee (or persons performing
the equivalent functions) or any other person, describing the nature
and scope of their assignment, the material elements of the
instructions or directions given to the consultants with respect to the
performance of their duties under the engagement and identifying any
executive officer within the company the consultants contacted in
carrying out their assignment.

    In addition, as noted above, disclosure would be required regarding
each member of the compensation committee that the registrant has
identified as not independent.
    Further, the rule proposals would consolidate into this
compensation committee disclosure requirement the disclosure currently
required in Item 402 regarding compensation committee interlocks and
insider participation in compensation decisions.\288\
---------------------------------------------------------------------------

    \288\ Current Item 402(j).
---------------------------------------------------------------------------

    Finally, for registrants other than registered investment
companies, the rule proposals would eliminate an existing proxy
disclosure requirement regarding directors that have resigned or
declined to stand for re-election \289\ which is no longer necessary
since it has been superseded by a disclosure requirement in Form 8-
K.\290\ For registered investment companies, which do not file Form 8-
K, the requirement would be moved to Item 22(b) of Schedule 14A.\291\
Also, the rule proposals would combine various proxy disclosure
requirements regarding board meetings and committees into one
location.\292\ In addition, we propose two instructions to Item 407 to
combine repetitive provisions, one relating to independence disclosure,
and the other relating to board committee charters.\293\
---------------------------------------------------------------------------

    \289\ Item 7(g) of Schedule 14A.
    \290\ Item 5.02(a) of Form 8-K.
    \291\ Proposed Item 22(b)(17) of Schedule 14A.
    \292\ Current paragraphs (d)(1), (f), and (h)(3) of Item 7 of
Schedule 14A would be included in proposed Item 407(b).
    \293\ Proposed Instructions 1 and 2 to Item 407. Proposed
Instruction 2 also includes a requirement that the charter be
provided if it is materially amended.
---------------------------------------------------------------------------

Request for Comment
     Should the disclosure requirements proposed to be
consolidated in Item 407 continue to remain separate? If so, why? Is
the proposed location of this consolidated disclosure appropriate,
including the proposed options for disclosing adopted independence
definitions?
     Are there independence standards that would be preferable
to the ones referenced in proposed new Item 407?
     Should companies that are not listed on a national
securities exchange or on an inter-dealer quotation system of a
national securities association be able to reference their own
standards of independence that they have adopted, or should those
companies be required to refer to established listing standards as
proposed?
     Should we require as proposed a description of
transactions considered (other than those that would be reported under
proposed Item 404(a)) when determining if the independence standards
were met?
     Is there any reason why we should not eliminate the
requirement that companies provide disclosure in their proxy statements
regarding directors who have resigned or declined to stand for re-
election? \294\
---------------------------------------------------------------------------

    \294\ Item 7(g) of Schedule 14A.
---------------------------------------------------------------------------

     Are there circumstances in which disclosure should not be
required under proposed Item 407(a)? Should disclosure not be required
for a director who is no longer a director at the time of filing any
registration statement or report? Should disclosure not be required if
information is being presented in a proxy or information statement for
a director whose term of officer as a director will not continue after
the meeting to which the statement relates?
     Given that registered investment companies do not file
Form 8-K, should we continue to require registered investment companies
to make proxy statement disclosures pursuant to current Item 7(g) of
Schedule 14A regarding directors who have resigned or declined to stand
for re-election?
     Should we also move the disclosure required by Rule 10A-
3(d) (under which companies must disclose whether they have relied on
an exemption from the audit committee independence requirements of Rule
10A-3) to proposed Item 407?
     Should the audit committee charter disclosure requirement
be changed to be consistent with the nominating committee charter
disclosure requirements? Should the compensation committee charter
disclosure requirement be the same? Should there be any changes to the
proposed compensation committee disclosure requirements?
     Are there any disclosure requirements regarding
compensation consultants that we should add to or delete or change from
the proposal?

E. Treatment of Specific Types of Issuers

1. Small Business Issuers
    Proposed Item 404 of Regulation S-B is substantially similar to
proposed Item 404 of Regulation S-K, except for the following two
matters:
     Paragraph (b) relating to policies and procedures for
reviewing related party transactions is proposed not to be included in
Regulation S-B, and
     Regulation S-B would provide for a disclosure threshold of
the lesser of $120,000 or one percent of the average of the small
business issuer's total assets for the last three completed fiscal
years, to require disclosure for small business issuers that may have
material related person transactions even though smaller than the
absolute dollar amount of $120,000.
    Both proposed items would consist of disclosure requirements
regarding related person transactions and promoters. These provisions
of Item 404 of Regulation S-B would be substantially identical to those
of Item 404 of Regulation S-K, except for certain changes conforming
proposed Item 404 of Regulation S-B to current Item 404 of Regulation
S-B. These changes consist of the following:
     Throughout proposed Item 404 of Regulation S-B using the
two year time period for disclosure in current Item 404 of Regulation
S-B;
     Retaining in proposed Item 404 of Regulation S-B an
instruction in current Item 404 of Regulation S-B regarding
underwriting discounts and commissions; \295\ and
---------------------------------------------------------------------------

    \295\ This instruction, which is current Instruction 2 to Item
404 of Regulation S-B, is proposed Instruction 9 to Item 404 of
Regulation S-B.
---------------------------------------------------------------------------

     Not including an instruction in proposed Item 404 of
Regulation S-B regarding the treatment of foreign private issuers that
is included in proposed Item 404 of Regulation S-K.\296\
---------------------------------------------------------------------------

    \296\ This instruction, which is current Instruction 3 to Item
404 of Regulation S-K, is not included in current Item 404 of
Regulation S-B.
---------------------------------------------------------------------------

    In addition, proposed Item 404 of Regulation S-B would retain a
paragraph from current Item 404 of Regulation S-B requiring disclosure
of a list of all parents of the small business issuer showing the basis
of control and as to each parent, the percentage of voting securities
owned or other basis of control by its immediate parent, if any.
    One conforming change that we are not making, however, concerns the
calculation of a related person's interest in a given transaction.
Current Item 404(a) of Regulation S-B differs from current Item 404(a)
of S-K with respect to, among other things, the calculation of the
dollar value of a person's interest in a related transaction. Current
Instruction 4 to Item 404(a) of Regulation S-K specifically provides
that the amount of such interest shall be computed without regard to
the amount of profit or loss involved in the transaction. In contrast,
current Item 404(a) of Regulation S-B contains no such instruction. We
propose that the method of calculation of a related person's interest
in a transaction will be the same for both Regulation S-B and
Regulation S-K. We believe that differences, if any, between the types
of

transactions that small business issuers may engage in with related
persons as compared to transactions of larger issuers would not warrant
a different approach for calculating a related person's interest in a
transaction.
    Proposed Item 407 of Regulation S-K is substantially identical to
proposed Item 407 of Regulation S-B,\297\ except that it would it would
not require disclosure regarding compensation committee interlocks and
insider participation in compensation decisions, since Regulation S-B
currently does not require disclosure of this information.\298\
---------------------------------------------------------------------------

    \297\ Current paragraphs (e), (f), and (g) of Item 401 of
Regulation S-B would become paragraphs (d)(5), (d)(4) and (c)(3),
respectively, of Item 407 of Regulation S-B.
    \298\ This disclosure is currently required under Item 402(j) of
Regulation S-K.
---------------------------------------------------------------------------

Request for Comment
     Should small business issuers be categorically exempted
from any additional aspect of the proposed Item 404 or Item 407
disclosure requirements? If so, which requirements and why? Should any
of the proposed exclusions not be excluded? If so, why?
     Currently Item 404(a) of Regulation S-K states that
companies are not to consider the amount of profit or loss when
computing the amount involved in a transaction, but Item 404 of
Regulation S-B does not include this statement. We propose to provide
the same instruction in both Regulation S-K and Regulation S-B. Should
Item 404(a) of Regulation S-B continue to omit this instruction? Why or
why not?
     Currently Item 404(a) of Regulation S-K specifically
provides for using the value of the aggregate amount of all periodic
payments or installments when computing the amount involved in a
transaction, but Item 404 of Regulation S-B does not. Should Item
404(a) of Regulation S-B, as does proposed Instruction 3 to Item 404(a)
of Regulation S-B, provide for this?
     Is the definition of ``related person'' in Item 404 of
Regulation S-B sufficiently broad? Should this definition be expanded
to include consultants and advisors?
     Should we use a different alternative threshold for
disclosure in proposed Item 404(a) of Regulation S-B? For example the
lesser of $120,000 or a percentage of annual corporate expenses?
2. Foreign Private Issuers
    Currently a foreign private issuer will be deemed to comply with
Item 404 of Regulation S-K if it provides the information required by
Item 7.B. of Form 20-F. The proposals would retain this approach, but
would require that if more detailed information is required to be
disclosed by the issuer's home jurisdiction or a market in which its
securities are listed or traded, that same information must also be
disclosed pursuant to Item 404.
Request for Comment
     Is there any reason to discontinue this treatment of
foreign private issuers? Should a foreign private issuer that is
required to comply with Item 404 (for example, by filing an annual
report on Form 10-K) be required to provide all of the information
required under Item 404 instead of the information required under Form
20-F?
3. Registered Investment Companies
    We propose to revise Items 7 and 22(b) of Schedule 14A to reflect
the reorganization that we have proposed with respect to operating
companies. Under the proposals, information that is currently required
to be provided by registered investment companies under Item 7 would
instead be required by Item 22(b).\299\ The requirements of Item 7 that
are currently applicable to registered investment companies regarding
the nominating and audit committees, board meetings, the nominating
process, and shareholder communications generally would be included in
Item 22(b) by cross-references to the appropriate paragraphs of
proposed Item 407 of Regulation S-K.\300\ The substance of these
requirements would not be altered. In addition, the proposed revisions
to Item 22(b) would directly incorporate disclosures relating to the
independence of members of nominating and audit committees that are
similar to those contained in proposed Item 407(a) of Regulation S-K
and currently contained in Item 7.\301\
---------------------------------------------------------------------------

    \299\ Proposed amendments to Item 7(e) of Schedule 14A. Business
development companies would furnish the information required by Item
7 of Schedule 14A, in addition to the information required by Items
8 and 22(b) of Schedule 14A. See proposed amendments to Items 7, 8,
and 22(b) of Schedule 14A.
    \300\ Proposed Items 22(b)(15)(i) and (ii)(A) and 22(b)(16)(i)
of Schedule 14A. Proposed Item 22(b)(15)(i) would require the
information required by Items 407(b)(1) and (2) and (f),
corresponding to the information that registered investment
companies are required to provide pursuant to current Items 7(f) and
7(h). Proposed Item 22(b)(15)(ii)(A) would require the information
required by proposed Items 407(c)(1) and (2), corresponding to the
information that registered investment companies are required to
provide pursuant to current Items 7(d)(2)(i) and 7(d)(2)(ii) (other
than the nominating committee independence disclosures required by
current Item 7(d)(2)(ii)(C)). Proposed Item 22(b)(16)(i) would
require closed-end investment companies to provide the information
required by proposed Items 407(d)(1) through (3), corresponding to
the information that closed-end investment companies are required to
provide pursuant to current Item 7(d)(3) (other than the audit
committee independence disclosures required by Items
7(d)(3)(iv)(A)(1) and (B)).
    \301\ Proposed Items 22(b)(15)(ii)(B) and (16)(ii) of Schedule
14A. Proposed Item 22(b)(15)(ii)(B) requires disclosure about the
independence of nominating committee members that is similar to
those required by current Item 7(d)(2)(ii)(C) and proposed Item
22(b)(16)(ii) requires disclosure about the independence of audit
committee members that is similar to those required by current Items
7(d)(3)(iv)(A)(1) and (B).
---------------------------------------------------------------------------

    We are also proposing to raise from $60,000 to $120,000 the
threshold for disclosure of certain interests, transactions, and
relationships of each director or nominee for election as director who
is not or would not be an ``interested person'' of an investment
company within the meaning of Section 2(a)(19) of the Investment
Company Act.\302\ This disclosure is required in investment company
proxy and information statements and registration statements. The
increase in the disclosure threshold would correspond to the proposal
to increase the disclosure threshold for Item 404 from $60,000 to
$120,000.
---------------------------------------------------------------------------

    \302\ Proposed amendments to Items 22(b)(7), 22(b)(8), and
22(b)(9) of Schedule 14A; proposed amendments to Items 12(b)(6),
12(b)(7), and 12(b)(8) of Form N-1A; proposed amendments to Items
18.9, 18.10, and 18.11 of Form N-2; proposed amendments to Items
20(h), 20(i), and 20(j) of Form N-3.
---------------------------------------------------------------------------

Request for Comment
     Should we reorganize in the manner proposed the
disclosures that registered investment companies are currently required
to make under Item 7 of Schedule 14A? If not, how should these
disclosures be organized? Should any substantive changes be made to the
proposed disclosures?
     Is it appropriate to adjust to $120,000 the threshold for
disclosure of certain interests, transactions, and relationships of
each director or nominee for election as director who is not or would
not be an ``interested person'' of an investment company? Should there
be no threshold? Should the threshold also operate on a sliding scale
(for example, the lower of $120,000 or 1% of total or net assets for
the last three completed fiscal years or the lower of $120,000 or a
percentage of annual expenses) to capture smaller transactions for
smaller companies? Explain whether a higher or lower threshold, or no
threshold, would result in more effective disclosure.

F. Conforming Amendments

    The changes we propose to Item 404 necessitate conforming
amendments to

other rules that refer specifically to Item 404.
1. Regulation Blackout Trading Restriction
    We are proposing conforming changes to Regulation Blackout Trading
Restriction,\303\ also known as Regulation BTR, which we adopted to
clarify the scope and operation of Section 306(a) \304\ of the
Sarbanes-Oxley Act of 2002 and to prevent evasion of the statutory
trading restriction.\305\ Rule 100 of Regulation BTR defines terms used
in Section 306(a) and Regulation BTR, including the term ``acquired in
connection with service or employment as a director or executive
officer.'' \306\ Under this definition, one of the specified methods by
which a director or executive officer directly or indirectly acquires
equity securities in connection with such service is an acquisition
``at a time when he or she was a director or executive officer, as a
result of any transaction or business relationship described in
paragraph (a) or (b) of Item 404 of Regulation S-K.'' \307\ To conform
this provision of Regulation BTR to the proposed Item 404 amendments,
we propose to amend Rule 100(a)(2) so that it references only
transactions described in paragraph (a) of Item 404.
---------------------------------------------------------------------------

    \303\ 17 CFR 245.100-104.
    \304\ 15 U.S.C. 7244(a), entitled ``Prohibition of Insider
Trading During Pension Fund Blackout Periods.''
    \305\ Insider Trades During Pension Fund Blackout Periods,
Release No. 34-47225 (Jan. 22, 2003) [68 FR 4337]. Section 306(a)
makes it unlawful for any director or executive officer of an issuer
of any equity security (other than an exempted security), directly
or indirectly, to purchase, sell, or otherwise acquire or transfer
any equity security of the issuer (other than an exempted security)
during any pension plan blackout period with respect to such equity
security, if the director or executive officer acquired the equity
security in connection with his or her service or employment as a
director or executive officer. This provision equalizes the
treatment of corporate executives and rank-and-file employees with
respect to their ability to engage in transactions involving issuer
equity securities during a pension plan blackout period if the
securities were acquired in connection with their service to, or
employment with, the issuer.
    \306\ This term is defined in Rule 100(a) of Regulation BTR.
    \307\ Rule 100(a)(2) of Regulation BTR.
---------------------------------------------------------------------------

2. Rule 16b-3 Non-Employee Director Definition
    We also are proposing conforming amendments to the definition of
Non-Employee Director in Exchange Act Rule 16b-3. Section 16(b)
provides an issuer (or shareholders suing on its behalf) the right to
recover from an officer, director, or ten percent shareholder profits
realized from a purchase and sale of issuer equity securities within a
period of less than six months. However, Rule 16b-3 exempts
transactions between issuers of securities and their officers and
directors if specified conditions are met. In particular, acquisitions
from and dispositions to the issuer are exempt if the transaction is
approved in advance by the issuer's board of directors, or board
committee composed solely of two or more Non-Employee Directors.\308\
---------------------------------------------------------------------------

    \308\ Exchange Act Rules 16b-3(d)(1) and 16b-3(e).
---------------------------------------------------------------------------

    The definition of ``Non-Employee Director,'' among other things,
limits these directors to those who:
     Do not directly or indirectly receive compensation from
the issuer, its parent or subsidiary for consulting or other non-
director services, except for an amount that does not exceed the Item
404(a) dollar disclosure threshold;
     Do not possess an interest in any other transaction for
which Item 404(a) disclosure would be required; and
     Are not engaged in a business relationship required to be
disclosed under Item 404(b).
    As described above, the Item 404 proposals would substantially
revise or rescind the Item 404 provisions on which the Non-Employee
Director definition is based. To minimize potential disruptions and
because no problems have been brought to our attention regarding any
aspect of the current definition, the proposed conforming amendment
would continue to permit consulting and similar arrangements subject to
limits measured by reference to the proposed Item 404(a) disclosure
requirements.\309\ The amendment would delete the provision referring
to business relationships subject to disclosure under Item 404(b),
without otherwise revising the text of the rule.\310\ Because the
disclosure threshold of Item 404(a) would be raised from $60,000 to
$120,000, however, the effect in some cases may be to permit previously
ineligible directors to be Non-Employee Directors.\311\ In other cases,
where proposed Item 404(a) may require disclosure of business
relationships not subject to disclosure under current Item 404(b), some
current Non-Employee Directors may become ineligible.
---------------------------------------------------------------------------

    \309\ Because it appears appropriate that the standards for an
exemption from Section 16(b) liability be readily determinable by
reference to the exemptive rule, and not variable depending upon
where the issuer's securities are listed, we do not propose to base
the amended definition on the listing standards for director
independence applicable to the issuer.
    \310\ Exchange Act Rule 16b-3(b)(3)(ii), which defines a Non-
Employee Director of a closed-end investment company as ``a director
who is not an ``interested person'' of the issuer, as that term is
defined in Section 2(a)(19) of the Investment Company Act of 1940,''
would not be revised.
    \311\ As under the current rule, each test referring to Item 404
will be measured by reference to the Regulation S-K Item, even if
the disclosure requirements applicable to the company are governed
by Regulation S-B.
---------------------------------------------------------------------------

Request for Comment
     Should the Rule 16b-3 Non-Employee Director definition
continue to permit consulting or similar arrangements with the issuer,
as proposed?
     Is the proposed Item 404(a) disclosure threshold an
appropriate limit for permitting consulting or similar arrangements?
Instead, should the dollar limit be lower, such as the current $60,000
threshold? Explain the basis for recommending a different dollar limit.
     For business relationships for which disclosure is not
required by current Item 404(b), but would be under proposed Item
404(a), should there be a different test? Are there any particular
transactions or relationships that would become disclosable under
proposed Item 404(a) that should not render a director ineligible to be
a Non-Employee Director? If so, explain why.
     Would continued use of Item 404 as a measure for defining
Non-Employee Directors place an undue burden on companies in forming
their Non-Employee Director committees? Would reference to another
disclosure requirement or standard be better?
3. Other Conforming Amendments
    The changes we propose to Item 404, along with the consolidation of
provisions into Item 407, necessitate conforming amendments to various
forms and schedules under the Securities Act and the Exchange Act. The
rule proposals would amend:
     Forms that require disclosure of the information required
by Item 404 to instead require disclosure of the information required
by proposed Items 404 and 407(a); \312\
---------------------------------------------------------------------------

    \312\ See proposed amendments to Item 15 of Form SB-2, Item
11(n) of Form S-1, Item 18(a)(7)(iii) and Item 19(a)(7)(iii) of Form
S-4, Item 23 of Form S-11, Item 7 of Form 10, Item 13 of Form 10-K,
Item 7 of Form 10-SB, and Item 12 of Form 10-KSB. The proposed
amendments to Forms SB-2, 10-SB and 10-KSB would require disclosure
of the information required by proposed Items 404 and 407(a) of
Regulation S-B.
---------------------------------------------------------------------------

     Some forms that require disclosure of the information
required by Item 404(a) or by Items 404(a) and (c), to instead require
disclosure of the information required by proposed Items 404(a) and
(b), or proposed Item 404(a), as appropriate; \313\
---------------------------------------------------------------------------

    \313\ See proposed amendments to Item 7(b) of Schedule 14A,
which refers to proposed Items 404(a) and (b), and Item 22(b)(11)
and the Instruction to Item 22(b)(11) of Schedule 14A, and Item
5.02(c)(2) of Form 8-K, which refer to proposed Item 404(a). The
proposed amendments to Form 8-K that reference paragraphs (a) and
(b) of Item 404 of Regulation S-B would require disclosure of the
information required by proposed Item 404(a) of Regulation S-B.

---------------------------------------------------------------------------

     A form that cross-references an instruction in Item 404
which we propose to eliminate to instead include the text of this
instruction; \314\
---------------------------------------------------------------------------

    \314\ See proposed amendments to Item 23 of Form S-11.
---------------------------------------------------------------------------

     Item 7 of Schedule 14A to require disclosure of the
information required by proposed Item 407(a) rather than current Item
404(b), and to eliminate current paragraphs (d)-(h) which are
duplicative of proposed Item 407 and replace them with a requirement to
disclose information specified by corresponding paragraphs of Item 407;
     Forms that require disclosure of the information required
by Item 402 to instead require disclosure of the information required
by proposed Item 402 and Item 407(e)(4); \315\
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    \315\ See proposed amendments to Item 8 of Schedule 14A, Item
11(l) of Form S-1, General Instruction I.B.4.(c) to Form S-3, Items
18(a)(7)(ii) and 19(a)(7)(ii) of Form S-4, Item 22 of Form S-11,
Item 6 of Form 10 and Item 11 of Form 10-K.
---------------------------------------------------------------------------

     Some forms that require disclosure of the information
required by Item 401 to instead require disclosure of the information
required by Item 401 and paragraphs (c)(3), (d)(4) and/or (d)(5) of
proposed Item 407, as appropriate; \316\
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    \316\ See proposed amendments to General Instruction I.B.4.(c)
of Form S-3, and Item 10 of Form 10-K, which refer to Item 401 and
paragraphs (c)(3), (d)(4) and (d)(5) of proposed Item 407, and Item
7(b) of Schedule 14A, which refers to Item 401 and paragraphs (d)(4)
and (d)(5) of proposed Item 407.
    The proposed amendments to Forms SB-2, 10-SB and 10-KSB would
require disclosure of the information required by proposed Items 401
and 407(c)(3), (d)(4) and (d)(5) of Regulation S-B. We are not
proposing any changes to the reference to Item 401 in Note G to Form
10-K, however, because the portion of Item 401 applicable in Note G
(certain disclosure regarding executive officers) does not include
the part of Item 401 that we propose to combine into proposed Item
407.
---------------------------------------------------------------------------

     Forms that require disclosure of the information required
by Item 401(j), to instead require disclosure of the information
required by proposed Item 407(c)(3); \317\ and
---------------------------------------------------------------------------

    \317\ See proposed amendments to Item 5 in Part II of Form 10-Q,
and Item 5 in Part II of Form 10-QSB. The proposed amendments to
Item 5 in Part II of Form 10-QSB would require disclosure of the
information required by proposed Item 407(c)(3) of Regulation S-B.
---------------------------------------------------------------------------

     Item 10 of Form N-CSR to include a cross reference to
proposed Item 407(c)(2)(iv) of Regulation S-K and proposed Item
22(b)(15) of Schedule 14A, in lieu of the current reference to Item
7(d)(2)(ii)(G) of Schedule 14A.
    In addition, conforming amendments would be made to a provision in
Regulation AB, which currently requires disclosure of the information
required by Items 401, 402 and 404, so that instead it would require
disclosure of the information required by proposed Items 401, 402, 404
and paragraphs (a), (c)(3), (d)(4), (d)(5) and (e)(4) of Item 407.\318\
---------------------------------------------------------------------------

    \318\ See proposed amendments to Item 1107(e) of Regulation AB.
---------------------------------------------------------------------------

VI. Plain English Disclosure

    We are proposing that most of the disclosure required by proposed
Items 402, 403, 404 and 407 be provided in plain English. We propose
that this plain English requirement apply when information responding
to these items is included (whether directly or through incorporation
by reference) in reports required to be filed under Exchange Act
Sections 13(a) or 15(d).
    In 1998, we adopted rule changes requiring issuers to write the
cover page, summary and risk factors section of prospectuses in plain
English and apply plain English principles to other portions of the
prospectus.\319\ These rules transformed the landscape of public
offering disclosure and made prospectuses more accessible to investors.
We believe that plain English principles should apply to the disclosure
requirements that we propose to revise, so disclosure provided in
response to those requirements is easier to read and understand.
Clearer, more concise presentation of executive and director
compensation, related person transactions, beneficial ownership and
corporate governance matters can facilitate more informed investing and
voting decisions in the face of complex information about these
important areas.
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    \319\ Plain English Disclosure, Release No. 33-7497 (Jan. 28,
1998) [63 FR 6369] (adopting revisions to Securities Act Rule 421
[17 CFR 230.421]). We have also required that risk factor disclosure
included in annual reports and Summary Term Sheets in business
combination filings be in plain English. See General Instruction 1A.
to Form 10-K and Item 1001 of Regulation M-A 17 CFR 229.1001],
respectively.
---------------------------------------------------------------------------

    We propose to add Exchange Act Rules 13a-20 and 15d-20 to require
that companies prepare their executive and director compensation,
related person transactions, beneficial ownership and corporate
governance disclosures included in Exchange Act reports using plain
English principles, including the following standards:
     Present information in clear, concise sections, paragraphs
and sentences;
     Use short sentences;
     Use definite, concrete, everyday words;
     Use the active voice;
     Avoid multiple negatives;
     Use descriptive headings and subheadings;
     Use a tabular presentation or bullet lists for complex
material, wherever possible;
     Avoid legal jargon and highly technical business and other
terminology;
     Avoid frequent reliance on glossaries or defined terms as
the primary means of explaining information, defining terms in the
glossary or other section of the document only if the meaning is
unclear from the context and using a glossary only if it facilitates
understanding of the disclosure; and
     In designing the presentation of the information, include
pictures, logos, charts, graphs, schedules, tables or other design
elements so long as the design is not misleading and the required
information is clear, understandable, consistent with applicable
disclosure requirements and any other included information, drawn to
scale and not misleading.
    The proposed rule would also provide additional guidance on
drafting the disclosure that would comply with plain English
principles, including guidance as to the following practices that
registrants should avoid:
     Legalistic or overly complex presentations that make the
substance of the disclosure difficult to understand;
     Vague ``boilerplate'' explanations that are imprecise and
readily subject to different interpretations;
     Complex information copied directly from legal documents
without any clear and concise explanation of the provision(s); and
     Disclosure repeated in different sections of the document
that increases the size of the document but does not enhance the
quality of the information.
    Under the proposed rules, if the executive compensation, beneficial
ownership, related person transaction or corporate governance matters
disclosure were incorporated by reference into an Exchange Act report
from a company's proxy or information statement, the disclosure would
be required to be in plain English in the proxy or information
statement.\320\ The plain English rules are proposed as part of the
disclosure rules applicable to filings required under Sections 13(a)
and 15(d) of the Exchange Act. We believe that these plain English
requirements are

best administered by the Commission under these rules.
---------------------------------------------------------------------------

    \320\ See, e.g., General Instruction G(3) to Form 10-K and
General Instruction E.3. to Form 10-KSB (specifying information that
may be incorporated by reference from a proxy or information
statement in an annual report on Form 10-K or 10-KSB).
---------------------------------------------------------------------------

Request for Comment
     Will the plain English requirements discussed above be
sufficient to discourage boilerplate and promote clear, more user-
friendly Exchange Act reports and proxy or information statements? If
not, how should we revise the requirements?
     Are there differences between proxy statements and
Exchange Act reports which would require different requirements in
order to accomplish the objectives of plain English? If so, what are
the different requirements and how should the different requirements be
addressed?
     In addition to the proposal, should we require that
information provided under proposed Items 402, 403, 404 and 407 in
other filings, such as Form S-1, be written in plain English?
     Since only portions of the disclosure under proposed Item
407 would be required to be included in Exchange Act reports, should we
specifically require that all Item 407 disclosure be in plain English?
If so, how should we impose this requirement?
     Should we require that all or portions of proxy or
information statements be in plain English? If so, should a plain
English requirement apply to disclosure provided by anyone who solicits
a proxy with a proxy statement, or should it be limited to just
companies making a solicitation of their shareholders? Should
shareholder proposals under Exchange Act Rule 14a-8 \321\ or financial
statements and related disclosures under Item 13 of Schedule 14A be
excluded from any plain English requirements applicable to proxy
statements? Would a plain English requirement under the proxy rules
have the potential to increase disputes, including possible litigation,
that could inappropriately delay or frustrate the conduct of
solicitations and shareholder meetings or otherwise interfere with the
proper operation of the proxy rules?
---------------------------------------------------------------------------

    \321\ 17 CFR 240.14a-8.
---------------------------------------------------------------------------

VII. Transition

    We propose that, following their adoption, the proposed new rules
and amendments would become effective following publication of the
adopting release in the Federal Register as follows:
     For Forms 10-K and 10-KSB, for fiscal years ending 60 days
or more after publication;
     For Forms 8-K, for triggering events that occur 60 days or
more after publication;
     For Securities Act and Investment Company Act registration
statements (including post-effective amendments) and Exchange Act
registration statements that become effective 120 days or more after
publication; and
     For proxy statements that are filed 90 days or more after
publication.\322\
---------------------------------------------------------------------------

    \322\ The proposed amendments to the cross-references in Item 10
of Form N-CSR would appear in the Form concurrent with the effective
date of the amendments to our proxy rules, and would be effective
for a particular registrant's Forms N-CSR that are filed after the
filing of any proxy statement that includes a response to proposed
Item 407(c)(2)(iv) of Regulation S-K (as required by proposed Item
22(b)(15) of Schedule 14A). The substance of the information
required by the Item would not be changed.
---------------------------------------------------------------------------

    We do not propose to require companies to ``restate'' compensation
or related person transaction disclosure for fiscal years for which
they previously were required to apply the current rules. Instead, the
proposed Summary Compensation Table and disclosure required by proposed
Item 404(a) would be required only for the most recent fiscal
year.\323\ This would result in phased-in implementation of the
proposed Summary Compensation Table amendments and proposed Item 404(a)
disclosure over a three-year period for Regulation S-K companies, and a
two-year period for Regulation S-B companies.
---------------------------------------------------------------------------

    \323\ The other proposed executive and director compensation
disclosure requirements which relate to the last completed fiscal
year would not be affected by this proposed transition approach. The
Summary Compensation Table would be treated differently because, as
proposed, it would require disclosure of compensation to the named
executive officers for the last three fiscal years.
---------------------------------------------------------------------------

Request for Comment
     Is the proposed effectiveness schedule workable?
     Is the proposed phased-in transition provision for the
amended Summary Compensation Table and proposed related person
transaction disclosure necessary? Could companies revise the previous
years' required disclosure to conform to the amended requirements
without incurring undue costs or burdens?
     Are any special transition provisions necessary for any
other aspects of the proposed amendments? If so, explain what would be
needed and why.
General Request for Comments
    We request and encourage any interested person to submit comments
on any aspect of our proposals and any other matters that might have an
impact on the amendments. We request comment from companies and all
users of the executive compensation, related party and corporate
governance information required by Commission rules that may be
affected by the proposals. With respect to any comments, we note that
they are of greatest assistance to our rulemaking initiative if
accompanied by supporting data and analysis of the issues addressed in
those comments and by alternatives to our proposals where appropriate.

VIII. Paperwork Reduction Act

A. Background

    The proposed rules and amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\324\ We are submitting these to the Office of
Management and Budget for review and approval in accordance with the
Paperwork Reduction Act.\325\ The titles for this information are:
\326\
---------------------------------------------------------------------------

    \324\ 44 U.S.C. 3501 et seq.
    \325\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \326\ The paperwork burden from Regulations S-K and S-B is
imposed through the forms that are subject to the requirements in
those Regulations and is reflected in the analysis of those forms.
To avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens, for administrative convenience we estimate the burdens
imposed by each of Regulations S-K and S-B to be a total of one
hour.
---------------------------------------------------------------------------

    (1) ``Regulation S-B'' (OMB Control No. 3235-0417);
    (2) ``Regulation S-K'' (OMB Control No. 3235-0071);
    (3) ``Form SB-2'' (OMB Control No. 3235-0418);
    (4) ``Form S-1'' (OMB Control No. 3235-0065);
    (5) ``Form S-4'' (OMB Control Number 3235-0324);
    (6) ``Form S-11'' (OMB Control Number 3235-0067);
    (7) ``Regulation 14A and Schedule 14A'' (OMB Control Number 3235-
0059);
    (8) ``Regulation 14C and Schedule 14C'' (OMB Control Number 3235-
0057);
    (9) ``Form 10'' (OMB Control No. 3235-0064);
    (10) ``Form 10-SB'' (OMB Control No. 3235-0419);
    (11) ``Form 10-K'' (OMB Control No. 3235-0063);
    (12) ``Form 10-KSB'' (OMB Control No. 3235-0420);
    (13) ``Form 8-K'' (OMB Control No. 3235-0060); and
    (14) ``Form N-2'' (OMB Control No. 3235-0026).
    We adopted all of the existing regulations and forms pursuant to
the

Securities Act and the Exchange Act. In addition, we adopted Form N-2
pursuant to the Investment Company Act. These regulations and forms set
forth the disclosure requirements for annual \327\ and current reports,
registration statements, proxy statements and information statements
that are prepared by issuers to provide investors with the information
they need to make informed investment decisions in registered offerings
and in secondary market transactions, as well as informed voting
decisions in the case of proxy statements.
---------------------------------------------------------------------------

    \327\ The pertinent annual reports are those on Form 10-K or 10-
KSB.
---------------------------------------------------------------------------

    Our proposed amendments to existing forms and regulations are
intended to:
     Provide investors with a clearer and more complete picture
of compensation awarded to, earned by or paid to principal executive
officers, principal financial officers, the highest paid executive
officers other than the principal executive officer and principal
financial officer and directors;
     Provide investors with better information about key
financial relationships among companies and their executive officers,
directors, significant shareholders and their respective immediate
family members;
     Include more complete information about independence
regarding members of the board of directors and board committees;
     Reorganize and modify the type of executive and director
compensation information that must be disclosed in current reports; and
     Require most of the disclosure required under these
proposals to be provided in plain English.
    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
    The information collection requirements related to annual and
current reports, registration statements, proxy statements and
information statements would be mandatory. However, the information
collection requirements relating exclusively to proxy and information
statements would only apply to issuers subject to the proxy rules.
There would be no mandatory retention period for the information
disclosed, and the information disclosed would be made publicly
available on the EDGAR filing system.

B. Summary of Information Collections

    The proposals would increase existing disclosure burdens for annual
reports on Form 10-K \328\ and registration statements on Forms 10, S-
1, S-4 and S-11 by requiring:
---------------------------------------------------------------------------

    \328\ The proposed disclosure requirements regarding executive
and director compensation, beneficial ownership, related person
transactions and parts of the proposed corporate governance
disclosure requirements are in Form 10-K, Schedule 14A and Schedule
14C. Form 10-K permits the incorporation by reference of information
in Schedules 14A or 14C to satisfy the disclosure requirements of
Form 10-K. The analysis that follows assumes that companies would
either provide the proposed disclosure in a Form 10-K only, if the
company is not subject to the proxy rules, or would incorporate the
required disclosure into the Form 10-K by reference to the proxy or
information statement if the company is subject to the proxy rules.
This approach takes into account the burden from the proposed
disclosure requirements that are included in both the Form 10-K and
in Schedule 14A or 14C.
---------------------------------------------------------------------------

     An expanded and reorganized Summary Compensation Table,
which would require expanded disclosure of a ``total compensation''
amount, and information necessary for computing the total amount of
compensation, such as the grant date fair value of stock-based and
option-based awards computed in accordance with FAS 123R, and the
aggregate increase in actuarial value of defined benefit and actuarial
pension plans;
     Disclosure at lower thresholds of information regarding
perquisites and other personal benefits;
     A more focused presentation of compensation plan awards in
a Grants of Performance-Based Awards Table and a Grants of All Other
Equity Awards Table, which would build upon existing tabular
disclosures regarding long term incentive plans and awards of option
and stock appreciation rights to supplement the information proposed to
be included in the Summary Compensation Table;
     Expanded disclosure regarding holdings and exercises by
named executive officers of outstanding previously awarded stock,
options and similar instruments which would include the grant date of
the award, the vesting date of restricted stock and similar instruments
and amounts (both number of shares and value) realized upon vesting and
the previously reported grant date fair value of awards exercised or
vested;
     Improved narrative disclosure accompanying data presented
in the executive compensation tables and a new Compensation Discussion
and Analysis section to explain material elements of compensation of
named executive officers;
     Disclosure regarding up to three employees who were not
executive officers and whose total compensation for the last completed
fiscal year was greater than that of any of the named executive
officers;
     New tables and narrative disclosure regarding retirement
plans and nonqualified defined contribution and other deferred
compensation plans;
     Expanded disclosure regarding post-employment payments
other than pursuant to retirement and deferred compensation plans;
     A new table and improved narrative disclosure for director
compensation to replace current disclosure requirements;
     Disclosure regarding additional related persons under the
proposed related person transaction disclosure requirement;
     New disclosure regarding a company's policies and
procedures for the review, approval or ratification of transactions
with related persons;
     New and reorganized disclosure regarding corporate
governance matters such as the independence of directors and members of
the nominating, compensation and audit committees of the board of
directors; and
     Additional disclosure regarding pledges of securities by
officers and directors and directors' qualifying shares.
    At the same time, the proposals would decrease existing disclosure
burdens for annual reports on Form 10-K and registration statements on
Form 10, S-1, S-4 and S-11 by:
     Eliminating requirements to provide a Compensation
Committee Report and Performance Graph in proxy materials and
information statements, which would substantially offset the increased
burdens regarding Compensation Discussion and Analysis that would be
required to be included or incorporated by reference in annual reports
or registration statements;
     Eliminating tabular presentation regarding projected stock
option values under alternative stock appreciation scenarios, which
would substantially offset the increased burdens regarding equity
holdings and exercises;
     Eliminating a generalized tabular presentation regarding
defined benefit plans, which would offset in part the increased burdens
regarding defined benefit plan disclosure;
     Increasing the dollar value threshold for determining if
related person transaction disclosure is required from $60,000 to
$120,000; and
     Eliminating a current disclosure requirement regarding
specific director

relationships that could affect independence.
    In addition, the proposals may increase or decrease existing
disclosure burdens, or not affect them at all, for annual reports on
Form 10-K and registration statements on Form 10, S-1, S-4 and S-11,
depending on a company's particular circumstances, by:
     Eliminating the requirement to include in proxy or
information statements a compensation committee report on the repricing
of options and stock appreciation rights and a table reporting on the
repricing of options and stock appreciation rights over the past ten
years, in favor of a narrative discussion of repricings, if any
occurred in the last fiscal year, which would be required to be
included or incorporated by reference in annual reports and
registration statements; and
     Eliminating or reducing the scope of instructions that
provide bright line tests for determining whether transactions with
related persons are required to be disclosed in particular
circumstances.
    Specifically with respect to proxy and information statements, the
proposals would impose a new disclosure requirement regarding the
company's processes and procedures for the consideration and
determination of executive and director compensation, and disclosure
regarding the availability of the compensation committee's charter (if
it has one), either as an appendix to the proxy or information
statement at least once every three fiscal years or on the company's
Web site. These proposals would not require a compensation committee to
establish or maintain a charter. The proposed disclosure that would be
required regarding compensation committees is similar to what is
currently required for audit committees and nominating committees. The
proposals would decrease existing disclosure requirements for proxy and
information statements by eliminating a current disclosure requirement
regarding the resignation of directors, as well as eliminating current
requirements to provide a Compensation Committee Report, Performance
Graph and a compensation committee report on the repricing of options
and stock appreciation rights. However, the extent to which eliminating
current requirements to provide a Compensation Committee Report,
Performance Graph and a compensation committee report on the repricing
of options and stock appreciation rights reduces burdens for proxy and
information statements would be offset to a substantial extent, as
discussed above, by the proposed Compensation Discussion and Analysis
and narrative disclosure requirement regarding repricings and other
modifications, both of which would be required to be included or
incorporated by reference in annual reports and registration
statements. We estimate that, on balance, the proposed changes that are
specific to proxy or information statements would not result in
incremental burdens on proxy or information statement collections of
information.
    The proposals would increase existing disclosure burdens for annual
reports on Form 10-KSB \329\ and registration statements on Forms 10-SB
and SB-2 filed by small business issuers by requiring:
---------------------------------------------------------------------------

    \329\ The same analysis as discussed above with regard to the
relationship of Form 10-K to the disclosure required in proxy or
information statements is also applied to Form 10-KSB.
---------------------------------------------------------------------------

     An expanded and reorganized Summary Compensation Table,
which would require expanded disclosure of a ``total compensation''
amount, and information necessary for computing the total amount of
compensation, such as the grant date fair value of stock-based and
option-based awards computed in accordance with FAS 123R and the
aggregate increase in actuarial value of defined benefit and actuarial
pension plans;
     Disclosure at lower dollar thresholds for information
regarding perquisites and other personal benefits;
     Expanded disclosure regarding holdings of previously
awarded stock, options and similar instruments, which would include the
value of stock and other similar incentive plan awards that had not
vested;
     A new table for director compensation, to replace current
narrative disclosure requirements;
     A narrative description of retirement plans;
     Disclosure regarding additional related persons under the
proposed related person transaction disclosure requirement;
     New and reorganized disclosure regarding corporate
governance matters such as the independence of directors and members of
the nominating, compensation and audit committees of the board of
directors; and
     Additional disclosure regarding pledges of securities by
officers and directors, and director qualifying shares.
    At the same time, the proposals would decrease existing disclosure
burdens for annual reports on Form 10-KSB and registration statements
on Form 10-SB and SB-2 filed by small business issuers by:
     Reducing by two the number of named executive officers for
the purposes of executive compensation disclosure, to include only the
principal executive officer and the two most highly compensated
executive officers other than the principal executive officer;
     Reducing the required information in the Summary
Compensation Table from three years to two years of data;
     Eliminating tabular disclosure of grants of options and
stock appreciation rights in the last fiscal year;
     Eliminating tabular disclosure regarding exercises of
options and stock appreciation rights;
     Eliminating tabular disclosure regarding long term
incentive plan awards in the last fiscal year; and
     Eliminating a current disclosure requirement regarding
specific director relationships that could affect independence.
    In addition, the proposals may increase or decrease, or not affect,
existing disclosure burdens for annual reports on Form 10-KSB or
registration statements on Form 10-SB and SB-2 filed by small business
issuers depending on the small business issuer's particular
circumstances, by:
     Eliminating the requirement to include a compensation
committee report on the repricing of options and stock appreciation
rights, in favor of a narrative discussion of repricings, if any
occurred in the last fiscal year;
     Changing the dollar value threshold used for determining
if related person transaction disclosure is required from $60,000 to
the lesser of $120,000 or one percent of the average of the small
business issuer's total assets for the last three completed fiscal
years; and
     Eliminating or reducing the scope of instructions that
provide bright line tests for determining whether transactions with
related persons are required to be disclosed in particular
circumstances.
    The proposals would decrease existing disclosure burdens for Forms
N-1A, N-2, and N-3 by increasing to $120,000 the current $60,000
threshold in such forms for disclosure of certain interests,
transactions, and relationships of disinterested directors, although as
discussed below we do not believe the increase in the disclosure
threshold will significantly impact the hours of company personnel time
and cost of outside professionals in responding to these items. The
proposals would increase the existing disclosure burdens for Form N-2
by requiring business development companies to provide additional
disclosure regarding compensation. However, the proposals

would decrease the existing disclosure burden by no longer requiring
compensation disclosure with respect to certain affiliated persons and
the advisory board of business development companies and by no longer
requiring business development companies to disclose certain
compensation from the fund complex.
    The proposals would decrease the Form 8-K disclosure burdens, by
limiting both the existing requirement to disclose a company's entry
into a material definitive agreement outside of the ordinary course of
business or any material amendment to such an agreement and the
requirement to collect information regarding directors, executive
officers other than named executive officers and officers covered by
Item 5.02 of Form 8-K. By focusing the Form 8-K disclosure requirement
on more presumptively material employment agreements, plans or
arrangements of a narrower group of executive officers, the number of
Form 8-Ks filed each year relating to executive and director
compensation matters should be reduced.
    We do not believe that our proposals regarding exhibit filing
requirements for Form 20-F and our proposed treatment for foreign
private issuers under the revised rules would impose any incremental
increase or decrease in the disclosure burden for these issuers.

C. Paperwork Reduction Act Burden Estimates

    For purposes of the Paperwork Reduction Act, we estimate the annual
incremental increase in the paperwork burden for companies to comply
with our proposed collection of information requirements to be
approximately 537,792 hours of in-house company personnel time and to
be approximately $69,794,000 for the services of outside
professionals.\330\ These estimates include the time and the cost of
preparing and reviewing disclosure, filing documents and retaining
records. Our methodologies for deriving the above estimates are
discussed below.
---------------------------------------------------------------------------

    \330\ For administative convenience, the presentation of the
totals related to the paperwork burden hours have been rounded to
the nearest whole number and the cost totals have been rounded to
the nearest thousand.
---------------------------------------------------------------------------

    Our estimates represent the average burden for all issuers, both
large and small. As described below, we expect that the burdens and
costs could be greater for larger issuers and lower for smaller
issuers. For Exchange Act annual reports on Form 10-K or 10-KSB,\331\
or current reports on Form 8-K, we estimate that 75% of the burden of
preparation is carried by the company internally and that 25% of the
burden is carried by outside professionals retained by the issuer at an
average cost of $300 per hour.\332\ For Securities Act registration
statements on Forms SB-2, S-1, S-4, S-11, or N-2 and Exchange Act
registration statements on Form 10 or 10-SB, we estimate that 25% of
the burden of preparation is carried by the company internally and that
75% of the burden is carried by outside professionals retained by the
issuer at an average cost of $300 per hour.\333\ The portion of the
burden carried by outside professionals is reflected as a cost, while
the portion of the burden carried by the company internally is
reflected in hours.
---------------------------------------------------------------------------

    \331\ We apply the same allocation of burden with regard to
proxy or information statements.
    \332\ In connection with other recent rulemakings, we have had
discussions with several private law firms to estimate an hourly
rate of $300 as the average cost of outside professionals that
assist issuers in preparing disclosures and conducting registered
offerings.
    \333\ As mentioned above, we do not believe that the proposal to
increase to $120,000 the current $60,000 threshold in Forms N-1A, N-
2, and N-3 for disclosure of certain interests, transactions, and
relationships of disinterested directors will significantly impact
the hours of company personnel time and cost of outside
professionals in responding to these items.
---------------------------------------------------------------------------

1. Securities Act Registration Statements, Exchange Act Registration
Statements and Exchange Act Annual Reports
    For the purposes of the Paperwork Reduction Act, we estimate that,
over a three year period,\334\ the annual incremental disclosure burden
imposed by the proposed revisions would average 67 hours per Form 10-K;
35 hours per Form 10-KSB; 60 hours per Form 10; 30 hours per Forms 10-
SB and SB-2; 60 hours per Forms S-1, S-4 and S-11; and 1.675 hours per
Form N-2. To the extent that companies incorporate information proposed
to be required by reference to proxy or information statements, the
proposed plain English requirements would apply to disclosure in those
statements, however the incremental burden of preparing plain English
disclosure is factored into the burden estimates for Forms 10-K and 10-
KSB. We estimate that the proposed amendments to Item 22(b) of Schedule
14A and the proposal to increase to $120,000 the current $60,000
threshold in Forms N-1A, N-2, and N-3 for disclosure of certain
interests, transactions, and relationships of disinterested directors
will not impose an annual incremental disclosure burden.
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    \334\ We calculated an annual average over a three year period
because OMB approval of Paperwork Reduction Act submissions covers a
three year period.
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    These estimates were based on the following assumptions:
     On an ongoing basis, the hours of company personnel time
and outside professional time required to prepare the disclosure under
proposed Item 402 of Regulation S-K (executive and director
compensation) would increase in light of the expansion and
reorganization of the proposed disclosure requirements relative to the
current disclosure requirements on these topics, in particular the
requirements regarding Compensation Discussion and Analysis.
     Companies filing annual reports on Form 10-K that would be
required to include Item 402 of Regulation S-K, as we propose to amend
it, and proposed Item 407(e)(4) of Regulation S-K (regarding
compensation committee interlocks and insider participation), would
experience higher costs in responding to these disclosure requirements
in the first year of compliance with them, and, to a lesser extent, in
the second year, as systems are implemented to obtain the relevant data
and compliance efforts with respect to new or expanded disclosure
requirements, with lower incremental costs expected in subsequent
years.\335\
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    \335\ For Form 10-K, we estimate that it would take issuers 120
additional hours to prepare the proposed disclosure in year one, and
55 hours in year two and 25 hours in year three and thereafter,
which results in an average of 67 hours over the three year period.
This estimate takes into account that the burden would be incurred
by either including the proposed disclosure in the report directly
or incorporating by reference from a proxy or information statement.
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     On an ongoing basis, the hours of company personnel time
and outside professional time required to prepare the disclosure under
proposed Item 404 (related person transactions), 407(a) (director
independence) and paragraphs (e)(1) through (e)(3) of Item 407
(compensation committee functions) of both Regulation S-K and
Regulation S-B would be approximately the same as for compliance with
the current related party transaction disclosure and disclosure about
the board of directors required by existing Item 404 of Regulations S-K
and S-B and Item 7 of Schedule 14A.\336\ Other revisions proposed to be
made by moving

disclosure requirements relating to corporate governance to Item 407 of
Regulations S-K and S-B would not change the substance of existing
disclosure and would therefore not increase burdens, particularly for
proxy or information statements where much of the disclosure is
currently required.
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    \336\ Similarly, on an ongoing basis, the hours of company
personnel time and outside professional time required to prepare the
disclosure required by the proposed conforming revisions to Item
22(b) relating to the independence of members of nominating and
audit committees of investment companies would be approximately the
same as for compliance with the current requirements regarding
disclosure of the independence of nominating and audit committee
members of investment companies required by existing Item 7 of
Schedule 14A.
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     Companies filing registration statements on Forms 10, S-1,
S-4 and S-11 that are not already filing periodic reports pursuant to
Exchange Act Sections 13(a) or 15(d) would in many cases not have been
required to comply with the proposed disclosure requirements prior to
filing such registration statements, and would therefore take an
estimated 60 hours to comply with the proposed changes in the
disclosure requirements. The additional time required by these
registrants to obtain the relevant data and to compile the required
information is offset to some extent by the fact that only one year of
compensation information would generally be required for presentation
in the Summary Compensation Table, as compared to three years for
issuers already subject to Exchange Act reporting requirements.\337\
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    \337\ Our estimates of the number of annual responses to the
collections of information are based on the number of filings made
in the period from October 1, 2004 through September 30, 2005. In
order to factor in disclosure that may be incorporated by reference
from other filings, we have estimated that 496 out of 619
registration statements on Form S-4 would include the required
information contemplated by these rule proposals through
incorporation by reference to a Form 10-K or Form 10-KSB.
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     Small business issuers filing annual reports on Form 10-
KSB would be subject to lower incremental costs than other issuers as a
result of the proposals, given the reduced disclosure required by Item
402 of Regulation S-B relative to Item 402 of Regulation S-K, as
described above. As with companies filing annual reports on Form 10-K,
we expect that small business issuers would experience higher costs in
responding to the proposed disclosure requirements in the first year of
compliance with them, as systems are implemented to obtain the relevant
data and compliance efforts with respect to new or expanded disclosure
requirements are implemented, with lower incremental costs in
subsequent years.\338\
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    \338\ For Form 10-KSB, we estimate that it would take issuers 70
additional hours to prepare the proposed disclosure in year one, and
25 additional hours in year two and 10 additional hours in year
three and thereafter, which results in an average of 35 additional
hours over the three year period. This estimate assumes that the
burden would be incurred by either including the proposed disclosure
in the report directly or incorporating by reference from a proxy or
information statement.
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     Small business issuers filing registration statements on
Forms 10-SB and SB-2 that are not already filing periodic reports
pursuant to Exchange Act Sections 13(a) or 15(d) would not have been
required to comply with the proposed disclosure requirements prior to
filing such registration statements, and would therefore take an
estimated 30 additional hours to comply with the proposed changes in
the disclosure requirements. The additional time required by these
registrants to obtain the relevant data and to compile the required
information is offset to some extent by the fact that only one year of
compensation information would generally be required for presentation
in the Summary Compensation Table, as compared to two years for small
business issuers already subject to Exchange Act reporting
requirements.
     Based on our experience with the requirement we adopted in
1998 for companies to write certain sections of prospectuses in plain
English, drafting documents in plain English would result in an initial
increase in time and cost burdens in the first year of implementation,
and to a lesser extent, the second year, with those time or cost
burdens decreasing in the year following implementation of the new
rules. The plain English rule proposals would not affect the substance
of the required disclosure, and companies that have filed registration
statements under the Securities Act are already familiar with the
requirements.
     We estimate that the proposals to increase to $120,000 the
current $60,000 threshold for disclosure of certain interests,
transactions, and relationships of disinterested directors in Forms N-
1A, N-2, and N-3 and in proxy and information statements would neither
increase nor decrease the annual paperwork burden, because these forms
are already required to disclose these interests, transactions, and
relationships in amounts exceeding $60,000, and we do not believe the
increase in the disclosure threshold will significantly impact the
hours of company personnel time and cost of outside professionals in
responding to these items.
     Business development companies filing Form N-2 would be
required to include Item 402 of Regulation S-K, as we propose to amend
it, and would experience higher costs in responding to these disclosure
requirements in the first year of complying with them, and, to a lesser
extent, in the second year, as systems are implemented to obtain the
relevant data and compliance efforts with respect to new or expanded
disclosure requirements are implemented, with lower incremental costs
expected in subsequent years.\339\
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    \339\ For Form N-2, we estimate that it would take business
development companies 100 additional hours to prepare the proposed
disclosure in year one, 50 hours in year two and 25 hours in year
three and thereafter, which results in an average of 58 hours for
each business development company to comply with the proposed
compensation disclosures that would be required on Form N-2. We
estimate an average annual incremental disclosure burden of 1.675
hours per Form N-2, based on 58 hours per Form N-2 filing by
business development companies times 27 filings on Form N-2 by
business development companies (representing all Form N-2 and N-2/A
filings by business development companies during the year ended
December 31, 2005) (58 hours times 27 Form N-2 filings (including
amendments) = 1,566 hours), divided by 935 total annual filings on
Form N-2 (representing all Form N-2 and N-2/A filings during the
year ended December 31, 2005) (1,566 hours divided by 935 filings on
Form N-2 (including amendments) = 1.675 hours per Form N-2
(including amendments)).
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    Tables 1 and 2 below illustrate the incremental annual compliance
burden in the collection of information in hours and cost for Exchange
Act periodic reports for companies other than registered investment
companies, Securities Act registration statements and Exchange Act
registration statements.

                     Table 1.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                $300
                          Form                                Annual        Incremental     Incremental     75% Issuer          25%        Professional
                                                             responses      hours/form        burden                       Professional        cost
                                                                     (A)             (B)   (C) = (A)*(B)         (D) = (  (E) = (C)*0.25  (F) = (E)*$300
                                                                                C)*0.75
---------------------------------------------------------
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
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 Table 2.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Securities Act Registration Statements and Exchange Act Registration
                                                                       Statements
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                                                                                $300
                          Form                                Annual        Incremental     Incremental     75% Issuer          75%        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
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2. Exchange Act Current Reports
    For purposes of the Paperwork Reduction Act, we estimate that the
proposals affecting the collection of information requirements related
to current reports on Form 8-K would reduce the annual paperwork burden
by approximately 6,458 hours of company personnel time and by a cost of
approximately $645,750 for the services of outside professionals. This
estimate reflects the reduction in the number of filings that could
result from our proposals. These estimates were based on the following
assumptions:
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    \340\ The burden estimates for Form 10-K and 10-KSB assume that
the proposed requirements are satisfied by either including
information directly in the annual reports or incorporating the
information by reference from the proxy statement or information
statement in Schedule 14A or Schedule 14C, respectively. As
described above, we estimate that the proposed changes to executive
compensation disclosure and corporate governance matters that would
be included only in proxy or information statements (and thus not in
Securities Act registration statements or Exchange Act reports or
registration statement) would not, on balance, impose an incremental
burden.
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     The number of annual responses for Form 8-K is estimated
to be 110,416.\341\ Based on a study of current reports on Form 8-K