table.\311\ Examples of such factors may include, in given cases, among
other things:
---------------------------------------------------------------------------

    \311\ Item 402(i)(3).
---------------------------------------------------------------------------

     The type(s) of compensation permitted to be deferred, and
any limitations (by percentage of compensation or otherwise) on the
extent to which deferral is permitted;
     The measures of calculating interest or other plan
earnings (including whether such measure(s) are selected by the named
executive officer or the company and the frequency and manner in which
such selections may be changed), quantifying interest rates and other
earnings measures applicable during the company's last fiscal year; and
     material terms with respect to payouts, withdrawals and
other distributions.
    Where plan earnings are calculated by reference to actual earnings
of mutual funds or other securities, such as company stock, it is
sufficient to identify the reference security and quantify its return.
This disclosure may be aggregated to the extent the same measure
applies to more than one named executive officer.
c. Other Potential Post-Employment Payments
    We are adopting the significant revisions that we proposed to our
requirements to describe termination or change in control provisions.
The Commission has long recognized that ``termination provisions are
distinct from other plans in both intent and scope and, moreover, are
of particular interest to shareholders.'' \312\ Prior to today's
amendments, disclosure did not in many cases capture material
information regarding these plans and potential payments under them. We
therefore proposed and are adopting disclosure of specific aspects of
written or unwritten arrangements that provide for payments at,
following, or in connection with the resignation, severance, retirement
or other termination (including constructive termination) of a named
executive officer, a change in his or her responsibilities,\313\ or a
change in control of the company.
---------------------------------------------------------------------------

    \312\ 1983 Release, at Section III.E.
    \313\ We confirm that this aspect of the disclosure requirement
is not limited to a change in responsibilities in connection with a
change in control.
---------------------------------------------------------------------------

    Our amendments call for narrative disclosure of the following
information regarding termination and change in control provisions:
\314\
---------------------------------------------------------------------------

    \314\ Item 402(j).
---------------------------------------------------------------------------

     the specific circumstances that would trigger payment(s)
or the provision of other benefits (references to benefits include
perquisites and health care benefits);
     the estimated payments and benefits that would be provided
in each covered circumstance, and whether they would or could be lump
sum or annual, disclosing the duration and by whom they would be
provided; \315\
---------------------------------------------------------------------------

    \315\ We have eliminated the $100,000 disclosure threshold that
was specified in the rule prior to today's amendments. For post-
termination perquisites, however, the same disclosure and
itemization thresholds used for the amended Summary Compensation
Table apply. See Section II.C.1.e.i. above. We have modified Item
402(j)(2) from the proposal in response to comments to clarify that
the required description covers both annual and lump sum payments.
See letter from ABA.
---------------------------------------------------------------------------

     how the appropriate payment and benefit levels are
determined under the various circumstances that would trigger payments
or provision of benefits; \316\
---------------------------------------------------------------------------

    \316\ We have modified Item 402(j)(3) from the proposal to
clarify the scope of the required disclosure. The proposal would
have required the company to describe and explain the specific
factors used to determine the appropriate payment and benefit levels
under the various triggering circumstances. A commenter suggested
that the proposed language was overly broad and ambiguous and could
result in mere repetition of the pension payout formula and
actuarial assumptions. See letter from ABA.
---------------------------------------------------------------------------

     any material conditions or obligations applicable to the
receipt of payments or benefits, including but not limited to non-
compete, non-solicitation, non-disparagement or confidentiality
covenants; and

     any other material factors regarding each such contract,
agreement, plan or arrangement.\317\
---------------------------------------------------------------------------

    \317\ This would include, for example, disclosure of whether an
executive simultaneously receives both severance and retirement
benefits, a practice commonly known as a ``double dip.'' See letter
from WorldatWork.
---------------------------------------------------------------------------

    The item contemplates disclosure of the duration of non-compete and
similar agreements, and provisions regarding waiver of breach of these
agreements, and disclosure of tax gross-up payments.
    A company will be required to provide quantitative disclosure under
these requirements even where uncertainties exist as to amounts payable
under these plans and arrangements. We clarify that in the event
uncertainties exist as to the provision of payments and benefits or the
amounts involved, the company is required to make a reasonable estimate
(or a reasonable estimated range of amounts), and disclose material
assumptions underlying such estimates or estimated ranges in its
disclosure. In such event, the disclosure will be considered forward-
looking information as appropriate that falls within the safe harbors
for disclosure of such information.\318\
---------------------------------------------------------------------------

    \318\ See, e.g., Securities Act Section 27A and Exchange Act
Section 21E.
---------------------------------------------------------------------------

    We have modified the requirement somewhat in response to comments
that compliance with the proposal would involve multiple complex
calculations and projections based on circumstantial and variable
assumptions.\319\ We adopt commenters' suggestions that the
quantitative disclosure required be calculated applying the assumptions
that:
---------------------------------------------------------------------------

    \319\ See, e.g., letters from Cleary; Foley; HRPA; and Top Five
Data.
---------------------------------------------------------------------------

     the triggering event took place on the last business day
of the company's last completed fiscal year; and
     the price per share of the company's securities is the
closing market price as of that date.\320\
---------------------------------------------------------------------------

    \320\ Instruction 1 to Item 402(j). See, e.g., letters from
Emerson; Foley; and Frederic W. Cook & Co.
---------------------------------------------------------------------------

    We have also revised the rule to provide that if a triggering event
has occurred for a named executive officer who was not serving as a
named executive officer at the end of the last completed fiscal year,
disclosure under this provision is required for that named executive
officer only with respect to the actual triggering event that
occurred.\321\ These modifications will both facilitate company
compliance and provide investors with disclosure that is more
meaningful. We further clarify that health care benefits are included
in this requirement, and quantifiable based on the assumptions used for
financial reporting purposes under generally accepted accounting
principles.\322\
---------------------------------------------------------------------------

    \321\ Instruction 4 to Item 402(j). See letter from ABA.
    \322\ Item 402(j)(1) and Instruction 2 to Item 402(j). These
would be the assumptions applied under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 106,
Employer's Accounting for Postretirement Benefits Other Than
Pensions (FAS 106). See, e.g., letters from Peabody Energy and
WorldatWork.
---------------------------------------------------------------------------

    We further clarify in response to comments that to the extent that
the form and amount of any payment or benefit that would be provided in
connection with any triggering event is fully disclosed in the Pension
Benefits Table or the Nonqualified Deferred Compensation Table and the
narrative disclosure related to those tables, reference may be made to
that disclosure.\323\ However, to the extent that the form or amount of
any such payment or benefit would be increased, or its vesting or other
provisions accelerated upon any triggering event, such increase or
acceleration must be specifically disclosed in this section.\324\ In
addition, we have added an instruction that companies need not disclose
payments or benefits under this requirement to the extent such payments
or benefits do not discriminate in scope, terms or operation, in favor
of a company's executive officers and are available generally to all
salaried employees.\325\
---------------------------------------------------------------------------

    \323\ See letter from Academy of Actuaries.
    \324\ Instruction 3 to Item 402(j).
    \325\ Instruction 5 to Item 402(j).
---------------------------------------------------------------------------

6. Officers Covered
a. Named Executive Officers
    As proposed, we are amending the disclosure rules so that the
principal executive officer, the principal financial officer \326\ and
the three most highly compensated executive officers other than the
principal executive officer and principal financial officer comprise
the named executive officers.\327\ In addition, as was the case prior
to these amendments, up to two additional individuals for whom
disclosure would have been required but for the fact that they were no
longer serving as executive officers at the end of the last completed
fiscal year shall be included.
---------------------------------------------------------------------------

    \326\ We are adopting the nomenclature used in Item 5.02 of Form
8-K, which refers to ``principal executive officer'' and ``principal
financial officer.''
    \327\ Item 402(a)(3). As defined in Securities Act Rule 405 [17
CFR 230.405] and Exchange Act Rule 3b-7 [17 CFR 240.3b-7], ``the
term 'executive officer,' when used with reference to a registrant,
means its president, any vice president of the registrant in charge
of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-
making function or any other person who performs similar policy-
making functions for the registrant. Executive officers of
subsidiaries may be deemed executive officers of the registrant if
they perform such policy-making functions for the registrant.''
Therefore, as was formerly the case, a named executive officer may
be an executive officer of a subsidiary or an employee of a
subsidiary who performs such policy-making functions for the
registrant. We have clarified this point in the provision describing
the determination of named executive officer. Instruction 2 to Item
402(a)(3).
---------------------------------------------------------------------------

    As we noted in the Proposing Release, we believe that compensation
of the principal financial officer is important to shareholders
because, along with the principal executive officer, the principal
financial officer provides the certifications required with the
company's periodic reports and has important responsibility for the
fair presentation of the company's financial statements and other
financial information.\328\ Like the principal executive officer,
disclosure about the principal financial officer will be required even
if he or she was no longer serving in that capacity at the end of the
last completed fiscal year.\329\ As was the case for the chief
executive officer prior to today's amendments, all persons who served
as the company's principal executive officer or principal financial
officer during the last completed fiscal year are named executive
officers.
---------------------------------------------------------------------------

    \328\ Exchange Act Rules 13a-14 and 15d-14.
    \329\ Paragraphs (a)(3)(i) and (a)(3)(ii) of Item 402 provide
that all individuals who served as a principal executive officer and
principal financial officer or in similar capacities during the last
completed fiscal year must be considered named executive officers.
Item 402(a)(4) specifies that if the principal executive officer or
principal financial officer served in that capacity for only part of
a fiscal year, information must be provided as to all of the
individual's compensation for the full fiscal year. Item 402(a)(4)
also specifies that if a named executive officer (other than the
principal executive officer or principal financial officer) served
as an executive officer of the company (whether or not in the same
position) during any part of the fiscal year, then information is
required as to all compensation of that individual for the full
fiscal year.
---------------------------------------------------------------------------

    We are not requiring compensation disclosure for all of the
officers listed in Items 5.02(b) and (c) of Form 8-K.\330\ Those Form
8-K Items were adopted to provide current disclosure in the event of an
appointment, resignation, retirement or termination of the specified
officers, based on the principle that changes in employment status of
these particular officers are unquestionably or presumptively material.
At the time when a decision is made regarding the employment status of
a particular officer, it will not always be clear who will be the named
executive officers for the current year.

Given these factors, it is reasonable for the two groups not to be
identical.
---------------------------------------------------------------------------

    \330\ These are the registrant's principal executive officer,
president, principal financial officer, principal accounting
officer, principal operating officer or any person performing
similar functions. As described in Section III.A. below, the rules
we adopt today also amend Item 5.02 of Form 8-K.
---------------------------------------------------------------------------

b. Identification of Most Highly Compensated Executive Officers; Dollar
Threshold for Disclosure
    In the rule prior to today's amendments, the determination of the
most highly compensated executive officers was based solely on total
annual salary and bonus for the last fiscal year, subject to a $100,000
disclosure threshold. We proposed to revise the dollar threshold for
disclosure of named executive officers other than the principal
executive officer and the principal financial officer to $100,000 of
total compensation for the last fiscal year. Given the proliferation of
various forms of compensation other than salary and bonus, we believe
that total compensation would more accurately identify those officers
who are, in fact, the most highly compensated.
    Several commenters objected to using total compensation to identify
named executive officers.\331\ In particular, commenters stated that
this measure would minimize the importance of the compensation
committee's compensation decisions for the most recent year and include
significant elements beyond the committee's control, such as the
increase in pension value and earnings on nonqualified deferred
compensation. Some commenters recommended continuing to rely solely on
salary and bonus, stating that these measures more accurately reflect
the executives who are most highly valued in the company and permit
greater year-to-year consistency.\332\ Other commenters expressed
concern that including episodic option awards would result in more
frequent changes to the named executive officer roster.\333\
---------------------------------------------------------------------------

    \331\ See, e.g., letters from ACC; Emerson; Leggett & Platt;
SCSGP; and Unitrin.
    \332\ See, e.g., letters from Frederic W. Cook & Co. and Intel.
    \333\ See, e.g., letter from Intel.
---------------------------------------------------------------------------

    We are persuaded that it is appropriate to exclude from the named
executive officer determination compensation elements that principally
reflect executives' decisions to defer compensation and wealth
accumulation in pension plans, or are unduly influenced by age or years
of service. However, as we stated in the Proposing Release, basing
identification of named executive officers solely on the compensation
reportable in the salary and bonus categories may provide an incentive
to re-characterize compensation. Further, limiting the determination to
salary and bonus is not consistent with our decision to eliminate the
distinction between ``annual'' and ``long-term'' compensation in the
Summary Compensation Table.\334\ We realize that this may result in
more frequent changes to the officers designated as named executive
officers, but believe that it will provide a clearer picture of
compensation at a company. Accordingly, we require the most highly
compensated executive officers to be determined based on total
compensation, reduced by the sum of the increase in pension values and
nonqualified deferred compensation above-market or preferential
earnings reported in column (h) of the Summary Compensation.\335\
---------------------------------------------------------------------------

    \334\ See Section II.C.1.f. above, discussing the effect of this
change on compensation formerly reported as ``bonus.''
    \335\ Instruction 1 to Item 402(a)(3).
---------------------------------------------------------------------------

    Prior to these amendments, companies were permitted to exclude an
executive officer (other than the chief executive officer) due to
either an unusually large amount of cash compensation that was not part
of a recurring arrangement and was unlikely to continue, or cash
compensation relating to overseas assignments attributed predominantly
to such assignments.\336\ Because payments attributed to overseas
assignments have the potential to skew the application of Item 402
disclosure away from executives whose compensation otherwise properly
would be disclosed, we are retaining this basis for exclusion, as we
proposed. However, we believe that other compensation that is ``not
recurring and unlikely to continue'' should be considered compensation
for disclosure purposes. There has been inconsistent interpretation of
the ``not recurring and unlikely to continue'' standard, and it is
susceptible to manipulation. We therefore are eliminating this basis
for exclusion, as we proposed.\337\
---------------------------------------------------------------------------

    \336\ This exclusion had been set forth in Instruction 3 to Item
402(a)(3) prior to these amendments.
    \337\ Instruction 3 to Item 402(a)(3).
---------------------------------------------------------------------------

7. Interplay of Items 402 and 404
    We are amending Item 402 so that it requires disclosure of all
transactions between the company and a third party where the primary
purpose of the transaction is to furnish compensation to a named
executive officer as proposed. Also as proposed, amended Item 402 will
no longer exclude from its disclosure requirements information about
compensatory transaction that had been disclosed under the related
person transaction disclosure requirements of Item 404.\338\ Further,
instructions to amended Item 404 clarify what compensatory transactions
with executive officers and directors need not be disclosed under Item
404.\339\
---------------------------------------------------------------------------

    \338\ These relevant provisions were set forth in paragraphs
(a)(2) and (a)(5) of Item 402 before today's amendments. Because
paragraph (a)(5) of Item 402 as it had been stated prior to these
amendments was otherwise redundant with paragraph (a)(2) of Item 402
as that provision had been stated, we are eliminating the language
that had been set forth in paragraph (a)(5) in its entirety and
making a conforming amendment to paragraph (a)(2) of Item 402.
    \339\ See Instruction 5 to Item 404(a), discussed in Section
V.A.3., below.
---------------------------------------------------------------------------

    As noted in the Proposing Release, the result of these amendments
may be that in some cases compensation information will be required to
be disclosed under Item 402, while the related person transaction
giving rise to that compensation is also disclosed under Item 404. We
believe that the possibility of additional disclosure in the context of
each of these respective items is preferable to the possibility that
compensation is not properly and fully disclosed under Item 402.
8. Other Changes
    Before today's amendments, a company was permitted to omit from
Item 402 disclosure of ``information regarding group life, health,
hospitalization, medical reimbursement or relocation plans that do not
discriminate in scope, terms or operation, in favor of executive
officers or directors of the registrant and that are available
generally to all salaried employees.'' \340\ Because relocation plans,
even when available generally to all salaried employees, are
susceptible to operation in a discriminatory manner that favors
executive officers, this exclusion may have deprived investors of
disclosure of significant compensatory benefits. For this reason, we
are deleting relocation plans from this exclusion, as we proposed. For
the same reason, as we proposed, we are also deleting relocation plans
from the exclusion from portfolio manager compensation in forms used by
management investment companies to register under the Investment
Company Act and offer securities under the Securities Act.\341\ We also
are revising the definition of ``plan'' so that it is more principles-
based, as we proposed.\342\ Finally, in order to

simplify the language of the individual requirements, we have
consolidated into one provision the definitions for the terms stock,
option and equity as used in Item 402.\343\
---------------------------------------------------------------------------

    \340\ This language appeared in Item 402(a)(7)(ii) prior to
today's amendments, which generally defined the term ``plan.''
    \341\ Amendment to Instruction 2 to Item 15(b) of Form N-1A;
amendment to Instruction 2 to Item 21.2 of Form N-2; amendment to
Instruction 2 to Item 22(b) of Form N-3.
    \342\ Item 402(a)(6)(ii).
    \343\ Item 402(a)(6)(i).
---------------------------------------------------------------------------

9. Compensation of Directors
    Director compensation has continued to evolve from simple
compensation packages mostly involving cash compensation and attendance
fees to more complex packages, which can also include equity-based
compensation, incentive plans and other forms of compensation.\344\ In
light of this complexity, we proposed to require formatted tabular
disclosure for director compensation, accompanied by narrative
disclosure of additional material information. In doing so, we
revisited an approach that the Commission proposed in 1995 but did not
adopt at that time.\345\
---------------------------------------------------------------------------

    \344\ See, e.g., National Association of Corporate Directors and
Pearl Meyer & Partners, 2003-2004 Director Compensation Survey
(2004); National Association of Corporate Directors, Report of the
NACD Blue Ribbon Commission On Director Compensation (2001); and
Dennis C. Carey, et al, How Should Corporate Directors Be
Compensated?, Investment Dealers' Digest Inc.--Special Issue: Boards
and Directors (Jan. 1996).
    \345\ 1995 Release. The 1995 proposed amendment was coupled with
a proposed amendment to permit companies to reduce the detailed
executive compensation information provided in the proxy statement
by instead furnishing that information in the Form 10-K. We did not
act upon these proposed amendments.
---------------------------------------------------------------------------

    Director compensation has continued to evolve since 1995 so that we
are today adopting a Director Compensation Table, which resembles the
revised Summary Compensation Table, but presents information only with
respect to the company's last completed fiscal year. Consistent with
the modifications to the Summary Compensation Table, this table moves
pension and nonqualified deferred compensation plan disclosure from All
Other Compensation to a separate column.\346\ Because the same
instructions as provided in the Summary Compensation Table govern
analogous matters in the Director Compensation Table, our modifications
to those instructions also apply to this table.
---------------------------------------------------------------------------

    \346\ As noted in n. 303 above, Item 402(a)(5) provides that a
column may be omitted if there is no compensation required to be
reported in that column.

                                                                  Director Compensation
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Change in pension
                                                                                value and
                      Fees earned or                                              Non-equity        nonqualified        All other
       Name          paid in cash ($)    Stock awards ($)  Option awards ($)    incentive plan        deferred       compensation ($)      Total ($)
                                                                               compensation ($)     compensation
                                                                                earnings
(a)                 (b)                 (c)                (d)                (e)                (f)                (g)                (h)
--------------------------------------------------------------------------------------------------------------------------------------------------------
A

--------------------------------------------------------------------------------------------------------------------------------------------------------
B

--------------------------------------------------------------------------------------------------------------------------------------------------------
C

--------------------------------------------------------------------------------------------------------------------------------------------------------
D

--------------------------------------------------------------------------------------------------------------------------------------------------------
E

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

    As proposed and adopted, director fees earned or paid in cash would
be reported separately from fees paid in stock. The All Other
Compensation column of the Director Compensation Table includes, but is
not limited to:
     All perquisites and other personal benefits if the total
is $10,000 or greater;
     All tax reimbursements;
     For any security of the company or its subsidiaries
purchased from the company or its subsidiaries (through deferral of
fees or otherwise) at a discount from the market price of such security
at the date of purchase, unless the discount is generally available to
all security holders or to all salaried employees of the company, the
compensation cost, if any, computed in accordance with FAS 123R;
     Amounts paid or accrued to any director pursuant to a plan
or arrangement in connection with the resignation, retirement or any
other termination of such director or a change in control of the
company;
     Annual company contributions to vested and unvested
defined contribution plans;
     All consulting fees;
     Awards under director legacy or charitable awards
programs; \347\ and
---------------------------------------------------------------------------

    \347\ Under director legacy programs, also known as charitable
award programs, registrants typically agree to make a future
donation to one or more charitable institutions in the director's
name, payable by the company upon a designated event such as death
or retirement. The amount to be disclosed in the table shall be the
annual cost of such promises and payments, with footnote disclosure
of the total dollar amount and other material terms of each such
program. Instruction 1 to Item 402(k)(2)(vii).
---------------------------------------------------------------------------

     The dollar value of any insurance premiums paid by, or on
behalf of, the company for life insurance for the director's benefit.
    An additional requirement to include the dollar value of any
dividends or other earnings paid in stock or option awards when the
dividend or earnings were not factored into the grant date fair value
has been adopted for this column as discussed above.
    In addition to the disclosure specified in the columns of the
table, we proposed to require, by footnote to the appropriate column,
disclosure for each director of the outstanding equity awards at fiscal
year end as would be required if the Outstanding Equity Awards at
Fiscal Year-End table for named executive officers were required for
directors. In response to a comment that this disclosure would be
provided

in the narrative accompanying the table, we have simplified the
relevant instruction to require footnote disclosure only of the
aggregate numbers of stock awards and option awards outstanding at
fiscal year end.\348\ As with the Summary Compensation Table, the new
rules make clear that all compensation must be included in the
table.\349\ As is the case with the current director disclosure
requirement, companies will not be required to include in the director
disclosure any amounts of compensation paid to a named executive
officer and disclosed in the Summary Compensation Table with footnote
disclosure indicating what amounts reflected in that table are
compensation for services as a director.\350\ An instruction to the
Director Compensation Table permits the grouping of multiple directors
in a single row of the table if all of their elements and amounts of
compensation are identical.\351\
---------------------------------------------------------------------------

    \348\ Instruction to Item 402(k)(2)(iii) and (iv). See letter
from ABA.
    \349\ The only exception is if all perquisites received by the
director total less than $10,000, they do not need to be disclosed.
Further, as described above for the Summary Compensation Table,
disclosure of nonqualified deferred compensation earnings is limited
to the above-market or preferential portion.
    \350\ Instruction 3 to Item 402(c).
    \351\ Instruction to Item 402(k)(2).
---------------------------------------------------------------------------

    Following the table, narrative disclosure will describe any
material factors necessary to an understanding of the table. Such
factors may include, for example, a breakdown of types of fees.\352\ In
addition, as noted in Section II.A., disclosure regarding option timing
or dating practices may be necessary under this narrative disclosure
requirement when the recipients of the stock option grants are
directors of the company. As we proposed, we are not requiring a
supplemental Grants of Plan-Based Awards Table for directors.
---------------------------------------------------------------------------

    \352\ Item 402(k)(3).
---------------------------------------------------------------------------

D. Treatment of Specific Types of Issuers

1. Small Business Issuers
    The Item 402 amendments continue to differentiate between small
business issuers and other issuers, as we proposed. In adopting the
amendments, we recognize that the executive compensation arrangements
of small business issuers typically are less complex than those of
other public companies.\353\ We also recognize that satisfying
disclosure requirements designed to capture more complicated
compensation arrangements may impose new, unwarranted burdens on small
business issuers.\354\
---------------------------------------------------------------------------

    \353\ These amendments apply only to small business issuers, as
defined by Item 10(a)(1) of Regulation S-B. The Commission's
Advisory Committee on Smaller Public Companies has recommended that
the Commission incorporate the scaled disclosure accommodations
currently available to small business issuers under Regulation S-B
into Regulation S-K and make them available to all microcap
companies. Final Report of the Advisory Committee on Smaller Public
Companies to the United States Securities and Exchange Commission
(Apr. 23, 2006). Any future consideration of this recommendation
would be the subject of a separate rulemaking.
    \354\ Prior to today's amendments, under both Item 402 of
Regulation S7-B and Item 402 of Regulation S-K, a small business
issuer was not required to provide the Compensation Committee
Report, the Performance Graph, the Compensation Committee Interlocks
disclosure, the Ten-Year Option/SAR Repricings Table, and the Option
Grant Table columns disclosing potential realizable value or grant
date value. The rules prior to today's amendments also permitted
small business issuers to exclude the Pension Plan Table.
---------------------------------------------------------------------------

    Some commenters addressing the proposed amendments to Item 402 of
Regulation S-B expressed the view that all companies whose shares are
publicly traded should have to meet the same reporting and disclosure
standards, regardless of their size, or urged that exemptions for
smaller public companies be limited,\355\ suggesting that they be
required to file some form of a basic Compensation Discussion and
Analysis.\356\ We are not following these recommendations, because the
executive compensation arrangements of small business issuers generally
are so much less complex than those of other public companies that they
do not warrant the more extensive disclosure requirements imposed on
companies that are not small business issuers and related regulatory
burdens that could be disproportionate for small business issuers.
---------------------------------------------------------------------------

    \355\ See, e.g., letters from CII; CRPTF; IUE-CWA; SBAF; and
WSIB.
    \356\ See, e.g., letters from ISS and Institutional Investors
Group.
---------------------------------------------------------------------------

    Other commenters who supported the Commission's proposal to require
less extensive disclosure for companies subject to Regulation S-B
suggested that the Commission amend the definition of small business
issuer to encompass a larger group of smaller public companies, such as
by adopting the definition of ``smaller public company'' recommended by
the Advisory Committee on Smaller Public Companies, and scale back the
disclosure thresholds for all such smaller companies.\357\ We are not
following this recommendation at this time, but would instead defer
consideration until we can fully consider all recommendations of the
Advisory Committee.
---------------------------------------------------------------------------

    \357\ See letters from America's Community Bankers (``ACB'');
Independent Community Bankers of America (``ICBA''); and SCSGP.
---------------------------------------------------------------------------

    As proposed and adopted, small business issuers will be required to
provide, along with related narrative disclosure:
     The Summary Compensation Table; \358\
---------------------------------------------------------------------------

    \358\ Items 402(b) and 402(c) of Regulation S-B. Consistent with
the instructions to the narrative disclosure required by Item 402(e)
of Regulation S-K, we have added an instruction to Item 402(c) of
Regulation S-B so that disclosure is not required regarding any
repricing that occurs through specified provisions. Instruction to
Item 402(c) of Regulation S-B.
---------------------------------------------------------------------------

     The Outstanding Equity Awards at Fiscal Year-End Table;
\359\ and
---------------------------------------------------------------------------

    \359\ Item 402(d) of Regulation S-B.
---------------------------------------------------------------------------

     The Director Compensation Table.\360\
---------------------------------------------------------------------------

    \360\ Item 402(f) of Regulation S-B.
---------------------------------------------------------------------------

    Small business issuers will be required to provide information in
the Summary Compensation Table only for the last two fiscal years. In
addition, small business issuers will be required to provide
information for fewer named executive officers, namely the principal
executive officer and the two most highly compensated officers other
than the principal executive officer.\361\ In light of our decision to
link the Summary Compensation Table pension plan disclosure to the
disclosure in the Pension Benefits Table, which is not required for
small business issuers, and in response to comment,\362\ we have
decided not to require that small business issuers include pension plan
disclosure in the Summary Compensation Table. Narrative discussion of a
number of items to the extent material replaces tabular or footnote
disclosure, for example identification of other items in the All Other
Compensation column and a description of post-employment payments and
other benefits.\363\ In light of our request in Release No. 33-8735 for
further comment on the proposed additional narrative disclosure
requirement regarding up to three highly compensated employees so that
it might apply only to large accelerated filers, we have not adopted
this proposal for Item 402 of Regulation S-B. Small business issuers
are not required to provide a Compensation

Discussion and Analysis or the related Compensation Committee
Report.\364\
---------------------------------------------------------------------------

    \361\ Item 402(a) of Regulation S-B. Item 402(c)(7) of
Regulation S-B requires an identification to the extent material of
any item included under All Other Compensation in the Summary
Compensation Table. However, identification of an item will not be
considered material if it does not exceed the greater of $25,000 or
10% of all items included in the specified category. All items of
compensation are required to be included in the Summary Compensation
Table without regard to whether such items are required to be
identified.
    \362\ See letter from ABA.
    \363\ Items 402(c) and 402(e) of Regulation S-B.
    \364\ We are also eliminating a provision of Item 402 of
Regulation S-K that allows small business issuers using forms that
call for Regulation S-K disclosure to exclude the disclosure
required by certain paragraphs of that Item. This provision had been
set forth in Item 402(a)(1)(i) of Regulation S-K prior to today's
amendments.
---------------------------------------------------------------------------

2. Foreign Private Issuers
    Prior to today's amendments, a foreign private issuer was deemed to
comply with Item 402 of Regulation S-K if it provided the information
required by Items 6.B. and 6.E.2. of Form 20-F, with more detailed
information provided if otherwise made publicly available. We proposed
to continue this treatment of these issuers and clarify that the
treatment of foreign private issuers under Item 402 parallels that
under Form 20-F. Commenters supported this approach, stating that it
showed appropriate deference to a foreign private issuer's home country
requirements.\365\ We are adopting these requirements as proposed.\366\
---------------------------------------------------------------------------

    \365\ See, e.g., letters from Federation of German Industries;
DaimlerChrysler AG; and jointly, Allianz AG, Deutsche Bank AG and
Siemens AG.
    \366\ Item 402(a)(1).
---------------------------------------------------------------------------

3. Business Development Companies
    As proposed, we are applying the same executive compensation
disclosure requirements to business development companies that we are
adopting for operating companies.\367\ We received no comments on this
proposal. Our amendments eliminate the inconsistency between Form 10-K,
on the one hand, which requires business development companies to
furnish all of the information required by Item 402 of Regulation S-K,
and the proxy rules and Form N-2, on the other, which require business
development companies to provide some of the information from Item 402
and other information that applies to registered investment companies.
---------------------------------------------------------------------------

    \367\ Business development companies are a category of closed-
end investment companies that are not required to register under the
Investment Company Act [15 U.S.C. 80a-2(a)(48)].
---------------------------------------------------------------------------

    Under the amendments, the registration statements of business
development companies will be required to include all of the
disclosures required by Item 402 of Regulation S-K for all of the
persons covered by Item 402.\368\ This disclosure will also be required
in the proxy and information statements of business development
companies if action is to be taken with respect to the election of
directors or with respect to the compensation arrangements and other
matters enumerated in Items 8(b) through (d) of Schedule 14A.\369\
Business development companies will also be required to make these
disclosures in their annual reports on Form 10-K.\370\
---------------------------------------------------------------------------

    \368\ New Item 18.14 of Form N-2. Under the amendments, business
development companies will no longer be required to respond to Item
18.13 of Form N-2, and Item 18.13(c) of Form N-2 is being deleted.
Items 18.14 and 18.15 of Form N-2 are being redesignated as Items
18.15 and 18.16, respectively. As a result of the redesignation of
Item 18.15 of Form N-2, a change to the cross reference to this Item
in Instruction 8(a) of Item 24 of the form is also being made.
    \369\ Amendment to Item 8 of Schedule 14A. Under the amendments,
business development companies will no longer be required to respond
to Item 22(b)(13) of Schedule 14A, and Item 22(b)(13)(iii) of
Schedule 14A is being deleted. Amendments to Item 22(b)(13) of
Schedule 14A.
    \370\ Item 11 of Form 10-K.
---------------------------------------------------------------------------

    As a result of these amendments, the persons covered by the
compensation disclosure requirements will be changed. The compensation
disclosure in the proxy and information statements and registration
statements of business development companies will be required to cover
the same officers as for operating companies, including the principal
executive officer and principal financial officer, as well as the three
most highly compensated executive officers that have total compensation
exceeding $100,000,\371\ instead of each of the three highest paid
officers of the company that have aggregate compensation from the
company for the most recently completed fiscal year in excess of
$60,000. In addition, the registration statements of business
development companies will no longer be required to disclose
compensation of members of the advisory board or certain affiliated
persons of the company.
---------------------------------------------------------------------------

    \371\ See Section II.C.6., above.
---------------------------------------------------------------------------

    Finally, under the amendments, the proxy and information statements
and registration statements of business development companies will not
be required to include compensation from the ``fund complex.''
Previously, this information was required in some circumstances.\372\
---------------------------------------------------------------------------

    \372\ See instructions 4 and 6 to Item 22(b)(13)(i) of Schedule
14A; and instructions 4 and 6 to Item 18.13(a) of Form N-2 (prior to
today's amendments requiring certain entries in the compensation
table in the proxy and information statements and registration
statements of business development companies to include compensation
from the fund complex).
---------------------------------------------------------------------------

E. Conforming Amendments

    The Item 402 amendments necessitate conforming amendments to the
Items of Regulations S-K and S-B and the proxy rules that cross
reference amended paragraphs of Item 402. On this basis, we are
amending:
     the Item 201(d) of Regulations S-K and S-B and proxy rule
references to the Item 402 definition of ``plan;'' \373\
     the Item 601(b)(10) of Regulation S-K reference to the
Item 402 treatment of foreign private issuers; \374\ and
---------------------------------------------------------------------------

    \373\ Amendments to: Instruction 2 to paragraph (d) of Item 201
of Regulation S-B; Instruction 2 to paragraph (d) of Item 201 of
Regulation S-K; Exchange Act Rules 14a-6(a)(4) and 14c-5(a)(4); and
Instruction 1 to Item 10 of Schedule 14A.
    \374\ Amendment to Item 601(b)(10)(iii)(C)(5).
---------------------------------------------------------------------------

     the proxy rule references to Item 402 retirement plan
disclosure.\375\

III. Revisions to Form 8-K and the Periodic Report Exhibit Requirements

    As part of our broader effort to revise our executive and director
compensation disclosure requirements, we proposed revisions to Item
1.01 of Form 8-K. This item requires real-time disclosure about an
Exchange Act reporting company's entry into a material definitive
agreement outside of the ordinary course of the company's business, as
well as any material amendment to such an agreement. Our staff's
experience since Item 1.01 became effective in 2004 suggests that this
item has elicited executive compensation disclosure regarding types of
matters that do not appear always to be unquestionably or presumptively
material, which is the standard we set for the expanded Form 8-K
disclosure events.\376\ We therefore proposed to revise Items 1.01 and
5.02 of Form 8-K to require real-time disclosure of employee
compensation events that more clearly satisfy this standard. We are
adopting the revisions substantially as proposed.
---------------------------------------------------------------------------

    \375\ Amendments to Item 10(b)(1)(ii) and Instruction to Item
10(b)(1)(ii) of Schedule 14A.
    \376\ We stated in Section I of Additional Form 8-K Disclosure
Requirements and Acceleration of Filing Date, Release No 33-8400
(Mar. 16, 2004) [69 FR 15594] (the ``Form 8-K Adopting Release''):
``The revisions that we adopt today will benefit markets by
increasing the number of unquestionably or presumptively material
events that must be disclosed currently.''
---------------------------------------------------------------------------

    In addition to the amendments to Items 1.01 and 5.02 of Form 8-K,
we proposed to revise General Instruction D of Form 8-K to permit
companies in most cases to omit the Item 1.01 heading if multiple items
including Item 1.01 are applicable, so long as all of the substantive
disclosure required by Item 1.01 is included. We are adopting this
provision as proposed.

A. Items 1.01 and 5.02 of Form 8-K

    Item 1.01 of Form 8-K requires an Exchange Act reporting company to
disclose, within four business days, the company's entry into a
material definitive agreement outside of its ordinary course of
business, or any

amendment of such agreement that is material to the company. When we
initially proposed this item, several commenters stated that it would
be difficult to determine, within the shortened Form 8-K filing period,
whether a particular definitive agreement met the materiality threshold
of Item 1.01, and whether the agreement was outside of the ordinary
course of business.\377\ Some of these commenters suggested that we
apply to Item 1.01 the standards used in pre-existing Item 601(b)(10)
of Regulation S-K, which governs the filing as exhibits to Commission
reports of material contracts entered into outside the ordinary course,
because these standards had been in place for many years and were
familiar to reporting companies.\378\
---------------------------------------------------------------------------

    \377\ See, e.g., letters on Additional Form 8-K Disclosure
Requirements and Acceleration of Filing Date, Release No. 33-8106
(June 17, 2002) [67 FR 42914] in File No. S7-22-02 from the
Committee on Federal Regulation of Securities, Section of Business
Law of the American Bar Association, dated September 12, 2002;
Cleary, Gottlieb, Steen & Hamilton, dated August 26, 2002; Intel
Corporation, dated August 26, 2002; Professor Joseph A. Grundfest,
et al. dated October 3, 2002; Perkins Coie LLP, dated August 26,
2002; Shearman & Sterling, dated August 30, 2002; and Sullivan &
Cromwell, dated August 26, 2002.
    \378\ See, e.g., letter in File No. S7-22-02 from the Section of
Business Law of the American Bar Association.
---------------------------------------------------------------------------

    In response to the concerns raised by these comments, we adopted
Item 1.01 of Form 8-K so that it uses the standards of Item 601(b)(10)
to determine the types of agreements that are material to a company and
not in the ordinary course of business. Item 601(b)(10) of Regulation
S-K requires a company to file, as an exhibit to Securities Act and
Exchange Act filings, material contracts that are not made in the
ordinary course of business and are to be performed in whole or part at
or after the filing of the registration statement or report, or were
entered into not more than two years before the filing. Item
601(b)(10)(iii) refers specifically to employment compensation
arrangements and established a company's obligation to file the
following as exhibits:
     any management contract or any compensatory plan, contract
or arrangement, including but not limited to plans relating to options,
warrants or rights, pension, retirement or deferred compensation or
bonus, incentive or profit sharing (or if not set forth in any formal
document, a written description thereof) in which any director or any
named executive officer (as defined by Item 402(a)(3) of Regulation S-
K) participates;
     any other management contract or any other compensatory
plan, contract, or arrangement in which any other executive officer of
the company participates, unless immaterial in amount or significance;
and
     any compensation plan, contract or arrangement adopted
without the approval of security holders pursuant to which equity may
be awarded, including, but not limited to, options, warrants or rights
in which any employee (whether or not an executive officer of the
company) participates unless immaterial in amount or significance.\379\
---------------------------------------------------------------------------

    \379\ Item 601(b)(10)(iii) of Regulation S-K. We note the
provision in Item 601(b)(10)(iii)(A) that carves out any plan,
contract or arrangement in which named executive officers and
directors do not participate that is ``immaterial in amount or
significance.'' In 1980, the Commission adopted amendments to
Regulation S-K that consolidated all of the exhibit requirements of
various disclosure forms into a single item in Regulation S-K.
Amendments Regarding Exhibit Requirements, Release No. 33-6230 (Aug.
27, 1980) [45 FR 58822], at Section II.B. This item was a forerunner
of the current Item 601. As part of that 1980 adopting release, the
definition of material contract contained in the new item was also
revised in an effort to reduce the number of remunerative plans or
arrangements that must be filed. Not long after, though, the staff
discovered that rather than reduce the number of exhibits filed, the
provision actually had the opposite effect. The staff found that the
revised definition of material contract ``has resulted in
registrants filing a large volume of varied remunerative contracts
involving directors and executive officers, contracts which are not
material and which would not have been filed under the previously
existing `material in amount or significance' standard.'' Technical
Amendment Regarding Exhibit Requirement, Release No. 33-6287 (Feb.
6, 1981) [46 FR 11952], at Section I. Therefore, in February 1981,
the Commission added ``unless immaterial in amount or significance''
to the definition of ``material contracts'' as applied to
remunerative plans, contracts or arrangements participated in by
executives who are not named executive officers. Id. We reiterate
that this phrase was intended to indicate that whether plans,
contracts or arrangements in which executive officers other than
named executive officers participate are required to be disclosed
under Item 601(b)(10) must be determined on the basis of
materiality.
---------------------------------------------------------------------------

    Therefore, entry into these types of contracts triggered the filing
of a Form 8-K within four business days. Importantly, the requirement
for directors and named executive officers does not include an
exception for those that are ``immaterial in amount or significance.''
The incorporation of the Item 601(b)(10) standards into Item 1.01 of
Form 8-K has therefore significantly affected executive compensation
disclosure practices. Prior to the Form 8-K amendments in 2004, it was
customary for a company's annual proxy statement to be the primary
vehicle for disclosure of executive and director compensation
information. However, Item 1.01 of Form 8-K as originally adopted has
resulted in executive compensation disclosures that are much more
frequent and accelerated than those included in a company's proxy
statement. In addition, particularly because of the terms of Item
601(b)(10), Item 1.01 of Form 8-K triggered compensation disclosure of
the types of matters that, in some cases, appear to have fallen short
of the ``unquestionably or presumptively material'' standard associated
with the expanded Form 8-K disclosure items. Companies and their
counsel have raised concerns that the expanded Form 8-K requirements
have resulted in real-time disclosure of compensation events that
should be disclosed, if at all, in a company's proxy statement for its
annual meeting or as an exhibit to the company's next periodic report,
such as the Form 10-Q or Form 10-K.
    As we stated in the Proposing Release, we believe that much of the
disclosure regarding employment compensation matters required in real-
time under the Form 8-K requirements is viewed by investors as
material. However, we also believe it is appropriate to restore a more
balanced approach to this aspect of Form 8-K, an approach which is
designed to elicit unquestionably or presumptively material information
on a real-time basis, but seeks to limit Form 8-K required disclosure
of information below that threshold.
    Accordingly, we are adopting amendments to Form 8-K that will
uncouple Item 601(b)(10)(iii) of Regulation S-K from the current
disclosure requirements of Form 8-K. As proposed, we are eliminating
employment compensation arrangements from the scope of Item 1.01
altogether and expanding Item 5.02 of Form 8-K to cover only those
compensatory arrangements with executive officers and directors that we
believe are unquestionably or presumptively material. Commenters
generally supported these proposed amendments.\380\ We are adopting
these amendments substantially as proposed.
---------------------------------------------------------------------------

    \380\ See, e.g., letters from ABA; Chamber of Commerce; N.
Ludgus; Committee on Securities Regulation of the Business Law
Section of the New York State Bar Association; SCSGP; and Sullivan.
---------------------------------------------------------------------------

1. Item 1.01--Entry Into a Material Definitive Agreement
    Specifically, we are deleting the last sentence of former
Instruction 1 to Item 1.01 of Form 8-K, which references the portions
of Item 601(b)(10) of Regulation S-K that specifically relate to
management compensation and compensatory plans. In place of the deleted
sentence, we are adding a sentence specifying that agreements

involving the subject matter identified in Item 601(b)(10)(iii)(A) and
(B) of Regulation S-K need not be disclosed under amended Item 1.01 of
Form 8-K. This change also will apply to the disclosure of terminations
of material definitive agreements under Item 1.02 of Form 8-K, which
references the definition of ``material definitive agreement'' in Item
1.01 of Form 8-K.\381\ Instead of being required to be disclosed based
on the general requirements with regard to material definitive
agreements in Item 1.01 and Item 1.02 of Form 8-K, employment
compensation arrangements will now be covered under Item 5.02 of Form
8-K, as amended.
---------------------------------------------------------------------------

    \381\ Item 1.02(b) states: ``For purposes of this Item 1.02, the
term material definitive agreement shall have the same meaning as
set forth in Item 1.01(b).''
---------------------------------------------------------------------------

2. Item 5.02--Departure of Directors or Certain Officers; Election of
Directors; Appointment of Certain Officers; Compensatory Arrangements
of Certain Officers
    Item 5.02 generally requires disclosure within four business days
of the appointment or departure of directors and specified officers. In
particular, Item 5.02(b) has required disclosure if a company's
principal executive officer, president, principal financial officer,
principal accounting officer, principal operating officer, or any
person performing similar functions, retires, resigns or is terminated
from that position and Item 5.02(c) has required disclosure if a
company appoints a new principal executive officer, president,
principal financial officer, principal accounting officer, principal
operating officer, or any person performing similar functions. Item
5.02 has also required disclosure if a director retires, resigns, is
removed, or declines to stand for re-election.\382\ Before adopting
today's amendments, the required disclosure under Item 5.02 included a
brief description of the material terms of any employment agreement
between the company and the officer and a description of disagreements,
if any.
---------------------------------------------------------------------------

    \382\ Items 5.02(a) and (b) of Form 8-K.
---------------------------------------------------------------------------

    As proposed, we are modifying Item 5.02 to capture generally the
information already required under that item, as well as additional
information regarding material employment compensation arrangements
involving named executive officers that, prior to today's amendments,
would be called for under Item 1.01.
    With respect to the additional disclosure that we are requiring for
named executive officers under amended Item 5.02, one commenter noted
that because the definition of ``named executive officer'' is
determined with reference to a company's last completed fiscal year,
greater clarity is needed to determine how the standard should be
applied for current Form 8-K reporting throughout the year.\383\ The
commenter suggested that companies might find it difficult to identify
their named executive officers for purposes of real-time disclosure
under Item 5.02 during the period following the completion of their
last fiscal year but prior to preparing their proxy statements or Forms
10-K in the new fiscal year. Accordingly, we are including a new
Instruction to Item 5.02 that will clarify that for purposes of this
Item the named executive officers are the persons for whom disclosure
was required in the most recent filing with the Commission that
required disclosure under Item 402(c) of Regulation S-K or Item 402(b)
of Regulation S-B, as applicable.\384\
---------------------------------------------------------------------------

    \383\ See letter from ABA.
    \384\ Instruction 4 to Item 5.02.
---------------------------------------------------------------------------

    In general, our revisions to Form 8-K will both modify the overall
requirements for disclosure of employment compensation arrangements on
Form 8-K and locate all such disclosure under a single item. We are
accomplishing this by taking the following steps:
     Expanding the information regarding retirement,
resignation or termination to include all persons falling within the
definition of named executive officers for the company's previous
fiscal year, whether or not included in the list specified in Item 5.02
prior to these amendments; \385\
---------------------------------------------------------------------------

    \385\ Item 5.02(b) of Form 8-K will continue to cover the
officers currently specified therein, whether or not named executive
officers for the previous or current years, and all directors.
---------------------------------------------------------------------------

     Expanding the disclosure items covered under Item 5.02
beyond employment agreements to require a brief description of any
material plan, contract or arrangement to which a covered officer or
director is a party or in which he or she participates that is entered
into or materially amended in connection with any of the triggering
events specified in Item 5.02(c) and (d), or any grant or award to any
such covered person, or modification thereto, under any such plan,
contract or arrangement in connection with any such event; \386\
---------------------------------------------------------------------------

    \386\ Items 5.02(c)(3) and (d)(5). Plans, contracts or
arrangements (but not material amendments or grants or awards or
modifications thereto) may be denoted by reference to the
description in the company's most recent annual report on Form 10-K
or proxy statement.
---------------------------------------------------------------------------

     With respect to the principal executive officer, the
principal financial officer, or persons falling within the definition
of named executive officer for the company's previous fiscal year,
expanding the disclosure items to include a brief description of any
material new compensatory plan, contract or arrangement, or new grant
or award thereunder (whether or not written), and any material
amendment to any compensatory plan, contract or arrangement (or any
modification to a grant or award thereunder), whether or not such
occurrence is in connection with a triggering event specified in Item
5.02. Grants or awards or modifications thereto will not be required to
be disclosed if they are consistent with the terms of previously
disclosed plans or arrangements and they are disclosed the next time
the company is required to provide new disclosure under Item 402 of
Regulation S-K; \387\ and
---------------------------------------------------------------------------

    \387\ Item 5.02(e) and Instruction 2 to Item 5.02(e).
---------------------------------------------------------------------------

     Adding a requirement for disclosure of salary or bonus for
the most recent fiscal year that was not available at the latest
practicable date in connection with disclosure under Item 402 of
Regulation S-K.\388\ This disclosure will also require a new total
compensation recalculation to reflect the new salary or bonus
information.
---------------------------------------------------------------------------

    \388\ Item 5.02(f). See Section II.C.1.b. above for a discussion
of the reporting delay that exists under the current disclosure
rules when bonus and salary are not determinable at the most recent
practicable date.
---------------------------------------------------------------------------

    In the case of each of these disclosure items for amended Item
5.02, we emphasize that we are requiring that a brief description of
the specified matter be included. We have observed that in response to
the requirements to disclose the entry into material definitive
agreements under Item 1.01, some companies have included disclosure
that resembles an updating of the disclosure required under former Item
402 of Regulation S-K. In the context of current disclosure under Form
8-K, we are seeking disclosure that informs investors of specified
material events and developments. However, the information we are
seeking does not require the information necessary to comply with Item
402.
    In response to comments received,\389\ we have revised Instruction
2 to new Item 5.02(e) from the text we proposed and created a new Item
5.02(f), as described above. The revised Instruction 2 to Item 5.02(e)
that we are adopting: (i) Changes or eliminates prior references to
``original terms'' and uses instead the phrase ``previously disclosed
terms,'' in order to minimize

ambiguity; and (ii) clarifies that, for purposes of the Instruction, no
distinction should be made between awards granted under cash or equity-
based plans. New Item 5.02(f) responds to comments we received that our
proposed Instruction 3 to 5.02(e) should be codified as a separate item
because it called for disclosure (determining salary or bonus amounts
for a completed fiscal year) that otherwise may not be required under
Item 5.02(e).\390\
---------------------------------------------------------------------------

    \389\ See letter from ABA.
    \390\ See letter from ABA.
---------------------------------------------------------------------------

B. Extension of Limited Safe Harbor Under Section 10(b) and Rule 10b-5
to Item 5.02(e) of Form 8-K and Exclusion of Item 5.02(e) From Form S-3
Eligibility Requirements

    We are extending the safe harbors regarding Section 10(b) and Rule
10b-5 and Form S-3 eligibility in the event that a company fails to
timely file reports required by Item 5.02(e) of Form 8-K.
    In March 2004, we adopted a limited safe harbor from liability
under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder for
failure to timely file reports required by Form 8-K Items 1.01, 1.02,
2.03, 2.04, 2.05, 2.06, 4.02(a) and 6.03. Because we believed that
these items may require management to make rapid materiality and
similar judgments within the condensed timeframe required for filing of
a Form 8-K, we established a safe harbor that applies until the filing
due date of the company's quarterly or annual report for the period in
question. We concluded that the risk of liability under these
provisions for the failure to timely file was disproportionate to the
benefit of real-time disclosure and therefore justified the need for a
limited safe harbor of a fixed duration. For the same reasons, we
believe that the safe harbor should also extend to Item 5.02(e) of Form
8-K. We therefore are amending Exchange Act Rules 13a-11(c) and 15d-
11(c) accordingly.
    In addition, a company forfeits its eligibility to use Form S-3 if
it fails to timely file all reports required under Exchange Act Section
13(a) or 15(d) during the 12 month period prior to filing of the
registration statement.\391\ For the same reasons, when adopting the
expanded Form 8-K rules in 2004, we revised the Form S-3 eligibility
requirements so that a company would not lose its eligibility to use
Form S-3 registration statements if it failed to timely file reports
required by the Form 8-K items to which the Section 10(b) and Rule 10b-
5 safe harbor applies.\392\ In particular, the burden resulting from a
company's sudden loss of eligibility to use Form S-3 could be a
disproportionately large negative consequence of an untimely Form 8-K
filing under one of the specified items.\393\ We believe that this safe
harbor should be extended to Item 5.02(e) of Form 8-K and, therefore,
we are amending General Instruction I.A.3.(b) of Form S-3, which
pertains to the eligibility requirements for use of Form S-3 to reflect
this position.
---------------------------------------------------------------------------

    \391\ General Instruction I.A.3 to Form S-3.
    \392\ Form 8-K Adopting Release, at Section II.E.
    \393\ Id.
---------------------------------------------------------------------------

C. General Instruction D to Form 8-K

    We are adopting the revision to General Instruction D as proposed.
Frequently, an event may trigger a Form 8-K filing under multiple
items, particularly under both Item 1.01 and another item. General
Instruction D to Form 8-K permits a company to file a single Form 8-K
to satisfy one or more disclosure items, provided that the company
identifies by item number and caption all applicable items being
satisfied and provides all of the substantive disclosure required by
each of the items. In order to promote prompt filings on Form 8-K and
avoid potential non-compliance with Form 8-K due to inadvertent
exclusions of captions, we are amending General Instruction D to permit
companies to omit the Item 1.01 heading in a Form 8-K that also
discloses any other item, so long as the substantive disclosure
required by Item 1.01 is included in the Form 8-K. This would not
extend to allowing a company to omit any other caption if the Item 1.01
caption is included.

D. Foreign Private Issuers

    We are amending the exhibit instructions to Form 20-F so that
foreign private issuers will be required to file an employment or
compensatory plan with management or directors (or portion of such
plan) only when the foreign private issuer either is required to
publicly file the plan (or portion of it) in its home country or if the
foreign private issuer has otherwise publicly disclosed the plan.\394\
---------------------------------------------------------------------------

    \394\ We are also making a similar revision to Item
601(b)(10)(iii)(C)(5) of Regulation S-K.
---------------------------------------------------------------------------

    Under Item 6.B.1 of Form 20-F, a foreign private issuer must
disclose the compensation of directors and management on an aggregate
basis and, additionally, on an individual basis, unless individual
disclosure is not required in the issuer's home country and is not
otherwise publicly disclosed by the foreign private issuer. Under the
exhibit instructions to Form 20-F prior to our amendments, management
contracts or compensatory plans in which directors or members of
management participate generally were required to be filed as exhibits,
unless the foreign private issuer provided compensation information on
an aggregate basis and not on an individual basis. Under those pre-
amendment provisions, an issuer that provided any individualized
compensation disclosure was required to file as an exhibit to Form 20-F
management employment agreements that potentially relate to matters
that have not otherwise been disclosed.
    Our amendment of the exhibit instructions to Form 20-F \395\ is
intended to be consistent with the existing disclosure requirements
under Form 20-F relating to executive compensation matters for foreign
private issuers. In the same way that executive compensation disclosure
under Form 20-F largely mirrors the disclosure that a foreign private
issuer makes under home country requirements or voluntarily, so too the
public filing of management employment agreements as an exhibit to Form
20-F under our amendments will mirror the public availability of such
agreements under home country requirements or otherwise. In addition,
we believe that the amendments may encourage foreign private issuers to
provide more compensation disclosure in their filings with the
Commission by eliminating privacy concerns associated with filing an
individual's employment agreement when such agreement is not required
to be made public by a home country exchange or securities regulator.
As foreign disclosure related to executive remuneration varies in
different countries but continues to improve,\396\ the revisions
recognize that trend and provide for greater harmonization of
international disclosure standards with respect to executive
compensation in a manner consistent with other requirements of Form 20-
F.
---------------------------------------------------------------------------

    \395\ New Instruction 4(c)(v) to Exhibits to Form 20-F.
    \396\ Many jurisdictions now require or encourage disclosure of
executive compensation information. For example, enhanced disclosure
of executive remuneration is included as part of the European
Commission's 2003 Company Law Action Plan. See Guido Ferrarini and
Niamh Moloney, Executive Remuneration in the EU: The Context for
Reform, European Corporate Governance Institute, Law Working Paper
N. 32/2005 (April 2005).
---------------------------------------------------------------------------

IV. Beneficial Ownership Disclosure

    Item 403 requires disclosure of company voting securities
beneficially owned by more than five percent holders,\397\ and company
equity securities beneficially owned by

directors, director nominees and named executive officers.\398\ These
disclosure requirements provide investors with information regarding
concentrated holdings of voting securities and management's equity
stake in the company, including securities for which these holders have
the right to acquire beneficial ownership within 60 days.\399\ Item 403
also requires disclosure of arrangements known to the company that may
result in a change in control of the company.\400\
---------------------------------------------------------------------------

    \397\ Item 403(a).
    \398\ Item 403(b).
    \399\ As specified in Exchange Act Rule 13d-3(d)(1) [17 CFR
240.13d-3(d)(1)].
    \400\ Item 403(c).
---------------------------------------------------------------------------

    As proposed, we are amending Item 403(b) \401\ by adding a
requirement for footnote disclosure of the number of shares pledged as
security by named executive officers, directors and director
nominees.\402\ To the extent that shares beneficially owned by named
executive officers, directors and director nominees are used as
collateral, these shares may be subject to material risk or
contingencies that do not apply to other shares beneficially owned by
these persons. These circumstances have the potential to influence
management's performance and decisions.\403\ As a result, we believe
that the existence of these securities pledges could be material to
shareholders. Because significant shareholders who are not members of
management are in a different relationship with other shareholders and
have different obligations to them, the amendments do not require
disclosure of their pledges pursuant to Item 403(a), other than pledges
that may result in a change of control currently required to be
disclosed.\404\ The amendments also specifically require disclosure of
beneficial ownership of directors' qualifying shares, which was not
required prior to these amendments, because we believe the beneficial
ownership disclosure should include a complete tally of the securities
beneficially owned by directors.
---------------------------------------------------------------------------

    \401\ Item 403(b) of Regulation S-K and Item 403(b) of
Regulation S-B are both amended in the same manner.
    \402\ This was similar to a proposal the Commission made in
2002. See Form 8-K Disclosure of Certain Management Transactions,
Release No. 33-8090 (Apr. 12, 2002) [67 FR 19914].
    \403\ See, e.g., Marianne M. Jennings, The Disconnect Between
and Among Legal Ethics, Business Ethics, Law, and Virtue: Learning
Not to Make Ethics So Complex, 1 U. St. Thomas L.J. 995, 1010
(Spring 2004) (arguing that the extension of loans to the CEO of
WorldCom, which were collateralized by WorldCom shares owned by the
CEO, contributed to WorldCom's financial demise). Regarding
commenters' views, contrast letters from Frederic W. Cook & Co.; PB-
UCC; and SBAF with letters from FSR; NACCO Industries; Unitrin; and
Compass Bancshares.
    \404\ Item 403(c) of Regulation S-K. See also Items 6 and 7(3)
of Schedule 13D [17 CFR 240.13d-101].
---------------------------------------------------------------------------

    One commenter recommended that we expand this section to also
require disclosure of hedging arrangements whereby the executive has
altered his or her economic interest in the securities that he or she
beneficially owns.\405\ These transactions frequently involve the
purchase or sale of a derivative security that the named executive
officer would be required to report within two business days under
Section 16(a) of the Exchange Act.\406\ Because information concerning
these transactions frequently would be available on a prompt basis in
the Section 16(a) filings and companies would disclose their policies
regarding these transactions in Compensation Discussion and
Analysis,\407\ we have not followed the commenter's recommendation.
---------------------------------------------------------------------------

    \405\ See letter from ABA.
    \406\ 15 U.S.C. 78p(a).
    \407\ See Item 402(b)(2)(xiii) of Regulation S-K, discussed in
Section II.B.1., above.
---------------------------------------------------------------------------

V. Certain Relationships and Related Transactions Disclosure

    As we explained in the Proposing Release, we believe that, in
addition to disclosure regarding executive compensation, a materially
complete picture of financial relationships with a company involves
disclosure regarding related party transactions. Therefore, we are also
adopting significant revisions to Item 404 of Regulation S-K,
previously titled ``Certain Relationships and Related Transactions.''
In 1982, various provisions that had been adopted in a piecemeal
fashion and had been subject to frequent amendment were consolidated
into Item 404 of Regulation S-K.\408\ Today we are amending Item 404 of
Regulation S-K and S-B to streamline and modernize this disclosure
requirement, while making it more principles-based. Although the
amendments significantly modify this disclosure requirement, its
purpose--to elicit disclosure regarding transactions and relationships,
including indebtedness, involving the company and related persons and
the independence of directors and nominees for director and the
interests of management--remains unchanged.
---------------------------------------------------------------------------

    \408\ See the 1982 Release. For a discussion of these
provisions, see also Disclosure of Certain Relationships and
Transactions Involving Management, Release No. 33-6416 (July 9,
1982) [47 FR 31394], at Section II.
---------------------------------------------------------------------------

    As discussed in greater detail below, the amendments have four
parts: \409\
---------------------------------------------------------------------------

    \409\ The discussion that follows focuses on changes to
Regulation S-K, with Section V.E.1. explaining the modifications to
Regulation S-B. References throughout the following discussion are
to Items of Regulation S-K, unless otherwise indicated.
---------------------------------------------------------------------------

     Item 404(a) contains a general disclosure requirement for
related person transactions, including those involving indebtedness.
     Item 404(b) requires disclosure regarding the company's
policies and procedures for the review, approval or ratification of
related person transactions.
     Item 404(c) requires disclosure regarding promoters and
certain control persons of a company.\410\
---------------------------------------------------------------------------

    \410\ Prior to adoption of these amendments, disclosure
regarding promoters was required under Item 404(d).
---------------------------------------------------------------------------

     Item 407 consolidates corporate governance disclosure
requirements.\411\ Also, Item 407(a) requires disclosure regarding the
independence of directors, including whether each director and nominee
for director of the company is independent, as well as a description by
specific category or type of any transactions, relationships or
arrangements not disclosed under paragraph (a) of Item 404 that were
considered when determining whether each director and nominee for
director is independent.
---------------------------------------------------------------------------

    \411\ These matters previously were required to be disclosed
pursuant to various provisions, including Item 7 of Schedule 14A and
Items 306, 401(h), (i) and (j), 402(j) and 404(b). We are
eliminating as proposed the requirement for disclosure regarding
specific director and director nominee relationships that had been
set forth in Item 404(b) prior to today's amendments, in favor of
the disclosures regarding director independence required by Item
407(a).
---------------------------------------------------------------------------

A. Transactions With Related Persons

    We are adopting amendments to Item 404 to make the certain
relationships and related transactions disclosure requirements clearer
and easier to follow. The revisions retain the principles for
disclosure of related person transactions that were previously
specified in Item 404(a), but no longer include all of the instructions
that served to delineate what transactions are reportable or excludable
from disclosure based on bright lines that can depart from a more
appropriate materiality analysis. Instead, Item 404(a) as amended
consists of a general statement of the principle for disclosure,
followed by specific disclosure requirements and instructions. The
instructions to Item 404(a) explain the related persons covered by the
Item, the scope of transactions covered by the Item, the method for
computation of the amount involved in the transaction, special
requirements regarding indebtedness, the interaction with Item 402, the
materiality of certain interests, and the circumstances in which
disclosure need not be provided.

    Item 404(a) as adopted extends to disclosure of indebtedness, by
consolidating the disclosure formerly required under Item 404(a)
regarding transactions involving the company and related persons with
the disclosure regarding indebtedness which had been separately
required by Item 404(c) prior to these amendments. We have consolidated
these two provisions substantially as proposed in order to eliminate
confusion regarding the circumstances in which each item applied and to
streamline duplicative portions of Item 404.
1. Broad Principle for Disclosure
    Item 404(a) as proposed and adopted articulates a broad principle
for disclosure; it states that a company must provide disclosure
regarding:
     Any transaction since the beginning of the company's last
fiscal year, or any currently proposed transaction;
     In which the company was or is to be a participant;
     In which the amount involved exceeds $120,000; and
     In which any related person had or will have a direct or
indirect material interest.
    As proposed, amended Item 404(a) no longer includes an instruction
that is repetitive of the general materiality standard applicable to
the Item.\412\ By omitting this instruction, we do not intend to change
the materiality standard applicable to Item 404(a). The materiality
standard for disclosure embodied in Item 404(a) prior to these
amendments is retained; a company must disclose based on whether the
related person had or will have a direct or indirect material interest
in the transaction. The materiality of any interest will continue to be
determined on the basis of the significance of the information to
investors in light of all the circumstances.\413\ As was the case
before adoption of amended Item 404(a), the relationship of the related
persons to the transaction, and with each other, the importance of the
interest to the person having the interest and the amount involved in
the transaction are among the factors to be considered in determining
the materiality of the information to investors.
---------------------------------------------------------------------------

    \412\ Prior to today's amendments, Instruction 1 to Item 404(a)
had stated that ``[t]he materiality of any interest is to be
determined on the basis of the significance of the information to
investors in light of all the circumstances of the particular case.
The importance of the interest to the person having the interest,
the relationship of the parties to the transaction with each other
and the amount involved in the transactions are among the factors to
be considered in determining the significance of the information to
investors.''
    \413\ See Basic v. Levinson and TSC Industries v. Northway.
---------------------------------------------------------------------------

    We are also eliminating as proposed an instruction to Item 404(a)
which had indicated that the dollar threshold is not a bright line
materiality standard.\414\ It remains true, however, that when the
amount involved in a transaction exceeds the prescribed threshold
($120,000 under the amended rule we adopt today), a company should
evaluate whether the related person has a direct or indirect material
interest in the transaction to determine if disclosure is required. We
eliminated the instruction because it was repetitive of the general
materiality standard applicable to the Item. We believe that
application of the materiality principles under the Item are more
consistent with a principles-based approach and will lead to more
appropriate disclosure outcomes than application of the instruction
that was eliminated. By deleting this instruction, we do not intend to
change the materiality standard applicable to Item 404(a). As was the
case with Item 404(a) prior to adoption of these amendments, there may
be situations where, although the instructions to Item 404(a) do not
expressly provide that disclosure is not required, the interest of a
related person in a particular transaction is not a direct or indirect
material interest. In that case, information regarding such interest
and transaction is not required to be disclosed under Item 404(a).
---------------------------------------------------------------------------

    \414\ Prior to today's amendments, Instruction 9 to Item 404(a)
had stated that ``There may be situations where, although these
instructions do not expressly authorize nondisclosure, the interest
of a person specified in paragraphs (a)(1) through (4) in a
particular transaction or series of transactions is not a direct or
indirect material interest. In that case, information regarding such
interest and transaction is not required to be disclosed in response
to this paragraph.''
---------------------------------------------------------------------------

    In addition, as proposed the amendments:
     Call for disclosure if a company is a ``participant'' in a
transaction, rather than if it is ``a party'' to the transaction, as
``participant'' more accurately connotes the company's involvement;
     Modify the $60,000 threshold for disclosure to $120,000 to
adjust for inflation;
     Include a defined term for ``transaction'' to provide that
it includes a series of similar transactions and to make clear its
broad scope; and
     Include a defined term for ``related persons.'' \415\
---------------------------------------------------------------------------

    \415\ The ``related persons'' covered by the amended Item are
discussed below in Section V.A.1.b.
---------------------------------------------------------------------------

    As was the case before these amendments, disclosure is required for
three years in registration statements filed pursuant to the Securities
Act or the Exchange Act.\416\
---------------------------------------------------------------------------

    \416\ However, if the disclosure is being incorporated by
reference into a registration statement on Form S-4, the additional
two years of disclosure will not be required, as specified in
Instruction 1 to Item 404.
---------------------------------------------------------------------------

    One commenter questioned whether changing the test of company
involvement from being a ``party'' to a transaction to being a
``participant'' in a transaction is intended to be a substantive
change.\417\ The purpose of this change is to more accurately connote
the company's involvement in a transaction by clarifying that being a
``participant'' encompasses situations where the company benefits from
a transaction but is not technically a contractual ``party'' to the
transaction.\418\
---------------------------------------------------------------------------

    \417\ See letter from Sullivan. See also letter from SCSGP.
    \418\ For example, disclosure would be required if a company
benefits from a transaction with a related person that the company
has arranged and in which it participates, notwithstanding the fact
that it is not a party to a contract.
---------------------------------------------------------------------------

    Commenters expressed diverse views on the appropriate disclosure
threshold. While some commenters supported increasing the threshold for
disclosure from $60,000 to $120,000,\419\ others recommended retaining
the $60,000 threshold,\420\ using a minimal dollar threshold,\421\ not
including any de minimis dollar threshold,\422\ or increasing the
threshold even further through use of a sliding scale.\423\ We believe
that a fixed dollar amount for the disclosure threshold will provide
the most certainty as to the size of transactions that must be tracked
for disclosure purposes under Item 404,\424\ and that increasing the
dollar amount of the threshold based on inflation is appropriate given
the amount of time that has elapsed since it was last set nearly
twenty-five years ago.
---------------------------------------------------------------------------

    \419\ See, e.g., letters from BRT and Sullivan.
    \420\ See, e.g., letters from Amalgamated and CalSTRS.
    \421\ See letter from Teamsters (recommending a $250 disclosure
threshold).
    \422\ See, e.g., letters from CII and ISS.
    \423\ See letter from SCSGP recommending a disclosure threshold
for companies that are not small business issuers of the greater of
$120,000 or a percentage (which it believes could be as low as two
percent) of consolidated gross revenues of the recipient for certain
types of transactions.
    \424\ The disclosure threshold in amended Item 404(a) of
Regulation S-B is the lesser of $120,000 or one percent of the
average of the small business issuer's total assets at year-end for
the last three completed fiscal years because we believe that
transactions that are below $120,000 can be significant for small
business issuers given their relative size.
---------------------------------------------------------------------------

    Finally, the rule changes include as proposed a technical
modification. Prior to today's amendments, Item 404(a) stated that
disclosure was required

regarding situations involving ``the registrant or any of its
subsidiaries.'' Because companies must include subsidiaries in making
materiality determinations in all circumstances, the reference to
``subsidiaries'' is superfluous, and we have therefore eliminated it.
This modification does not change the scope of disclosure required
under the Item.\425\
---------------------------------------------------------------------------

    \425\ For the same reason, we have eliminated as proposed the
references to ``subsidiaries'' in the ``compensation committee
interlocks and insider participation in compensation decisions''
disclosure requirement adopted in Item 407(e)(4). This revision does
not change the scope of disclosure required under the rule.
---------------------------------------------------------------------------

a. Indebtedness
    Section 402 of the Sarbanes-Oxley Act prohibits most personal loans
by a company to its officers and directors.\426\ This development
raises the issue of whether disclosure of indebtedness of the sort
required under our rules prior to the amendments should be maintained.
We believe that the approach to disclosure of indebtedness involving
related persons that we adopt today is 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 have, however, eliminated the distinction between
indebtedness and other types of related person transactions.
---------------------------------------------------------------------------

    \426\ Codified in Section 13(k) of the Exchange Act [15 U.S.C.
78m(k)].
---------------------------------------------------------------------------

    As a result of integrating what had been required to be disclosed
under paragraph (c) of Item 404 into paragraph (a) of Item 404, the
rule proposals would have changed the situations in which indebtedness
disclosure is necessary by requiring disclosure of indebtedness
transactions with regard to all related persons covered by the related
person transaction disclosure requirement, including significant
shareholders.\427\ Some commenters questioned whether disclosure of
indebtedness of significant shareholders would be useful to investors
and whether companies would have access to the information necessary to
provide this disclosure.\428\ In response to these comments, the
amendments do not require disclosure of indebtedness transactions of
significant shareholders (or their immediate family members).\429\
Another result of integrating the disclosure requirements that had been
specified in paragraph (c) of Item 404 into paragraph (a) of Item 404,
is that the rule changes set a $120,000 threshold and require
disclosure if there is a direct or indirect material interest in an
indebtedness transaction, while prior to these amendments Item 404(c)
required disclosure of all indebtedness exceeding $60,000.\430\ For
example, under amended Item 404(a) disclosure is required if an
executive officer had a material indirect interest in an indebtedness
transaction (exceeding $120,000) between the company and another entity
due to that executive officer's ownership interest in the other entity.
Disclosure of material indirect interests of related persons in
transactions involving the company will be required by Item 404(a) as
amended, just as it was prior to adoption of these amendments. 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; however,
as discussed below,\431\ we address certain ordinary course loans by
financial institutions in an instruction to Item 404(a).
---------------------------------------------------------------------------

    \427\ Prior to today's amendments, the related person
transaction disclosure requirement in Item 404(a) covered
significant shareholders, while the indebtedness disclosure
requirement in Item 404(c) did not. The significant shareholders
covered by Item 404(a) as adopted will continue to be any security
holder who is known to the company to beneficially own more than
five percent of any class of the company's voting securities. See
Instruction 1.b.i. to Item 404(a).
    \428\ See, e.g., letter from Sullivan. See also, letter from
SCSGP.
    \429\ See Instruction 4.b. to Item 404(a). Disclosure would be
required, however, if the significant shareholder (or such
shareholder's immediate family member) was also a related person
specified in Instruction 1.a. to Item 404(a), for example, if the
significant shareholder was also an executive officer.
    \430\ Prior to these amendments, Item 404(c) also had required
disclosure of some specific indirect interests of directors,
nominees for director, and executive officers of the company in
indebtedness through corporations, organizations, trusts, and
estates. Disclosure of these specific interests had been required by
subparagraphs (c)(4) and (c)(5) of Item 404. Under the amendments,
these subparagraphs have been eliminated as duplicative and the need
for disclosure in these situations will be determined using a
materiality analysis under the principle for disclosure in Item
404(a).
    \431\ See Section V.A.3. below.
---------------------------------------------------------------------------

b. Definitions
    We have defined the terms ``transaction,'' ``related person'' and
``amount involved'' substantially as proposed in order to streamline
Item 404(a) and to clarify the broad scope of financial transactions
and relationships covered by the rule.
    The term ``transaction'' has a broad scope in Item 404(a).\432\
This term is not to be interpreted narrowly, but rather broadly
includes, but is not limited to, any financial transaction, arrangement
or relationship or any series of similar transactions, arrangements or
relationships. The definition of ``transaction'' also specifically
notes that the term includes indebtedness and guarantees of
indebtedness.
---------------------------------------------------------------------------

    \432\ Instruction 2 to Item 404(a).
---------------------------------------------------------------------------

    The definition of ``related person'' identifies the persons
covered, and clarifies the time periods during which they are covered.
The term ``related person'' \433\ means 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 is required:
---------------------------------------------------------------------------

    \433\ Instruction 1 to Item 404(a).
---------------------------------------------------------------------------

     Any director or executive officer of the company and his
or her immediate family members; and
     If disclosure were provided in a proxy or information
statement relating to 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 company to beneficially
own 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, is also a related
person.
    The definition of ``related person'' that we have adopted will
require disclosure of related person transactions involving the company
and a person (other than a significant shareholder or immediate 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.\434\ A person who had 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
company during that year. While prior to these amendments Item 404(a)
did not indicate whether disclosure was required for the transaction in
this situation, the history of Item 404 suggests that disclosure was
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.\435\ 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 timeframe could influence the
person's performance of his or her duties.
---------------------------------------------------------------------------

    \434\ As proposed, the principle for disclosure that we have
adopted only applies to nominees for director if disclosure is being
provided in a proxy or information statement involving the election
of directors. Also, as proposed, ongoing disclosure is not required
regarding nominees for director who were not elected (unless a
nominee has been nominated again for director).
    \435\ 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--Item7(f).'' Before
today's amendments, Note C to Schedule 14A provided that
``[i]nformation 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.'' We have
amended Note C to Schedule 14A as proposed so that it will 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 immediate family members),
but are not at the time of the transaction, raise different
considerations and are harder to track, and thus we are excluding them
as proposed. Disclosure will 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 time that the person becomes
a significant shareholder.
    We are adopting the definition of ``immediate family member'' as
proposed. Under Item 404(a), the term ``immediate family member'' means
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 company. The amended definition
differs from the former definition in that it includes stepchildren,
stepparents, and any person (other than a tenant or employee) sharing
the household of a director, nominee for director, executive officer,
or significant shareholder of the company.\436\
---------------------------------------------------------------------------

    \436\ The persons included in these additions to the definition
are also included in the definition of ``family member'' in General
Instruction A.1.(a)(5) to Securities Act Form S-8.
---------------------------------------------------------------------------

    The amended definition of ``amount involved'' is adopted as
proposed.\437\ The definition incorporates two concepts that were
included in Item 404 prior to these amendments regarding how to
determine the ``amount involved'' in transactions, and clarifies that
the amounts reported must be in dollars even if the amount was set or
expensed in a different currency. As adopted, the term ``amount
involved'' means the dollar value of the transaction, or series of
similar transactions, and includes:
---------------------------------------------------------------------------

    \437\ 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 or other transaction
providing for periodic payments or installments; \438\ and
---------------------------------------------------------------------------

    \438\ Prior to today's amendments, Instruction 3 to Item 404(a)
had provided guidance regarding computing the amount involved in
lease or other agreements providing for periodic payments or
installments.
---------------------------------------------------------------------------

     In the case of indebtedness, the largest aggregate 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.\439\
---------------------------------------------------------------------------

    \439\ Prior to today's amendments, the basis for determining the
amount involved in indebtedness transactions had been set forth in
Item 404(c).
---------------------------------------------------------------------------

2. Disclosure Requirements
    Subparagraphs of Item 404(a) as adopted provide the disclosure
requirements for related person transactions. The company will be
required to describe the transaction, including:
     The person's name and 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 approximate dollar value of the amount involved in the
transaction and of the related person's interest in the
transaction.\440\
---------------------------------------------------------------------------

    \440\ Because of the manner in which the amount involved in the
transaction is calculated for indebtedness, as discussed above,
disclosure with respect to indebtedness will 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. Item 404(a)(5).
---------------------------------------------------------------------------

    Companies will 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.
    As was the case prior to adoption of these amendments, the dollar
value of the related person's interest in the transaction will be
computed without regard to the amount of the profit or loss involved in
the transaction.\441\ One commenter pointed out that the proposals
expanded the application of this provision to also cover the
computation of the ``amount involved'' when the provision was moved
from an instruction into the body of Item 404(a).\442\ In streamlining
Item 404(a), we did not intend to change the scope of the prior
instruction. Therefore, the final rule clarifies the context in which
profit or loss is not to be considered.
---------------------------------------------------------------------------

    \441\ Item 404(a)(4).
    \442\ See letter from Sullivan.
---------------------------------------------------------------------------

    Consistent with the principles-based approach that we are applying
to related person transaction disclosure, we are eliminating an
instruction that, in the case of a related person transaction involving
a purchase or sale of assets by or to the company otherwise than in the
ordinary course of business, called for specific disclosure of the cost
of the assets to the purchaser, and if acquired within two years of the
transaction, the cost of the assets to the seller and related
information about the price of the assets. We note, however, that if
such information is material under the revised standards of Item
404(a), because, for example, the recent purchase price to the related
person is materially less than the sale price to the company, or the
sale price to the related person is materially more than the recent
purchase price to the company, disclosure of such prior purchase price
and related information about the prices could be required.
    Prior to adoption of today's amendments, disclosure was required
under Item 404(c) regarding amounts possibly owed to the company under
Section 16(b) of the Exchange Act.\443\ We believe that the purpose of
related person transaction disclosure differs from the purpose of
Section 16(b), and one commenter expressed support for eliminating this
requirement.\444\ Accordingly, the rule amendments eliminate this
former Section 16(b)-related disclosure requirement.
---------------------------------------------------------------------------

    \443\ This requirement had been set forth in Instruction 4 to
Item 404(c) prior to these amendments.
    \444\ See letter from SCSGP.
---------------------------------------------------------------------------

3. Exceptions
    Some categories of transactions do not fall within the principle
for disclosure

and therefore Item 404(a) as amended includes disclosure exceptions
that we believe are consistent with our principles-based approach.\445\
The first category of transactions involves compensation. Disclosure of
compensation to an executive officer will not be required if:
---------------------------------------------------------------------------

    \445\ Instructions 4, 5, 6 and 7 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
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, or recommended to the board of directors of the company for
approval, by the compensation committee of the board of directors (or
group of independent directors performing a similar function) of the
company.\446\
---------------------------------------------------------------------------

    \446\ Instruction 5.a. to Item 404(a).
---------------------------------------------------------------------------

    As proposed, this disclosure exception would have required
compensation committee approval of an executive officer's compensation
if that executive officer's compensation was not reported under Item
402. However, one commenter noted that in accordance with listing
standards, compensation committees may only need to recommend to the
board of directors, rather than approve, the compensation of executive
officers (other than the chief executive officer).\447\ We believe that
it is appropriate for this disclosure exception to apply a standard
that is consistent with the listing standards and we have thus modified
this exception from the proposal accordingly. Finally, as proposed
disclosure of compensation to a director will not be required if the
compensation is reported pursuant to the director compensation
disclosure requirement in Item 402(k).\448\
---------------------------------------------------------------------------

    \447\ See letter from NYCBA.
    \448\ Instruction 5.b. to Item 404(a).
---------------------------------------------------------------------------

    As we explained in the Proposing Release, since the disclosure
either would be reported under Item 402, or would not be required under
Item 402, we do not believe that these particular compensation
transactions fall within our Item 404 disclosure principle, or they
will have already been disclosed. Transactions involving compensation
that do not fall within these exceptions, such as compensation of
immediate family members, are within the scope of the principle for
disclosure in amended Item 404(a).\449\ These exceptions thus clarify
the limited situations in which disclosure of compensation to related
persons is not required under Item 404.
---------------------------------------------------------------------------

    \449\ One commenter believed that the proposals would have
eliminated disclosure of related person transactions involving the
employment of immediate family members. See letter from CRPTF. Item
404(a), as amended, continues to require disclosure of these types
of related person transactions when the threshold for disclosure has
been met and the immediate family member has or will have a direct
or indirect material interest.
---------------------------------------------------------------------------

    The second category of transactions involves three types of
situations that we believe do not raise the potential issues underlying
our principle for disclosure. First, in the case of transactions
involving indebtedness, as proposed we have adopted amendments so that
the following items of indebtedness may 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 do 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.\450\ Also, in
the case of a transaction involving indebtedness, the amendments
provide, as proposed, that if the lender is a bank, savings and loan
association, or broker-dealer extending credit under Federal Reserve
Regulation T \451\ and the loans are not disclosed as nonaccrual, past
due, restructured or potential problems,\452\ disclosure under
paragraph (a) of Item 404 may consist of a statement, if correct, that
the loans to such persons satisfied the following conditions:
---------------------------------------------------------------------------

    \450\ Instruction 4.a. to Item 404(a), which is based on
Instruction 2 to Item 404(c) as it was stated prior to today's
amendments.
    \451\ 12 CFR part 220.
    \452\ 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 lender; and
     They did not involve more than the normal risk of
collectibility or present other unfavorable features.\453\
---------------------------------------------------------------------------

    \453\ Instruction 4.c. to Item 404(a).
---------------------------------------------------------------------------

    This exception is based on the exception that was included in
Instruction 3 to Item 404(c) prior to these amendments, and has been
modified as proposed to be more consistent with the prohibition of the
Sarbanes-Oxley Act on personal loans to officers and directors.\454 \
---------------------------------------------------------------------------

    \454\ Specifically, the language that was in Instruction 3 to
paragraph (c) of Item 404 prior to these amendments has been
modified to replace the reference ``comparable transactions with
other persons'' with the phrase ``comparable loans with persons not
related to the lender.''
---------------------------------------------------------------------------

    Second, we are adopting as proposed an instruction indicating 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 that 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.\455 \
---------------------------------------------------------------------------

    \455\ Instruction 6 to Item 404(a). This amendment is based on
the language that was in parts A and B of Instruction 8 to Item
404(a) prior to these amendments. This amendment omits the portion
of that 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 exception may
have resulted in inappropriate non-disclosure of transactions
without regard to whether they were material to the company. In
addition, we are eliminating the language that had been set forth in
Instruction 6 to Item 404(a) prior to these amendments, which had
covered a subset of transactions now covered by Instruction 6, as
amended, and therefore was duplicative.
---------------------------------------------------------------------------

    Finally, disclosure will not be required under paragraph (a) of
Item 404 in three other types of circumstances. First, disclosure will
not be required under paragraph (a) of Item 404 as to any transaction
where the rates or charges involved in the transaction are determined
by competitive bids, or the transaction involves the rendering of
services as a common or contract carrier, or public utility, at rates
or charges fixed in conformity with law or governmental authority.\456\
We had proposed to eliminate this exception because we considered such
bright-line presumptions as inconsistent with our principles-based
approach to the rule. We are persuaded, however, by a commenter who
indicated that the prior

exception embodied a conclusion that the terms of these types of
transactions would likely not be influenced by the related persons and
therefore should be excluded as not material.\457\ As a result, the
instruction is retained in the rule as adopted.
---------------------------------------------------------------------------

    \456\ Instruction 7.a. to Item 404(a).
    \457\ Letter from SCSGP.
---------------------------------------------------------------------------

    Second, disclosure need not be provided under paragraph (a) of Item
404 if the transaction involves services as a bank depositary of funds,
transfer agent, registrar, trustee under a trust indenture, or similar
services.\458\ We had proposed to eliminate this exception. We are
persuaded by commenters' concerns that eliminating this exception may
be detrimental to financial institutions and may not result in
additional meaningful disclosure.\459\ Accordingly, we are retaining
this exception.
---------------------------------------------------------------------------

    \458\ Instruction 7.b. to Item 404(a).
    \459\ See, e.g., letters from American Bankers Association
(``American Bankers''); Compass Bancshares; and Whitney Holding
Corporation (``Whitney Holding'').
---------------------------------------------------------------------------

    Third, we are adopting an exception indicating that disclosure need
not be provided pursuant to paragraph (a) of Item 404 if the interest
of the related person arises solely from the ownership of a class of
equity securities of the company and all holders of that class of
equity securities of the company received the same benefit on a pro
rata basis.\460\ Commenters expressed concern that our proposal to
eliminate the former exception \461\ would require disclosure if a
related person receives over $120,000 in dividends on company stock in
a year, even though those dividends are paid on the same terms as for
all other stockholders.\462\ We are persuaded by the commenters that
related person transaction disclosure is not necessary for transactions
where a related person receives pro rata dividends or returns on the
ownership of equity securities, and therefore we have adopted an
instruction to provide an exception from disclosure in these limited
circumstances.\463\
---------------------------------------------------------------------------

    \460\ Instruction 7.c. to Item 404(a).
    \461\ Before the adoption of these amendments, Instruction 7.C.
to Item 404(a) provided that no information was required under Item
404(a) for transactions where the interest of the related person
arose solely from the ownership of securities of the company and
such person received no extra or special benefit not shared on a pro
rata basis.
    \462\ See, e.g., letters from SCSGP and Sullivan.
    \463\ The instruction as adopted differs from the language of
Instruction 7.C. prior to these amendments in that it is limited to
ownership of a class of equity securities rather than securities
generally and focuses on benefits being provided pro rata to the
holders of that class rather than the absence of certain extra or
special benefits.
---------------------------------------------------------------------------

    Some commenters requested that we create a new exception for
transactions undertaken in the ordinary course of business of the
company and conducted on the same terms that the company offers
generally in transactions with persons who are not related
persons.\464\ Former Item 404(a) did not include such an ``ordinary
course of business'' disclosure exception, and we are not persuaded
that it should be expanded to include one. In this regard, we note that
transactions which should properly be disclosed under Item 404(a) might
be excluded under an ordinary course of business exception, such as
employment of immediate family members of officers and directors.
However, we note that whether a transaction which was not material to
the company or the other entity involved and which was undertaken in
the ordinary course of business of the company and on the same terms
that the company offers generally in transactions with persons who are
not related persons, are factors that could be taken into consideration
when performing the materiality analysis for determining whether
disclosure is required under the principle for disclosure.
---------------------------------------------------------------------------

    \464\ See, e.g., letters from SCSGP and Sullivan.
---------------------------------------------------------------------------

B. Procedures for Approval of Related Person Transactions

    We are adopting a new requirement for disclosure of the policies
and procedures established by the company and its board of directors
regarding related person transactions substantially as proposed. State
corporate law and increasingly robust corporate governance practices
support or provide for such procedures in connection with transactions
involving conflicts of interest.\465\ We believe that this type of
information may be material to investors, and our amendments therefore
require disclosure of policies and procedures regarding related person
transactions under paragraph (b) of Item 404, as amended.
---------------------------------------------------------------------------

    \465\ 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 amendments require a description of the company's
policies and procedures for the review, approval or ratification of
transactions with related persons that are reportable under paragraph
(a) of Item 404. The description must include the material features of
these policies and procedures that are necessary to understand them.
While the material features of such policies and procedures will 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