[Federal Register: July 17, 2009 (Volume 74, Number 136)]
[Proposed Rules]
[Page 35075-35111]
[DOCID:fr17jy09-13]

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Part V

Securities and Exchange Commission

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17 CFR Parts 229, 239, 240, 249, 270 and 274

Proxy Disclosure and Solicitation Enhancements; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 239, 240, 249, 270 and 274

[Release Nos. 33-9052; 34-60280; IC-28817; File No. S7-13-09]
RIN 3235-AK28

Proxy Disclosure and Solicitation Enhancements

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to our rules to enhance the
compensation and corporate governance disclosures registrants are
required to make about: Their overall compensation policies and their
impact on risk taking; stock and option awards of executives and
directors; director and nominee qualifications and legal proceedings;
company leadership structure; the board's role in the risk management
process; and potential conflicts of interest of compensation
consultants that advise companies. The proposed amendments to our
disclosure rules would be applicable to proxy and information
statements, annual reports and registration statements under the
Securities Exchange Act of 1934, and registration statements under the
Securities Act of 1933 as well as the Investment Company Act of 1940.
We are also proposing amendments to transfer from Forms 10-Q and 10-K
to Form 8-K the requirement to disclose shareholder voting results. In
addition, we are proposing amendments to our proxy rules to clarify the
manner in which they operate and address issues that have arisen in the
proxy solicitation process.

DATES: Comments should be received on or before September 15, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml);
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-13-09 on the subject line; or
     Use the Federal Rulemaking ePortal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-13-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: N. Sean Harrison, Special Counsel, at
(202) 551-3430 or Anne Krauskopf, Senior Special Counsel, at (202) 551-
3500, in the Division of Corporation Finance; or with respect to
questions regarding the proposed proxy solicitation amendments, Mark W.
Green, Senior Special Counsel, or Nicholas P. Panos, Senior Special
Counsel at<PHONE_NUMBER>, in the Division of Corporation Finance; or
with respect to questions regarding investment companies, Marc Oorloff
Sharma, Senior Counsel, Division of Investment Management, at (202)
551-6784, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Items 401,\1\
402,\2\ and 407 \3\ of Regulation S-K; \4\ Rules 14a-2,\5\ 14a-4,\6\
and 14a-12;\7\ Schedule 14A \8\ and Forms 8-K,\9\ 10-Q,\10\ and 10-K
\11\ under the Securities Exchange Act of 1934 (``Exchange Act''); \12\
and Forms N-1A,\13\ N-2,\14\ and N-3,\15\ registration forms used by
management investment companies to register under the Investment
Company Act of 1940 (``Investment Company Act'') \16\ and to offer
their securities under the Securities Act of 1933 (``Securities
Act'').\17\
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    \1\ 17 CFR 229.401.
    \2\ 17 CFR 229.402.
    \3\ 17 CFR 229.407.
    \4\ 17 CFR 229.10 et al.
    \5\ 17 CFR 240.14a-2.
    \6\ 17 CFR 240.14a-4.
    \7\ 17 CFR 240.14a-12.
    \8\ 17 CFR 240.14a-101.
    \9\ 17 CFR 249.308.
    \10\ 17 CFR 249.308a.
    \11\ 17 CFR 249.310.
    \12\ 15 U.S.C. 78a et seq.
    \13\ 17 CFR 239.15A and 274.11A.
    \14\ 17 CFR 239.14 and 274.11a-1.
    \15\ 17 CFR 239.17a and 274.11b.
    \16\ 15 U.S.C. 80a-1 et seq.
    \17\ 15 U.S.C. 77a et seq.
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I. Background and Summary

    We are proposing a number of revisions to our rules that would
improve the disclosure shareholders of public companies receive
regarding compensation and corporate governance, and facilitate
communications relating to voting decisions. During the past few years,
shareholders have increasingly focused on corporate accountability, and
have expressed the desire for additional information that would enhance
their ability to make informed voting and investment decisions. Several
rulemaking initiatives in recent years have focused on these themes. In
addition to proposals that are largely focused on disclosure
enhancements, we also are proposing some revisions to the rules
governing the proxy solicitation process that would clarify the manner
in which soliciting parties communicate with shareholders.
    First, we are proposing revisions to our rules governing disclosure
of executive and director compensation, director biographical
information and qualifications, compensation consultants, and other
matters. Over the past several years, we have engaged in a number of
rulemaking initiatives designed to improve the presentation of
information about executive officer and director compensation and
relationships with the company, and thereby assist investors' ability
to make more informed voting and investment decisions.\18\ The turmoil
in the markets during the past 18 months has reinforced the importance
of enhancing transparency, especially with regard to activities that
materially contribute to a company's risk profile. We have decided to
re-examine our disclosure rules to provide investors with important and
relevant information upon which to base their proxy voting and
investment decisions.
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    \18\ See Release No. 33-8340 (Nov. 24, 2003) [68 FR 69204]
(adopting rule amendments to improve the disclosure regarding the
nominating committee process of public companies and the ways by
which security holders may communicate with boards at the companies
in which they invest); Release No. 33-8732A (Aug. 29, 2006) [71 FR
53518] (adopting rule amendments that significantly revised the
disclosure of executive officer and director compensation, related
party transactions, director independence and the security ownership
of officers and directors).
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    The amendments proposed today would add new disclosure requirements
on several topics that are designed to enhance the information included
in

proxy and information statements,\19\ including information about the
relationship of a company's overall compensation policies to risk,
director and nominee qualifications, company leadership structure, and
the potential conflicts of interests of compensation consultants. We
believe that some of our current disclosure requirements on these
topics could be improved to elicit more informative disclosure for
investors. In addition, the proposals would improve Summary
Compensation Table reporting of stock and option awards. We are
proposing to change the manner in which stock and option awards are
reported both in the Summary Compensation Table \20\ and Director
Compensation Table.\21\ We believe the current method for presenting
this information may have inadvertently resulted in investor confusion.
The proposed amendments would require disclosure in these tables of the
aggregate grant date fair value of awards computed in accordance with
Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS
123R), instead of the dollar amount recognized for financial statement
reporting purposes. We also propose to accelerate the timing of the
reporting of information regarding voting results, so that investors
have access to this important information on a more timely basis.
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    \19\ The proposed amendments to Regulation S-K would also be
applicable to registration statements under the Securities Act, and
in some cases also Form 10-K under the Exchange Act.
    \20\ Item 402(c) and 402(n) of Regulation S-K [17 CFR 229.402(c)
and 229.402(n)].
    \21\ Item 402(k) and 402(r) of Regulation S-K [17 CFR 229.402(k)
and 229.402(r)].
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    Finally, we are proposing amendments to Exchange Act Rules 14a-2,
14a-4 and 14a-12 to clarify certain issues relating to the solicitation
of proxies and the granting of proxy authority.\22\ In 1992, we adopted
significant amendments to the proxy rules intended to remove
unnecessary impediments to the solicitation of proxy authority and to
allow management and other persons seeking proxy authority more
efficiently and effectively to communicate with shareholders.\23\ Since
that time, we have become aware of a few interpretive issues regarding
the rules governing proxy solicitations, particularly solicitations by
shareholders and other non-management parties. We believe the proposed
revisions will provide certainty in how the rules operate and
facilitate the proxy solicitation process.
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    \22\ The Commission has taken action in recent years in regard
to proxy materials. For example, in 2007 we provided for the use of
electronic proxy solicitations, and recently we proposed to revise
our rules to facilitate inclusion of shareholder nominations in
company proxy materials. See Release No. 34-56135 (July 26, 2007)
[72 FR 42222] (shareholder choice regarding proxy materials);
Release No. 33-9046 (June 10, 2009) [74 FR 29024] (proposed
amendments to facilitate rights of shareholders to nominate
directors).
    \23\ Release No. 34-31326 (Oct. 16, 1992) [52 FR 48276] (``1992
adopting release'').
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    If the amendments proposed in this release are adopted, we
anticipate that they would be effective for the 2010 proxy season.

II. Discussion of the Proposed Amendments

A. Enhanced Compensation Disclosure

1. Compensation Discussion and Analysis Disclosure
    In 2006, we amended our executive compensation disclosure rules to
require a new principles-based, narrative discussion that provides an
overview of a company's compensation program for its principal
executive officer, principal financial officer and the three most
highly compensated executive officers, other than the principal
executive officer and principal financial officer, and that provides an
analysis of the material elements of the company's compensation for
these named executive officers.\24\ This Compensation Discussion and
Analysis (``CD&A'') requirement is designed to elicit disclosure about
the material elements of the company's compensation for the named
executive officers, and is intended to put into perspective for
investors the tabular compensation data required by our rules.\25\
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    \24\ See Release No. 33-8732A (Aug. 29, 2006) [71 FR 53518];
Release No. 33-8765 (Dec. 22, 2006) [71 FR 78338].
    \25\ Shortly after implementation of the CD&A requirements, in
the spring of 2007, the Commission staff undertook a review of the
proxy statements of 350 public companies in an effort to both
evaluate compliance with the revised rules and provide guidance on
how companies could enhance their disclosures in this area. The
staff prepared a report of its observations of the CD&A disclosures
of these companies. In the report, the staff described the principal
comments they had issued to the companies that were subject to the
review. Overall, the staff noted at the time that companies appeared
to have generally made a good faith effort to comply with the new
rules, and investors had benefited from the new disclosures. At the
same time, the staff's comments highlighted areas where it believed
companies may need to provide additional or clearer disclosure in
future filings. Furthermore, the staff emphasized in its report that
companies should provide security holders and investors with a more
robust discussion of the basis and the context for granting
different types and amounts of executive compensation, and that
companies should continue thinking about how the CD&A can be better
organized and presented for both the lay reader and the
professional, in order to make the disclosure as useful and
meaningful to security holders and investors as possible. U.S.
Securities and Exchange Commission, Division of Corporation Finance,
Staff Observations in the Review of Executive Compensation
Disclosure, (2007) at http://www.sec.gov/divisions/corpfin/guidance/
execcompdisclosure.htm.
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    In addition to the compensation policies for the named executive
officers, a company's broader compensation policies and arrangements
for other employees may also be important. It has been suggested that,
at some companies, compensation policies have become disconnected from
long-term company performance because the interests of management and
some employees, in the form of incentive compensation arrangements, and
the long-term well-being of the company are not sufficiently
aligned.\26\ Critics have argued that, in some cases, the structure and
the particular application of incentive compensation policies can
create inadvertent incentives for management and employees to make
decisions that significantly, and inappropriately, increase the
company's risk, without adequate recognition of the risks to the
company.\27\ Companies, and in turn investors, may be negatively
impacted where the design or operation of their

compensation programs creates incentives that influence behavior
inconsistent with the overall interests of the company. Indeed, one of
the many contributing factors cited as a basis for the current market
turmoil is that at a number of large financial institutions the short-
term incentives created by their compensation policies were misaligned
with the long-term well-being of the companies.\28\ By contrast, well-
designed compensation policies may enhance a company's business
interests by encouraging innovation and appropriate levels of risk
taking.\29\
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    \26\ See, for example, Financial Stability Forum, FSF Principles
of Sound Compensation Practices 1 (Apr. 2, 2009) (noting that
``[h]igh short-term profits led to generous bonus payments to
employees without adequate regard to the longer-term risks they
imposed on their firms''), at http://
www.financialstabilityboard.org/publications/r_0904b.pdf. The
report also noted that ``below the level of the executive suite,
most employees view the performance of the firm as a whole as being
almost independent of their own actions. Actions by other employees
or business units are seen as determining the firm's fate.
Similarly, stock performance might be driven by various exogenous
factors. Thus, employees heavily discount the value of the stock and
act to bring the cash component of bonus up.'' Id. at 11.
    \27\ See, for example, Calvin H. Johnson, The Disloyalty of
Stock and Stock Option Compensation, 11 CONN. INS. L.J. 133 (2004-
2005); Michael C. Jensen, et al., Remuneration: Where we've been,
how we got here, what are the problems, and how to fix them (2004)
(unpublished manuscript on file), available at http://www.ssrn.com/
abstract=561305. The relationship between compensation incentives
and risk also has been recognized in the legislation authorizing the
Troubled Asset Relief Program (``TARP''). Specifically, Section
111(b) of the Emergency Economic Stabilization Act of 2008, as
amended by Section 7001 of the American Recovery and Reinvestment
Act of 2009, requires the Secretary of the Treasury to require each
TARP recipient to meet appropriate standards for executive
compensation and corporate governance that shall include ``limits on
compensation that exclude incentives for senior executive officers
of the TARP recipient to take unnecessary and excessive risks that
threaten the value of such recipient during the period in which any
obligation arising from financial assistance provided under the TARP
remains outstanding.'' See Pub. L. 111-5, Sec.  7001, 123 Stat. 115,
517 (2009).
    \28\ See, for example, Financial Stability Forum, FSF Report on
Enhancing Market and Institutional Resilience 8 (Apr. 2008) (noting
that ``[c]ompensation schemes in financial institutions encouraged
disproportionate risk-taking with insufficient regard to longer-term
risks''), at http://www.financialstabilityboard.org/publications/r_
0804.pdf L. Story, On Wall Street, Bonuses, Not Profits, Were Real,
N.Y. TIMES, Dec. 18, 2008.
    \29\ See, for example, U.S. Chamber of Commerce, Letter to the
Treasury Secretary, (Feb. 9, 2009) (suggesting that ``corporate
governance policies must promote long-term shareholder value and
profitability but should not constrain reasonable risk-taking and
innovation''), at http://www.uschamber.com/NR/rdonlyres/
ej2mxgcl4qbguyozahqba4xzsiht7wyqxcdcjhsyfbvl4jwcurjanaslkfm4up6xgxuf5
c57ogpkxt44shucmryo3ja/
ExecutiveCompensationSecretaryGeithnerFeb62009.pdf.
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    We are proposing to amend our CD&A requirements to broaden their
scope to include a new section that will provide information about how
the company's overall compensation policies for employees create
incentives that can affect the company's risk and management of that
risk. We believe investors would benefit from an expanded discussion
and analysis about how the company rewards and incentivizes its
employees to the extent it creates risk to the company. The proposed
amendments would require a company to discuss and analyze its broader
compensation policies and overall actual compensation practices for
employees generally, including non-executive officers, if risks arising
from those compensation policies or practices may have a material
effect on the company.\30\ In preparing this disclosure, we anticipate
that companies will need to consider the level of risk that employees
might be encouraged to take to meet their incentive compensation
elements.\31\ We believe that disclosure of a company's overall
compensation policies in certain circumstances can help investors
identify whether the company has established a system of incentives
that can lead to excessive or inappropriate risk taking by employees.
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    \30\ See proposed Item 402(b)(2) of Regulation S-K. If a company
had a policy against providing compensation that encouraged
imprudent risk-taking, but actually provided compensation that
encouraged such behavior and the effect may be material on the
company, disclosure under the new provision would be required.
    \31\ To the extent that such risk considerations are a material
aspect of the company's compensation policies or decisions for named
executive officers, the company is required to discuss them as part
of its CD&A under the current rules.
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    Under the proposed amendments, the situations that would require
disclosure will vary depending on the particular company and its
compensation programs. We believe situations that potentially could
trigger discussion and analysis include, among others, compensation
policies and practices:
     At a business unit of the company that carries a
significant portion of the company's risk profile;
     At a business unit with compensation structured
significantly differently than other units within the company;
     At business units that are significantly more profitable
than others within the company;
     At business units where the compensation expense is a
significant percentage of the unit's revenues; or
     That vary significantly from the overall risk and reward
structure of the company, such as when bonuses are awarded upon
accomplishment of a task, while the income and risk to the company from
the task extend over a significantly longer period of time.
    This is a non-exclusive list of situations where compensation
programs may have the potential to raise material risks to the company.
These are only examples; disclosure under the proposed rule amendment
would only be required if the materiality threshold is triggered.
    We believe that discussion and analysis of a company's broader
compensation policies may be appropriate in these situations because
the policies may create risk to the company that is not otherwise
apparent from a discussion solely focused on executive compensation
policies. For example, if a particular business unit that carries a
significant portion of the company's overall risk is significantly more
profitable than others within the company, compensation policies
relevant to employees of that unit could be just as essential to the
company's overall financial condition and performance as those of its
senior executives. Similarly, in situations where particular business
units compensate their employees significantly differently from other
units or carry an overall risk and reward structure that varies
significantly from the rest of the company, provided the effects of the
compensation policies may be material to the company, those differences
should be disclosed and explained so that investors can more readily
assess their significance and appropriateness.
    Consistent with the principles-based approach of the CD&A, the
proposed amendments provide several examples of the types of issues
that would be appropriate for a company to discuss and analyze. We wish
to emphasize, however, that the application of a particular example
must be tailored to the facts and circumstances of the company and that
the examples are non-exclusive. We believe that using illustrative
examples will help to identify the types of disclosure that may be
appropriate. A company must assess the importance to investors of the
information that is identified by the example in light of the
particular situation of the company. Examples of the issues that
companies may need to address regarding the compensation policies or
practices that may give rise to risks that may have a material effect
on the company would include the following:
     The general design philosophy of the company's
compensation policies for employees whose behavior would be most
affected by the incentives established by the policies, as such
policies relate to or affect risk taking by those employees on behalf
of the company, and the manner of its implementation;
     The company's risk assessment or incentive considerations,
if any, in structuring its compensation policies or in awarding and
paying compensation;
     How the company's compensation policies relate to the
realization of risks resulting from the actions of employees in both
the short term and the long term, such as through policies requiring
claw backs or imposing holding periods;
     The company's policies regarding adjustments to its
compensation policies to address changes in its risk profile;
     Material adjustments the company has made to its
compensation policies or practices as a result of changes in its risk
profile; and
     The extent to which the company monitors its compensation
policies to determine whether its risk management objectives are being
met with respect to incentivizing its employees.
     The level of detail required will necessarily depend on
the particular facts at a company and within various business units of
a company.

Request for Comment

     Would expanding the scope of the CD&A to require
disclosure concerning a company's overall compensation program as it
relates to risk management and or risk-taking incentives provide
meaningful disclosures to investors? Should the scope of the amendments
be limited in application to specific groups of employees, such as
executive officers? Should it be limited to companies of a particular
size, like large accelerated filers? Should it be limited to particular
industries like financial services, including companies that have
segments in such industries? Is the cost of tracking and disclosing the
nature of the risk different at different types of companies or company
segments and if so, should that be reflected in our rules?
     In light of the complexity of the issue and compensation
programs generally, we recognize that it may be difficult to identify
and describe which compensation structures may expose a company to
material risks. We believe the listed examples are situations where
compensation policies may induce risk taking behavior, and therefore,
potentially have a material impact on the company. Are the listed
examples appropriate issues for companies to consider discussing and
analyzing? Are there any other specific items we should list as
possibly material information? Are there any items that are listed that
should not be? If so, why?
     Should other elements of compensation that may encourage
excessive risk taking be highlighted in the CD&A?
     We have included a list of examples of the types of issues
that would be appropriate for a company to discuss and analyze. Is that
list appropriate? Rather than treat the list as examples, should we
require discussion of each item?
     Are there other disclosure requirements that would provide
more meaningful information about the effect of the registrant's
compensation policies on its risk profile or risk management?
     Are there certain risks that are more clearly aligned with
compensation practices the disclosure of which would be important to
investors?
     If a company determines that disclosure under the proposed
amendments is not required, should we require the company to
affirmatively state in its CD&A that it has determined that the risks
arising from its broader compensation policies are not reasonably
expected to have a material effect on the company?
     Should smaller reporting companies, who are currently not
required to provide CD&A disclosure, be required to provide disclosure
about their overall compensation policies as they relate to risk
management?
2. Revisions to the Summary Compensation Table
    The Item 402 amendments proposed today also would revise Summary
Compensation Table and Director Compensation Table disclosure of stock
awards and option awards to require disclosure of the aggregate grant
date fair value of awards computed in accordance with FAS 123R.\32\ The
proposed revised disclosure would replace currently mandated disclosure
of the dollar amount recognized for financial statement reporting
purposes for the fiscal year in accordance with FAS 123R.\33\
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    \32\ Pursuant to FAS 168, the FASB Accounting Standards
Codification has superseded all references to previous FASB
standards for interim or annual periods ending on or after September
15, 2009. For purposes of facilitating comments, our proposals
retain the well-known FAS 123R nomenclature. However, if we adopt
the Summary Compensation Table and Director Compensation Table
proposals, we expect in the final rules to update references
accordingly.
    \33\ In proposing these changes to the Summary Compensation
Table and Director Compensation Table, we do not suggest that
recognizing share-based compensation costs over the periods during
which employees perform the related services is an inappropriate
measure for financial statement reporting. Instead, we simply
acknowledge that the aggregate grant date fair value measure is more
useful to the users of executive compensation disclosure and would
facilitate CD&A disclosure.
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    A significant objective of the broad executive compensation
disclosure amendments we adopted in 2006 was to provide investors a
single total figure that includes all compensation and is comparable
across fiscal years and companies.\34\ To accomplish this, we needed to
include a dollar amount for option awards, which previously had been
reported in the Summary Compensation Table as the number of securities
underlying stock options granted.\35\ When we initially adopted the
2006 amendments, we required Summary Compensation Table and Director
Compensation Table disclosure of the aggregate grant date fair value of
stock awards and option awards computed in accordance with FAS 123R,
the same as we propose today.\36\ Before those amendments became
effective, however, we reconsidered the issue based on concerns that
the actual amounts ultimately paid out could differ from the amounts
initially reported in the tables. In December 2006, we adopted the
current disclosure requirements for the stock award and option award
columns as Interim Final Rules and solicited comment.\37\ In the same
rulemaking, we amended the Grants of Plan-Based Awards Table to require
disclosure of the FAS 123R grant date fair value of the individual
equity awards granted to named executive officers in the last completed
fiscal year.\38\
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    \34\ See Release No. 33-8732A in note 24 above at 53170. We
recognized that the timing for disclosing different elements of
compensation in the Summary Compensation Table disclosure varies
depending on the form of the compensation.
    \35\ See Release No. 33-6962 (Oct. 16, 1992) [57 FR 48126].
    \36\ See Release No. 33-8732A in note 24 above at 53172. This
approach was consistent with the timing of option and stock awards
disclosure that had applied in the Summary Compensation Table since
1992.
    \37\ See Release No. 33-8765 in note 24 above.
    \38\ Item 402(d)(2)(viii) of Regulation S-K.
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    Since the adoption of these current disclosure requirements, we
have received comments from a variety of sources that the information
that investors would find most useful and informative in the Summary
Compensation Table and Director Compensation Table is the full grant
date fair value of equity awards made during the covered fiscal
year.\39\ This is because investors may consider compensation decisions
made during the fiscal year--which usually are reflected in the full
grant date fair value measure, but not the financial statement
recognition measure--to be material to voting and investment
decisions.\40\ Disclosure of full grant date fair value permits
investors to better evaluate the amount of equity compensation awarded.
Investors have noted that disclosure in the Summary Compensation Table
of how much equity compensation the company decides to award during a
fiscal year is more informative to voting and

investment decisions than the dollar amount recognized for financial
statement reporting purposes.\41\ Investors have commented that because
full grant date fair value is indicative of which executives the
company intends to compensate most highly, it is a more useful measure
to include in the Summary Compensation Table as a component of total
compensation.\42\ Because total compensation is also the basis for
determining which executives, in addition to the principal executive
officer and principal financial officer, are the named executive
officers whose compensation is reported,\43\ the full grant date fair
value measure will better align the identification of named executive
officers with company compensation decisions. Summary Compensation
Table disclosure of the full grant date fair value measure also can
facilitate companies'' ability to provide a CD&A that clearly and
concisely explains and analyzes material compensation policies and
decisions.\44\
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    \39\ See, for example, letters regarding File No. S7-03-06 from
Ken Belcher (Dec. 28, 2006); Andrew H. Dral (Dec. 30, 2006); Council
of Institutional Investors (Jan. 25, 2007); American Federation of
Labor and Congress of Industrial Organizations (Jan. 29, 2007);
Teachers Insurance and Annuity Association of America (Jan. 16,
2007); CALSTRS (Jan. 16, 2007); Leggett & Platt, Inc. (Apr. 23,
2007); and CFA Institute for Financial Market Integrity (Dec. 20,
2007). These comment letters are available at http://www.sec.gov/
rules/proposed/s70306.shtml. In its May 5, 2009, meeting with the
staff of the Division of Corporation Finance, the Joint Committee on
Employee Benefits of the American Bar Association also recommended
that we revise Summary Compensation Table disclosure of stock awards
and option awards to report aggregate grant date fair value.
    \40\ See letter regarding File No. S7-03-06 from Council of
Institutional Investors (Jan. 25, 2007) (stating that ``the Summary
Compensation Table should disclose the decisions of the compensation
committee in the applicable year * * * [This] methodology is
consistent with the objective of providing investors with the tools
needed to evaluate the annual decisions of the compensation
committee[.]''). See also letter regarding File No. S7-03-06 from
Leggett & Platt, Inc. (Apr. 23, 2007) (stating that ``[t]his is
clearly the information most investors want'').
    \41\ See letter regarding File No. S7-03-06 from Teachers
Insurance and Annuity Association of America (Jan. 16, 2007) (``Our
view is that executive compensation disclosure and financial
reporting are separate and distinct. We believe that reporting the
aggregate fair value of awards in the Summary Compensation Table is
important to give an accurate representation of the compensation
committee's actions and intentions in any given reporting period'').
See also letter from American Federation of Labor and Congress of
Industrial Organizations in note above (``By spreading out the
disclosure of the value of equity awards over a number of years, the
total impact of executive compensation decisions will be concealed
from shareholders and the public'').
    \42\ See letter from American Federation of Labor and Congress
of Industrial Organizations in note 39 above (``The methodology used
to calculate total compensation in the Summary Compensation Table is
extremely important to shaping behavior by compensation committees
and investors. Shareholders will evaluate the disclosed total
compensation figure when voting in director elections and when asked
to ratify equity award plans. Directors will shape their executive
compensation decisions to reflect these shareholder views. For this
reason, the total compensation figure should represent the current
decisions made regarding executive compensation in the most recent
fiscal year.'').
    \43\ Pursuant to Instruction 1 to Items 402(a)(3) and
Instruction 1 to Item 402(m)(2), this determination is made by
reference to total compensation for the last completed fiscal year.
    \44\ Summary Compensation Table disclosure of the dollar amount
recognized for financial statement reporting purposes can frustrate
this objective because it can result in lengthy, complex CD&A
explanations of the FAS 123R recognition model. See The Corporate
Counsel, Mar.-Apr. 2009, at 3-4.
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    Some companies have recognized the importance of full grant date
fair value information to investors and have provided an
``alternative'' Summary Compensation Table--substituting full grant
date fair value numbers in the Stock Awards and Option Awards columns--
in addition to the Summary Compensation Table disclosure prescribed by
the current rules.\45\ Because companies generally consider the full
grant date fair value of these awards in making compensation decisions,
they may include such an ``alternative'' table in the CD&A to
illuminate their decisionmaking process. Some users of executive
compensation disclosure also independently substitute grant date fair
value information from the Grants of Plan-Based Awards Table for the
financial statement recognition-based numbers disclosed in the Summary
Compensation Table.\46\
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    \45\ Some compensation experts have also suggested adding an
alternative Summary Compensation Table if the mandated Summary
Compensation Table ``distorts'' the compensation of an executive.
See Frederick D. Lipman & Steven E. Hall, Executive Compensation
Best Practices 50-52 (2008).
    \46\ See Moody's Investors Service, A User's Guide to the SEC's
New Rules for Reporting Executive Pay (Apr. 2007), available at
http://www.law.yale.edu/documents/pdf/CBL/
AUsersGuidetotheSECPayDisclosures102762.pdf, and ( http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=987914) ( ``Moody's
uses the full Statement 123(R) grant date fair value of stock
awarded and options granted, as disclosed in the grants of plan-
based awards table, instead of the figures disclosed in the SCT
stock awards and options awards columns.'').
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    Further, correlating Stock Awards and Option Awards disclosure to
financial statement recognition can result in the disclosure of a
negative number in the relevant column.\47\ Such a negative number
currently flows through to the Total Compensation column, reducing the
amount of total compensation reported. Because decreases in stock price
affect the financial reporting of the value of stock options, using the
financial statement recognition measure to disclose stock and option
awards can result in disclosure of negative total compensation to
principal executive officers or principal financial officers, confusing
investors.\48\
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    \47\ Correlating Stock Awards and Option Awards reporting to
financial statement recognition often can involve negative
adjustments to the numbers reported. In particular:
    [ctrcir] Awards classified as ``liability awards'' under FAS
123R (such as an award that is cash settled) are initially measured
at grant date fair value, but for purposes of financial statement
recognition are re-measured at each financial statement reporting
date through the date the awards are settled.
    [ctrcir] Under FAS 123R, compensation cost for awards containing
a performance-based vesting condition is disclosed only if it is
probable that the performance condition will be achieved. If
achievement of the performance condition subsequently is no longer
considered probable, the amount of compensation cost previously
disclosed in the Summary Compensation Table is reversed in the
period when it is determined that achievement of the condition is no
longer probable.
    In addition, pursuant to the Instruction to Item 402(c)(2)(v)
and (vi) and the Instruction to Item 402(n)(2)(v) and (vi), the
compensation cost reported for stock and option awards in the
Summary Compensation Table does not include the estimate of
forfeitures related to service-based vesting conditions used for FAS
123R financial statement recognition because this estimate is not
considered meaningful in reporting the compensation of individual
named executive officers. Instead, compensation cost for awards with
service-based vesting is disclosed assuming that a named executive
officer will perform the service required for the award to vest. If
the named executive officer fails to do so and forfeits the award,
the amount of compensation cost previously disclosed in the Summary
Compensation Table is deducted in the period when the award is
forfeited.
    \48\ See G. Morgenson, Weird and Weirder Numbers on Pay Reports,
N.Y. TIMES, Mar. 11, 2007.
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    Because total compensation also determines identification of some
named executive officers, where a company experiences significant
volatility in its stock price, such as the significant decreases during
2008, the current rules may also cause the list of named executive
officers to change more frequently from year to year due to factors
unrelated to the company's compensation decisions.\49\ This can
potentially exclude from executive compensation disclosure executives
that the company considers the most highly compensated based on its
compensation decisions, including its decisions with respect to equity
awards.\50\ One reason for the adoption of the financial statement
recognition model was the potential to distort identification of named
executive officers when a single large grant, to be earned for services
to be performed over multiple years, affects the list of named
executive officers in the Summary Compensation Table, even though the
executive may earn a consistent level of compensation over the award's
term.\51\ Our experience with the current rules, however, leads us to
believe that it is more meaningful to shareholders if company
compensation decisions--including the decision to grant such a large
award--

rather than factors unrelated to those decisions, cause the named
executive officers to change.
---------------------------------------------------------------------------

    \49\ See letter regarding File No. S7-03-06 from the HR Policy
Association (Jan. 29, 2007) (``The Amended Rules also will increase
the annual variability of the composition of the NEOs based on
accounting rules rather than compensation programs. * * *
Consistency with financial accounting does not justify re-
introducing such variability into the table, especially with respect
to a core element of compensation such as equity compensation that
cannot be excluded in determining total compensation.'').
    \50\ See letter regarding File No. S7-03-06 from Ernst & Young
(Jan. 29, 2007) (generally supporting the current rules yet stating
that ``[w]e recommend that the SEC adopt an approach that also
excludes the effects of any negative amounts, regardless of their
source in the determination of the NEOs. We believe that such an
approach would result in more consistency from year to year in the
identity of the NEOs included in the SCT. Further, the NEOs
determined in this fashion would more likely be those executives
that the compensation committee regards as the most highly
compensated.'').
    \51\ See Release No. 33-8765 in note 24 above at 78340 (citing
letter from Fenwick & West LLP).
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    A further significant reason for adopting the current rules was
concern that disclosing the full grant date fair value would overstate
compensation earned related to service rendered for the year, and that
actual amounts earned later could be substantially different.\52\
However, companies have recognized that the current rules also have the
potential to over-report compensation for a given year.\53\ To the
extent that both methods possess this potential, we believe that
reporting based on the full grant date fair value method is more
informative because it better reflects compensation decisions. If a
company does not believe that full grant date fair value reflects a
named executive officer's compensation, it can provide appropriate
explanatory narrative disclosure.
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    \52\ See Release No. 33-8765 in note 24 above. See also Release
No. 33-8765, in note 24 above at 78340 (citing letters of U.S.
Chamber of Commerce (Apr. 7, 2006); Ernst & Young LLP (Apr. 10,
2006)).
    \53\ See Frederick D. Lipman & Steven E. Hall in note 45 above
(stating that ``[w]hen shareholders look at the `Total' column for a
2007 or a subsequent year proxy statement, the executive's
compensation would include the allocable share of the 2005 option
grant under FAS 123R. This figure could substantially inflate the
`Total' column for 2007 or subsequent years, leading unsophisticated
shareholders or financial writers to the conclusion that this amount
was received in 2007, when in fact the option grants were received
in 2005. If 2007 were a particularly bad year financially for the
company or for shareholders' stock values, there could be a hue and
cry that this was another example of excessive CEO compensation'').
---------------------------------------------------------------------------

    While we continue to recognize that no one approach to disclosure
of stock and option awards addresses all the issues regarding
disclosure of equity compensation, our experience and the comment
letters received since adoption of the current requirements lead us to
believe that the goals of clear, concise and meaningful executive
compensation disclosure would be better served by amending the Summary
Compensation Table and Director Compensation Table to report stock
awards and option awards based on aggregate grant date fair value.
Among other things, because presentation of aggregate grant date fair
value would include the incremental fair value of options repriced
during the fiscal year, the effect of option repricings on total
compensation would be clearer. Further, because smaller reporting
companies do not provide a Grants of Plan-Based Awards Table, the
current rules do not require them to provide any disclosure of the
grant date fair value of awards made in the fiscal year (although they
are currently required to provide the Summary Compensation Table). The
proposals thus would make this information available to smaller
reporting company investors.
    The amendments we propose also would:
     Rescind the requirement to report the full grant date fair
value of each individual equity award in the Grants of Plan-Based
Awards Table \54\ and corresponding footnote disclosure \55\ to the
Director Compensation Table because these disclosures may be considered
duplicative of the aggregate grant date fair value disclosure to be
provided in the Summary Compensation Table under the proposals; and
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    \54\ See Item 402(d)(2)(viii) of Regulation S-K and Instruction
7 to Item 402(d).
    \55\ Current Instruction to Item 402(k)(2)(iii) and (iv) of
Regulation S-K.
---------------------------------------------------------------------------

     Amend Instruction 2 to the salary and bonus columns of the
Summary Compensation Table to provide that registrants will not be
required to report in those columns the amount of salary or bonus
forgone at a named executive officer's election, and that non-cash
awards received instead are reportable in the column applicable to the
form of award elected. With this amendment, the Summary Compensation
Table disclosure would reflect the form of compensation ultimately
received by the named executive officer.\56\
---------------------------------------------------------------------------

    \56\ This proposed amendment would apply to General Instruction
2 to Item 402(c)(2)(iii) and (iv) and General Instruction 2 to Item
402(n)(2)(iii) and (iv). The current versions of these Instructions,
which require such forgone salary or bonus to be reported in the
Salary or Bonus column, as applicable, were adopted in Release No.
33-8765 to reflect that the original terms of the award, which would
have compensated the named executive officer in cash, are not within
the scope of FAS 123R.
---------------------------------------------------------------------------

Request for Comment

     Is the proposed Summary Compensation Table reporting of
equity awards a better approach for providing investors clear,
meaningful, and comparable executive compensation disclosure consistent
with the objectives of providing concise analysis in CD&A and a clear
understanding of total compensation for the year? Would the proposals
facilitate better informed investment and voting decisions?
     The proposal contemplates that the Summary Compensation
Table would report the aggregate grant date fair value of stock awards
and option awards granted during the relevant fiscal year, just as the
Grants of Plan-Based Awards Table reports each grant of an award made
to a named executive officer in the last completed fiscal year. Should
the Summary Compensation Table instead report the aggregate grant date
fair value of equity awards granted for services in the relevant fiscal
year, even if the awards were granted after fiscal year end? Explain
why or why not. For example, could such an approach be applied in a
manner inconsistent with the purposes of our compensation disclosure
rules, for example by distorting the determination of named executive
officers? If we change our approach with respect to the Summary
Compensation Table, should the Grants of Plan-Based Awards Table be
amended correspondingly to conform to the scope of awards reported in
that table?
     If the Summary Compensation Table is amended as proposed,
should the Grants of Plan-Based Awards Table disclosure of the full
grant date fair value of each individual award be retained, rather than
rescinded as proposed? Should the Grants of Plan Based Awards Table
continue to disclose the incremental fair value with respect to
individual awards that were repriced or otherwise materially modified
during the last completed fiscal year? If so, why? If disclosure of
grant date fair value of individual awards is retained, should it also
be made applicable to smaller reporting companies?
     As described above, one reason for adopting the financial
statement recognition model was the potential for distortion in
identifying named executive officers when a single large grant, to be
earned by services to be performed over multiple years, affects the
list of named executive officers in the Summary Compensation Table,
even though the executive earns a consistent level of compensation over
the award's term. Are multi-year grants a common practice, so that they
would introduce significant year-to-year variability in the list of
named executive officers if the proposed amendments are adopted
relative to the variability under the current rules? If so, how should
our rules address this variability?
     Under the proposal, all stock and option awards would be
reported in the Summary Compensation Table at full grant date fair
value, including awards with performance conditions. Would the proposal
discourage companies from tying stock awards to performance conditions,
since the full grant date fair value would be reported without regard
to the likelihood of achieving the performance objective? If the
proposal is adopted, is any disclosure other than that already
currently required (e.g., in the Compensation Discussion and Analysis,
the Grants of Plan-Based Awards Table, and the Outstanding

Equity Awards at Fiscal Year-End Table) needed to clarify that the
amount of compensation ultimately realized under a performance-based
equity award may be different?
     As proposed, Instruction 2 to the salary and bonus columns
would be revised to provide that any amount of salary or bonus forgone
at the election of a named executive officer pursuant to a program
under which a different, non-cash form of compensation may be received
need not be included in the salary or bonus column, but instead would
need to be reported in the appropriate other column of the Summary
Compensation Table. Should this approach cover elections to receive
salary or bonus in the form of equity compensation only if the
opportunity to elect equity settlement is within the terms of the
original compensatory arrangement, so that the original arrangement is
within the scope of FAS 123R? Why or why not?
     The Commission also has received a rulemaking petition
requesting that we revise Summary Compensation Table disclosure of
stock and option awards a different way.\57\ Instead of reporting the
aggregate grant date fair value of awards granted during the year, as
we propose, the petition's suggested approach would report the annual
change in value of awards, which could be a negative number if market
values decline. For restricted stock, restricted stock units and
performance shares, the reported amount would be the change in stock
price from year-end to year-end. For stock options, it would be the
change in the in-the-money value over the same period. Would the
approach suggested by the rulemaking petition be easy to understand or
difficult to understand? Would the information provided under the
suggested approach be useful to investors? In particular, would
investors be able to evaluate the decision making of directors with
respect to executive compensation if the value of equity compensation
on the date of the compensation decision is not disclosed, but instead
investors are provided information regarding changes in value of the
compensation, which changes occur after the compensation decision is
made? Would it enhance or diminish the ability of companies to explain
in CD&A the relationship between pay and company performance? Would it
be more or less informative to voting and investment decisions than the
aggregate grant date fair value approach we propose? Would it be a
better measure for computing total compensation, including for purposes
of identifying named executive officers? Are there any other ways of
reporting stock and option awards that would better reflect their
compensatory value? If so, please explain. For example, are there any
potential amendments to the Grants of Plan-Based Awards Table or the
Outstanding Equity Awards at Fiscal Year-End Table that we should
consider to better illustrate the relationship between pay and company
performance?
---------------------------------------------------------------------------

    \57\ See May 26, 2009, rulemaking petition submitted by Ira T.
Kay and Steven Seelig, Watson Wyatt Worldwide, File No. 4-585, at
http://www.sec.gov/rules/petitions/2009/petn4-585.pdf.
---------------------------------------------------------------------------

     The Summary Compensation Table requires disclosure for
each of the registrant's last three completed fiscal years,\58\ and
with respect to smaller reporting companies, for each of the
registrant's last two completed fiscal years.\59\ Regarding transition,
our goal is to facilitate year-to-year comparisons in a cost-effective
way. To this end, we are considering whether to require companies
providing Item 402 disclosure for a fiscal year ending on or after
December 15, 2009 to present recomputed disclosure for each preceding
fiscal year required to be included in the Summary Compensation Table,
so that the Stock Awards and Option Awards columns would present the
applicable full grant date fair values,\60\ and Total Compensation
would be recomputed correspondingly. If a person who would be a named
executive officer for the most recent fiscal year (2009) also was
disclosed as a named executive officer for 2007, but not for 2008, we
expect to require the named executive officer's compensation for each
of those three fiscal years to be reported pursuant to the proposed
amendments.\61\ However, we would not require companies to include
different named executive officers for any preceding fiscal year based
on recomputing total compensation for those years pursuant to the
proposed amendments or to amend prior years'' Item 402 disclosure in
previously filed Forms 10-K or other filings. Would recomputation of
prior years included in the 2009 Summary Compensation Table to
substitute aggregate grant date fair value numbers for the financial
statement recognition numbers previously reported for those years cause
companies practical difficulties? Is there a better approach that would
preserve the objective of year-to-year comparability on a cost-
effective basis as a transitional matter?
---------------------------------------------------------------------------

    \58\ See Item 402(c)(1) of Regulation S-K.
    \59\ See Item 402(n)(1) of Regulation S-K.
    \60\ This amount would be computed based on the individual award
grant date fair values reported in that year's Grants of Plan Based
Award Table.
    \61\ However, a smaller reporting company, which is required to
provide disclosure only for the two most recent fiscal years, could
provide Summary Compensation Table disclosure only for 2009 if the
person was a named executive officer for 2009 but not for 2008.
---------------------------------------------------------------------------

B. Enhanced Director and Nominee Disclosure

    We are proposing amendments to Item 401 of Regulation S-K to expand
the disclosure requirements regarding the qualifications of directors
and nominees, past directorships held by directors and nominees, and
the time frame for disclosure of legal proceedings involving directors,
nominees and executive officers. Specifically, we are proposing to
require disclosure detailing for each director and nominee for director
the particular experience, qualifications, attributes or skills that
qualify that person to serve as a director of the company as of the
time that a filing containing this disclosure is made with the
Commission, and as a member of any committee that the person serves on
or is chosen to serve on (if known), in light of the company's business
and structure.\62\
---------------------------------------------------------------------------

    \62\ We last adopted substantive revisions to the disclosure
concerning the background of directors, executive officers and
control persons in 1984, when we amended Item 401 of Regulation S-K
to require disclosure of legal proceedings involving Federal
commodities laws and applied the disclosure requirements to
promoters and control persons of newly public companies. See Release
No. 33-6545 (Aug. 9, 1984) [49 FR 32762].
---------------------------------------------------------------------------

    Item 401 currently requires only brief biographical information
about directors and nominees for the past five years, and Item 407
requires general disclosure about director qualification requirements
at a company. The proposed amendments to Item 401 would expand the
information required about individual directors and supplement the
current director qualification disclosures in Item 407 of Regulation S-
K. These revisions are aimed at helping investors determine whether a
particular director and the entire board composition is an appropriate
choice for a given company as of the time that a filing containing this
disclosure is made with the Commission.\63\
---------------------------------------------------------------------------

    \63\ See, for example, Richard Leblanc & James Gillies, Inside
the boardroom: How boards really work and the coming revolution in
corporate governance, (2005) (noting that an effective board ``must
have a set of directors who collectively have all the competencies
required by the board to fulfill its duties.'').
---------------------------------------------------------------------------

    Companies today face ever-increasing challenges from the business
and social environments in which they operate. As recent market events
have demonstrated, the capacity to assess risk and respond to complex
financial and

operational challenges can be important attributes for directors of
public companies. Moreover, developments such as the enactment of the
Sarbanes-Oxley Act of 2002 \64\ and corporate-governance related
listing standards of the major stock exchanges \65\ also have brought
about significant changes in the structure and composition of corporate
boards, such as requiring directors to have particular knowledge in
areas such as finance and accounting. We believe that the director
qualification disclosure requirements in Item 407 have resulted in more
general information being provided about the qualifications of the
board as a whole, but not more specific discussions of the background
and skills of individual directors.
---------------------------------------------------------------------------

    \64\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \65\ In 2003, we approved revisions to the listing standards of
the New York Stock Exchange (``NYSE'') and the National Association
of Securities Dealers (``NASD'') that, among other things, imposed
new independent director requirements and enhanced independence
standards. See Self-Regulatory Organizations; NYSE and NASD; Order
Approving Proposed Rule Changes Relating to Corporate Governance,
Release No. 34-48445 (Nov. 12, 2003) [68 FR 64154].
---------------------------------------------------------------------------

    The proposed amendments are designed to provide investors with more
meaningful disclosure to help them in their voting decisions by better
enabling them to determine whether and why a director or nominee is a
good fit for a particular company, and to allow companies flexibility
in disclosing material information on the background and specific
qualifications of each director and nominee, including information that
goes beyond the five-year biographical requirement of Item 401. We are
proposing that, for each director or nominee, disclosure be included
that discusses the specific experience, qualifications or skills that
qualify that person to serve as a director and committee member. The
types of information that may be disclosed include, for example,
information about a director's or nominee's risk assessment skills and
any specific past experience that would be useful to the company, as
well as information about a director's or nominee's particular area of
expertise and why the director's or nominee's service as a director
would benefit the company at the time at which the relevant filing with
the Commission is made. This expanded disclosure would apply to
incumbent directors, to nominees for director who are selected by a
company's nominating committee, and to any nominees put forward by
other proponents. Regardless of who has nominated the director, we
believe a discussion of why the particular person is qualified to serve
on the company's board would be useful to investors.
    In addition to the expanded narrative disclosure regarding director
and nominee qualifications, we are proposing two additional changes to
our director and nominee biographical disclosure requirements. First,
we are proposing to require disclosure of any directorships held by
each director and nominee at any time during the past five years at
public companies, and second, we are proposing to lengthen the time
during which disclosure of legal proceedings is required from five to
10 years. With respect to other directorships held by directors or
nominees, Item 401 requires disclosure of any current director
positions held by each director and nominee in any company with a class
of securities registered pursuant to Section 12 of the Exchange
Act,\66\ or subject to the requirements of Section 15(d) of that
Act,\67\ or any company registered as an investment company under the
Investment Company Act. We believe that expanding this disclosure to
include membership on corporate boards of those companies for the past
five years (even if the director or nominee no longer serves on that
board) would allow investors to better evaluate the relevance of a
director's or nominee's past board memberships, or professional or
financial relationships that might pose potential conflicts of interest
(such as membership on boards of major suppliers, customers, or
competitors).
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78l.
    \67\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    Item 401 requires disclosure of specified legal proceedings over
the past five years involving directors, executive officers, and
persons nominated to become directors that are material to an
evaluation of the ability or integrity of any director, director
nominee or executive officer.\68\ In 1994, we proposed rules that would
have increased the reporting period for legal proceedings from five to
ten years.\69\ Because the legal proceedings listed in Item 401 reflect
upon an individual's competence and character to serve as a public
company official, we believe it is appropriate to extend the required
reporting period from five to ten years in order to give investors more
extensive information regarding an individual's competence and
character.\70\
---------------------------------------------------------------------------

    \68\ Under Item 401(f), the registrant must disclose any of the
following events that occurred during the past five years and that
are material to an evaluation of the director, director nominee or
executive officer:
    (1) A petition under Federal bankruptcy laws or any State
insolvency law. A petition under the Federal bankruptcy laws or any
State insolvency law was filed by or against, or a receiver, fiscal
agent or similar officer was appointed by a court for the business
or property of such person, or any partnership in which he was a
general partner at or within two years before the time of such
filing, or any corporation or business association of which he was
an executive officer at or within two years before the time of such
filing;
    (2) Such person was convicted in a criminal proceeding or is a
named subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
    (3) Such person was the subject of any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining him from, or otherwise limiting, the following activities:
(i) Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of any
of the foregoing, or as an investment adviser, underwriter, broker
or dealer in securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or continuing any
conduct or practice in connection with such activity; (ii) Engaging
in any type of business practice; or (iii) Engaging in any activity
in connection with the purchase or sale of any security or commodity
or in connection with any violation of Federal or State securities
laws or Federal commodities laws;
    (4) Such person was the subject of any order, judgment or
decree, not subsequently reversed, suspended or vacated, of any
Federal or State authority barring, suspending or otherwise limiting
for more than 60 days the right of such person to engage in any
activity described in paragraph (f)(3)(i) of this section, or to be
associated with persons engaged in any such activity;
    (5) Such person was found by a court of competent jurisdiction
in a civil action or by the Commission to have violated any Federal
or State securities law, and the judgment in such civil action or
finding by the Commission has not been subsequently reversed,
suspended, or vacated; or
    (6) Such person was found by a court of competent jurisdiction
in a civil action or by the Commodity Futures Trading Commission to
have violated any Federal commodities law, and the judgment in such
civil action or finding by the Commodity Futures Trading Commission
has not been subsequently reversed, suspended or vacated.
    The instruction to Item 401(f) indicates that if any event
specified in Item 401(f) has occurred and information in a filing is
omitted on the grounds that it is not material, the registrant may
furnish to the Commission, at the time of filing, as supplemental
information and not as part of the registration statement, report,
or proxy or information statement, materials to which the omission
relates, a description of the event and a statement of the reasons
for the omission of the information.
    \69\ Release No. 33-7106 (Nov. 1, 1994) [59 FR 55385].
    \70\ Consistent with the current disclosure requirement
regarding legal proceedings, the proceedings required to be
disclosed under the proposal would not need to be disclosed if they
are not material to an evaluation of the director or director
nominee. See 17 CFR 229.401(f).
---------------------------------------------------------------------------

    The disclosures that would be required under the proposed
amendments to Item 401 would appear in proxy and information statements
on Schedules 14A and 14C, annual reports on Form 10-K and the
registration

statement on Form 10 under the Exchange Act, as well as in registration
statements under the Securities Act.
    Currently, Item 407(c)(2)(v) of Regulation S-K requires disclosure
of any specific minimum qualifications that a nominating committee
believes must be met by a nominee for a position on the board.\71\ We
are interested in understanding whether investors and other market
participants believe that diversity in the boardroom is a significant
issue. As indicated below, we are requesting comment on whether
additional disclosure in this area should be required.
---------------------------------------------------------------------------

    \71\ Management investment companies that are registered under
the Investment Company Act are subject to the disclosure
requirements of Item 407(c)(2)(v) of Regulation S-K pursuant to Item
22(b)(15)(ii)(A) of Schedule 14A. See 17 CFR 240.14a-101, Item
22(b)(15)(ii)(A). Management investment companies typically issue
shares representing an interest in a changing pool of securities,
and include open-end and closed-end companies. An open-end company
is a management company that is offering for sale or has outstanding
any redeemable securities of which it is the issuer. A closed-end
company is any management company other than an open-end company.
See Section 5 of the Investment Company Act [15 U.S.C. 80a-5].
---------------------------------------------------------------------------

    We also are proposing to apply the expanded disclosure requirements
regarding director and nominee qualifications, past directorships held
by directors and nominees, and the time frame for disclosure of legal
proceedings involving directors, nominees, and executive officers to
management investment companies that are registered under the
Investment Company Act (``funds''). We believe investors in funds
would, for the same reasons as investors in operating companies, find
this information useful. The proposal would amend the disclosures in
Schedules 14A and 14C to apply these expanded requirements to fund
proxy and information statements where action is to be taken with
respect to the election of directors.\72\ We are also proposing to
amend Forms N-1A, N-2, and N-3 to require that funds include the
expanded disclosures regarding director qualifications and past
directorships in their statements of additional information.\73\
---------------------------------------------------------------------------

    \72\ See proposed Item 22(b)(3)(i) of Schedule 14A
(qualifications); proposed Item 22(b)(4)(ii) of Schedule 14A
(directorships); proposed Item 22(b)(11) of Schedule 14A (legal
proceedings).
    \73\ See proposed Items 17(b)(3)(ii) & 17(b)(10) of Form N-1A;
proposed Items 18.6(b) & 18.17 of Form N-2; proposed Items 20(e)(ii)
& 20(o) of Form N-3. Form N-1A is used by open-end management
investment companies. Form N-2 is used by closed-end management
investment companies. Form N-3 is used by separate accounts,
organized as management investment companies, which offer variable
annuity contracts.
---------------------------------------------------------------------------

Request for Comment

     Would the proposed amendments provide investors with
important information regarding directors and nominees for director?
Are there any additional changes that we should make to further improve
the disclosures about director and nominee qualifications?
     If Item 401 is amended as proposed, should the disclosure
currently required by Item 407(c)(2)(v) of Regulation S-K regarding
disclosure of any minimum qualifications that a nominating committee
believes must be met by someone nominated by the committee for a
position on the board, be retained? Does the disclosure elicited by
Item 407(c)(2)(v) provide useful information that would supplement the
information provided pursuant to the proposed amendment to Item 401?
     Should we amend Item 407(c)(2)(v) to require disclosure of
any additional factors that a nominating committee considers when
selecting someone for a position on the board, such as diversity?
Should we amend our rules to require additional or different disclosure
related to board diversity?
     Would director qualification disclosure for all of a
company's board committees be useful to investors, or should the
disclosures be focused on membership of certain key committees, such as
the audit, compensation and nominating/governance committees?
     Should we require the proposed director qualification
disclosure less frequently than annually? Even though the overall
composition of a board may change, is it sufficient to require this
disclosure only when a director is first nominated or periodically,
such as every three years? Should the disclosure be required only when
the director is standing for election, or should it be required each
year, as proposed, in order to facilitate shareholders' assessments of
the quality of the board as a whole?
     Would it be helpful to investors if we required companies
to list and describe all committees of the board similar to the current
disclosure requirements for audit, compensation and nominating/
governance committees? Would it also be helpful if we required
disclosure of whether the board (or a committee) periodically conducts
an evaluation of the performance of the board as a whole, the
committees of the board and/or each individual director?
     Should we require disclosure of other directorships for
more than the past five years? If so, for how long?
     Could requiring more director and nominee qualification
disclosure in any way hinder a company's ability to find potential
candidates for the board? If so, explain how.
     Should the current five-year disclosure period for legal
proceedings be maintained? Should it be longer than proposed, for
example for fifteen or twenty years? Should there be no time limit?
Would it be more appropriate to require disclosure of legal proceedings
for longer periods with respect to certain types of legal proceedings--
for example, criminal fraud convictions, civil or administrative
actions based on fraud involving securities, commodities, financial
institutions, insurance companies or other businesses? If so, for what
period or periods and why?
     Are there additional legal proceeding disclosures that
reflect on a director's, executive officer's, or nominee's character
and fitness to serve as a public company official that should be
required to be disclosed? For example, should we expand the current
requirements to require disclosure of:
    [cir] Any civil or administrative proceedings resulting from
involvement in mail fraud, or wire fraud;
    [cir] Any judicial or administrative findings, orders or sanctions
based on violations of Federal or State securities, commodities,
banking or insurance laws and regulations or any settlement to such
actions;
    [cir] Any disciplinary sanctions imposed by a stock, commodities or
derivatives exchange or other self-regulatory organization; or
    [cir] Situations where the director, nominee, or executive officer
was a general partner of any partnership or served as a director or
executive officer of any corporation subject to any Federal or State
agency receivership?
     Should we continue, as proposed, to permit companies to
exclude disclosure of director, director nominee or executive officer
legal proceedings, when the registrant concludes that the information
would not be material to an evaluation of the ability or integrity of
the director, director nominee or executive officer, or should this
disclosure be required in all cases?
     Should we make any special accommodations in the proposed
amendments to Item 401 for smaller reporting companies? If so, what
accommodations should be made and why?
     Should the proposed amendments regarding director and
nominee qualifications, past directorships held by directors and
nominees, and the time frame for disclosure of legal proceedings apply
to registered management investment companies? If so, where should each
of the disclosures be

required (e.g., proxy statements, statements of additional information,
and/or shareholder reports)? Does the disclosure requirement need to be
modified in any way to make it more appropriate for registered
management investment companies?

C. New Disclosure About Company Leadership Structure and the Board's
Role in the Risk Management Process

    We are proposing a new disclosure requirement to Item 407 of
Regulation S-K and a corresponding amendment to Item 7 of Schedule 14A
that would require disclosure of the company's leadership structure and
why the company believes it is the best structure for it at the time of
the filing. This proposed disclosure would appear in proxy and
information statements. Under the proposed amendments, companies also
would be required to disclose whether and why they have chosen to
combine or separate the principal executive officer and board chair
positions. In some companies, the role of principal executive officer
and board chairman are combined, and a lead independent director is
designated to chair meetings of the independent directors. Those
companies would also be required to disclose whether and why the
company has a lead independent director, as well as the specific role
the lead independent director plays in the leadership of the company.
In proposing this requirement, we note that different leadership
structures may be suitable for different companies depending on factors
such as the size of a company, the nature of a company's business, or
internal control considerations, among other things. Regardless of the
type of leadership structure selected by a company, the disclosure
would provide investors with insights about why the company has chosen
that particular leadership structure.
    In making voting and investment decisions, investors should be
provided with meaningful information about the corporate governance
practices of companies.\74\ One important aspect of a company's
corporate governance practices is its board's leadership structure. Our
proposed amendments to Item 407 are not intended to influence a
company's decision regarding its board leadership structure. Disclosure
of board leadership structure and why the company believes this is the
best structure will increase the transparency for investors into how
boards function.
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    \74\ See, for example, National Association of Corporate
Directors, Key Agreed Principles to Strengthen Corporate Governance
for U.S. Publicly Traded Companies, (Mar. 2009) (``Every board
should explain, in proxy materials and other communications with
shareholders, why the governance structures and practices it has
developed are best suited to the company.'')
---------------------------------------------------------------------------

    We also are proposing to require additional disclosure in proxy and
information statements about the board's role in the company's risk
management process. Companies face a variety of risks, including credit
risk, liquidity risk, and operational risk. Similar to disclosure about
the leadership structure of a board, disclosure about the board's
involvement in the risk management process should provide important
information to investors about how a company perceives the role of its
board and the relationship between the board and senior management in
managing the material risks facing the company. Given the role that
risk and the adequacy of risk oversight have played in the recent
market crisis, we believe it is important for investors to understand
the board's, or board committee's role in this area. For example, how
does the board implement and manage its risk management function,
through the board as a whole or through a committee, such as the audit
committee? \75\ Such disclosure might address questions such as whether
the persons who oversee risk management report directly to the board as
whole, to a committee, such as the audit committee, or to one of the
other standing committees of the board; and whether and how the board,
or board committee, monitors risk. We believe that this disclosure will
provide key insights into how a company's board perceives and manages a
company's risks.
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    \75\ Section 303A of the NYSE's Listed Company Manual provides
that the audit committee of companies listed on the exchange must
``discuss guidelines and policies to govern the process by which
risk assessment and management is undertaken.''
---------------------------------------------------------------------------

    We also are proposing that registered management investment
companies provide the new Item 407 disclosure about leadership
structure and the board's role in the risk management process in proxy
and information statements.\76\ Similar to the transparency provided to
investors in corporate issuers, we believe that providing this
disclosure to investors in investment companies should enable them to
consider their management structure preference, if any, when deciding
where to invest.\77\ We have, however, tailored the proposal to the
management structure of funds. Accordingly, we propose to require that
a fund disclose whether the board chair is an ``interested person'' of
the fund, as defined in Section 2(a)(19) of the Investment Company
Act.\78\ If the board chair is an interested person, a fund would be
required to disclose whether it has a lead independent director and
what specific role the lead independent director plays in the
leadership of the fund. We are also proposing to require similar
disclosure in statements of additional information filed as part of
registration statements on Forms N-1A, N-2, and N-3.\79\
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    \76\ See proposed Item 22(b)(11) of Schedule 14A.
    \77\ In the context of this rulemaking, we believe it is
appropriate to propose to require disclosure about fund management
that is similar to the disclosure requirement for corporate issuers.
In another context and for other purposes, the Commission previously
considered a number of issues, including disclosure, regarding fund
governance that we are not addressing here. See Investment Company
Governance, File No. S7-03-04.
    \78\ 15 U.S.C. 80a-2(a)(19).
    \79\ See proposed Item 17(b)(1) of Form N-1A; proposed Item
18.5(a) of Form N-2; proposed Item 20(d)(i) of Form N-3. We are
proposing to require this disclosure in the statement of additional
information because not all funds hold annual meetings for the
election of directors.
    A large number of funds are organized as entities in
jurisdictions which do not require funds to hold an annual
shareholder meeting to elect directors. See, for example, Md. Code
Ann., Corps. & Ass'ns Code Sec.  2-501(b) (2009) (law exempts funds
from annual meeting requirement in any year that the fund is not
required to act upon the election of directors under the Investment
Company Act); Del. Code Ann. tit. 12, Sec.  3806 (2009) (statutory
trust law structure has the effect of generally not requiring
shareholder meetings). See also Sheldon A. Jones et al., The
Massachusetts Business Trust and Registered Investment Companies, 13
DEL. J. CORP. L. 421 (1988) (noting that the organizational and
operational requirements of Massachusetts business trusts are not
specified by statute, and a fund's essential structure is contained
in the trust agreement, which generally includes a provision
eliminating the need for annual shareholder meetings to elect
directors). Closed-end funds registered on national securities
exchanges, however, are required to hold an annual meeting to elect
directors under the rules of the exchanges. See, for example, AMEX
Company Guide Sec.  704; New York Stock Exchange Listed Company
Manual Sec.  302.00.
---------------------------------------------------------------------------

Request for Comment

     Are the proposed amendments to Item 407 appropriate? Are
there additional disclosure requirements that should also be included
in these proposed requirements?
     Are there certain considerations that would affect the
company's leadership structure that should be highlighted in the
proposed amendment? If so, explain.
     Are there any additional disclosures about a company's
leadership that would be helpful to investors?
     Should we require disclosure of the specific duties
performed by the board's chair or independent lead director?

     Should we require disclosure of other board structure
matters, such as how a company determines the number of independent
directors to have on its board, and/or how a company determines the
size of the board?
     Are there competitive or proprietary concerns about the
level of detail about the company's risk management structure and
function that the proposed rule should account for? If so, please
identify these concerns and explain how they should be accounted for.
     Should we make any special accommodations in these
proposed amendments for smaller reporting companies? If so, what
accommodations should be made and why?
     The proposals address risk management oversight by the
board of directors as a part of the corporate governance disclosures
required in proxy and information statements. We are considering
whether we should revise our existing disclosure requirements, such as
in Items 303 \80\ and 305 \81\ of Regulation S-K, to require additional
disclosure regarding a registrant's risk management practices in other
registrant filings, such as annual and quarterly reports? Should we
consider proposing additional requirements? If so, what additional or
different disclosure requirements should we consider proposing?
---------------------------------------------------------------------------

    \80\ 17 CFR 229.303.
    \81\ 17 CFR 229.305.
---------------------------------------------------------------------------

     Should we, as proposed, require a registered management
investment company to provide disclosure about its leadership structure
and the board's role in the risk management process? Are there
alternative disclosures relating to a fund's leadership structure and
board involvement in the risk management process that would be more
helpful to investors? If we require each of the disclosures, where
should such disclosures appear (e.g., proxy statements, statements of
additional information, and/or shareholder reports)?
     As proposed, funds would be required to include the
proposed disclosure in registration statements filed on Forms N-1A, N-
2, and N-3. Should we differentiate between open-end and closed-end
funds? For example, should we omit this requirement from Form N-2
because closed-end funds generally hold annual shareholder meetings
pursuant to exchange requirements and their shareholders will receive
this disclosure in annual proxy or information statements?

D. New Disclosure Regarding Compensation Consultants

    In 2003, we amended Regulation S-K to require new disclosures
regarding compensation committees similar to the disclosures required
regarding audit and nominating committees of the board of
directors.\82\ In addition, in 2006, we amended Item 407 to require
registrants to describe, among other things, any role played by
compensation consultants in determining or recommending the amount or
form of executive and director compensation, identifying such
consultants, stating whether they are engaged directly by the
compensation committee or any other person, describing the nature and
scope of their assignment, and the material elements of the
instructions or directions given to the consultants with respect to the
performance of their duties under the engagement.\83\
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    \82\ See Release No. 33-8340 (Nov. 24, 2003) [68 FR 69204].
    \83\ CFR 229.407(e)(3)(iii).
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    Many companies engage compensation consultants to make
recommendations on appropriate executive compensation levels, to design
and implement incentive plans, and to provide information on industry
and peer group pay practices.\84\ These services can benefit companies,
such as by providing management and the board current information about
compensation trends or any regulatory requirements related to executive
compensation.
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    \84\ See, for example, J. Creswell, Pressing for Independent
Advice from Consultants, N.Y. TIMES, Apr. 8 2007.
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    The services offered by compensation consultants, however, are
often not limited to recommending executive compensation plans or
policies. Many compensation consultants, or their affiliates, provide a
broad range of additional services, such as benefits administration,
human resources consulting and actuarial services.\85\ The fees
generated by these additional services may be more significant than the
fees earned by the consultants for their executive compensation
services.\86\ The provision of such additional services by compensation
consultants or their affiliates may create the appearance, or risk, of
a conflict of interest that may call into question the objectivity of
the consultants' executive pay recommendations. Increasingly, some
investors are becoming concerned that the executive compensation
services provided by compensation consultants may be influenced by the
provision of these additional services.\87\
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    \85\ See, for example, Rulemaking Petition No. 4-558 (May 12,
2008), at http://www.sec.gov/rules/petitions.shtml.
    \86\ In December 2007, the U.S. House of Representatives
Committee on Oversight and Government Reform issued a report on the
role played by compensation consultants at large, publicly-traded
companies. The report found that the fees earned by compensation
consultants for providing other services often far exceed those
earned for advising on executive compensation, and that on average
companies paid compensation consultants over $2.3 million for other
services and less than $220,000 for executive compensation advice.
See Staff of House Comm. on Oversight and Government Reform, 110th
Cong., Report on Executive Pay: Conflicts of Interest Among
Compensation Consultants (Comm. Print 2007).
    \87\ See Rulemaking Petition No. 4-558 in note 85 above. See
also letters regarding File No. S7-03-06 from CaIPERS, CaISTRS, New
York State Common Retirement System, Florida State Board of
Administration, New York City Pension Funds, PGGM, ABP, Hermes,
Universities Superannuation Scheme, UniSuper, London Pensions Fund
Authority, F&C Asset Management, Co-operative Insurance Society,
Illinois State Board of Investment, Ontario Teachers Pension Plan,
Public Sector and Commonwealth Super, and Railpen Investments (Apr.
10, 2006); CFA Institute for Financial Market Integrity (Apr. 13,
2006); and Denise Nappier, Connecticut State Treasurer (Apr. 10,
2006) at http://www.sec.gov/rules/proposed/s70306.shtml.
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    Presently, companies are not required to disclose the fees paid to
compensation consultants and their affiliates for executive
compensation consulting or other services, or to describe services that
are not related to executive or director compensation. We are proposing
amendments to Item 407 of Regulation S-K to require disclosure about
the fees paid to compensation consultants and their affiliates when
they play any role in determining or recommending the amount or form of
executive and director compensation, if they also provide other
services to the company. In addition, the proposed amendments would
require a description of any additional services provided to the
company by the compensation consultants and any affiliates of the
consultants. These disclosures are intended to enable investors to
assess any incentives a compensation consultant may have in
recommending executive compensation and better assess the compensation
decisions made by the board.
    Under the proposed amendments to Item 407, if a compensation
consultant or its affiliates played a role in determining or
recommending the amount or form of executive or director compensation,
and also provided additional services, then the company would be
required to disclose the following: \88\
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    \88\ See proposed Item 407(e)(3)(iii) of Regulation S-K.
---------------------------------------------------------------------------

     The nature and extent of all additional services provided
to the company or its affiliates during the last fiscal year by the
compensation

consultant and any affiliates of the consultant;
     The aggregate fees paid for all additional services, and
the aggregate fees paid for work related to determining or recommending
the amount or form of executive and director compensation;
     Whether the decision to engage the compensation consultant
or its affiliates for non-executive compensation services was made,
recommended, subject to screening or reviewed by management; and
     Whether the board of directors or the compensation
committee has approved all of these services in addition to executive
compensation services.
    These new requirements would apply to all services provided by a
compensation consultant and its affiliates if the compensation
consultant plays any role in determining or recommending the amount or
form of executive or director compensation. The proposed amendments
would not apply to those situations in which the compensation
consultant's only role in recommending the amount or form of executive
or director compensation is in connection with consulting on broad-
based plans that do not discriminate in favor of executive officers or
directors of the company, such as 401(k) plans or health insurance
plans. For example, if a company retains a compensation consultant to
assist it in developing a 401(k) plan in which all salaried employees,
including executives, will be eligible to participate on the same
terms, and the compensation consultant provides other services to the
company that are not related to determining or recommending the level
of executive or director compensation, the new disclosure requirements
would not apply to the services provided by that compensation
consultant.\89\ When a compensation consultant's only services that
touch on the form or amount of executive or director compensation are
limited to broad-based, non-discriminatory plans, even though
executives or directors may be eligible to participate in them, we do
not believe that these services give rise to the type of potential
conflict of interest intended to be addressed by our proposed
revisions.\90\
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    \89\ On the other hand, if a consultant provides other services
involving executive or director compensation, and also provides
services regarding broad-based, non-discriminatory plans, the new
disclosure requirements would be applicable to all services provided
by the consultant or its affiliates.
    \90\ We also propose to amend Item 407 along the same lines to
clarify that the existing disclosure requirements are not triggered
for a compensation consultant whose only services with regard to
executive or director compensation are limited to these types of
broad-based, non-discriminatory plans.
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Request for Comment

     Will this disclosure help investors better assess the role
of compensation consultants and potential conflicts of interest, and
thereby better assess the compensation decisions made by the board?
     Would the disclosure of additional consulting services and
any related fees adversely affect the ability of a company to receive
executive compensation consulting or non-executive compensation related
services? If so, how might we achieve our goal while minimizing that
impact?
     Are there competitive or proprietary concerns that the
proposed disclosure requirements should account for? If so, how should
the amendments account for them if the compensation consultant provides
additional services?
     Are there additional disclosures regarding the potential
conflicts of interest of compensation consultants that should be
required? For example, would requiring disclosure of any ownership
interest that an individual consultant may have in the compensation
consultant or any affiliates of the compensation consultant that are
providing the additional services to the company help provide
information about potential conflicts? If so, why?
     The proposed disclosure requirement calls for disclosure
of services during the prior year. Should we also require disclosure of
any currently contemplated services in order to capture a situation
where the compensation consultant provides services related to
executive pay in one year and in the next year receives fees for other
services? If so, should we require that fees for the currently
contemplated services be estimated? Is there a better way to require
that information, for instance through the date of the filing? Should
we require disclosure for the prior three years?
     Is the proposed exclusion for consulting services that are
limited to broad-based, non-discriminatory plans appropriate? Should we
consider any other exclusions for services that do not give rise to
potential conflicts of interest? If so, describe them.
     Should we establish a disclosure threshold based on the
amount of the fees for the non-executive compensation related services,
such as above a certain dollar amount or a percentage of income or
revenues? If so, how should the threshold be computed?
     Would disclosure of the individual fees paid for non-
executive compensation related services provided by the compensation
consultants be more useful to investors than disclosure of the
aggregate fees paid for non-compensation related service provided as
proposed?
     Would disclosure about the fees paid to compensation
consultants and their affiliates help highlight potential conflicts of
interest on the part of these compensation consultants and their
affiliates? Is fee disclosure necessary to achieve this goal, or would
it be sufficient to require disclosure of the nature and extent of
additional services provided by the compensation consultant and its
affiliates? Should disclosure only be required for fees paid in
connection with executive compensation related services?
     Should we make any special accommodations in the proposed
amendments to Item 407(h) for smaller reporting companies? If so, what
accommodations should be made and why?
     Are there other categories of consultants or advisors
whose activities on behalf of companies should be disclosed to
shareholders? If so, what kind of disclosure would be appropriate?

E. Reporting of Voting Results on Form 8-K

    We are proposing to transfer the requirement to disclose vote
results from Forms 10-Q and 10-K to Form 8-K. Currently, Item 4 in Part
II of Form 10-Q and Item 4 in Form 10-K require the disclosure of vote
results of any matter that was submitted to a vote of shareholders
during the fiscal quarter covered by either the Form 10-Q or Form 10-K
with respect to the fourth fiscal quarter. Under the proposals, we
would add a new Item 5.07 to Form 8-K to require a company to disclose
on the Form 8-K the results of a shareholder vote, and to have that
information filed within four business days after the end of the
meeting at which the vote was held. If the proposal is adopted, we
would delete the requirement from Forms 10-Q and 10-K.
    We believe that more timely disclosure of the voting result of an
annual or special meeting would benefit investors and the markets.
While quarterly and annual reports generally reflect historical
information, we are concerned that the delay between the end of an
annual or special meeting and when the voting result of the meeting is
disclosed in a Form 10-Q or 10-K may make the information less useful
to

investors and the markets. Depending on the date of the shareholder
meeting, it could take a few months before the vote is disclosed in a
Form 10-Q or 10-K. Because matters submitted for a shareholder vote at
an annual or special meeting often involve issues that directly impact
shareholder interests--for example, the composition of the board,
executive compensation policies, or changes in shareholder rights--we
believe more timely disclosure of those voting results is appropriate.
In short, we believe that if a matter is important enough to submit to
a vote at a meeting of shareholders, it likely is important enough to
warrant current reporting of the results on Form 8-K.
    We understand that technological advances in shareholder
communications and the growing use of third-party proxy services have
increased the ability of companies to tabulate vote results and
disseminate this information on a more expedited basis than is
currently required. However, we recognize that in situations such as
contested elections, companies may not have definitive vote results
within four business days after the meeting. We have included an
instruction to the proposed item that states that if the matter voted
upon at the meeting relates to a contested election of directors and
the voting results are not definitively determined at the end of the
meeting, companies should disclose on Form 8-K the preliminary voting
results within four business days after the preliminary voting results
are determined, and file an amended report on Form 8-K within four
business days after the final voting results are certified. We think it
is important for investors to have at least preliminary voting results
because the certification process may take a longer amount of time.

Request for Comment

     To what extent would requiring the reporting of voting
results on Form 8-K provide more timely information to investors and
the markets?
     Are there any possible adverse consequences to requiring
the disclosure of preliminary voting results in a contested election
when the outcome is not final? For example, could the preliminary
disclosure affect the final outcome?
     Should the filing period under Form 8-K for the reporting
of voting results be longer than four business days? Should we require
the reporting of preliminary voting results? Are there unique
difficulties or significant costs in finalizing voting results at
smaller reporting companies that would warrant a longer filing period
for those companies? What factors should we consider in deciding
whether to make the filing period longer? Are there situations other
than contested elections that might warrant a longer filing period?
     Are there alternative methods to disseminate this
information to investors sooner or within a similar time frame that
would be more effective or appropriate?
     We are moving and accelerating the disclosure requirement
but not proposing any other revisions to the disclosures that are
currently required by Item 4 of Form 10-Q and Form 10-K. Are there any
changes to the requirements as to what should be disclosed that we
should consider? For instance, since disclosure must be provided for
all matters voted, on including a separate tabulation for the election
of each director, should we eliminate the portion of Instruction 4 that
provides when paragraph (b) need not be answered?
     Would the proposal impose any significant costs or
difficulties on companies? If so, what type and amount of costs? Are
these short-term or one-time costs to adjust a company's reporting
procedures, or long-term, ongoing costs?
     Would the proposal create any special burdens for smaller
reporting companies? If so, would scaled disclosure be appropriate for
these companies and how should it be accomplished? Alternatively,
should these requirements be phased in for smaller reporting companies?
     Would the accuracy of disclosure of voting results be
affected as a result of a Form 8-K filing requirement?
     Section 13a-11(c) under the Exchange Act provides that
``[n]o failure to file a report on Form 8-K that is required solely
pursuant to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a), 5.02(e)
or 6.03 of Form 8-K shall be deemed to be a violation of'' Section
10(b) of the Exchange Act or Rule 10b-5 thereunder. Should we amend
Section 13a-11(c) to include proposed Item 5.07 in this list of Items
with respect to which the failure to file a report on Form 8-K will not
be deemed to be a violation of Section 10(b) or Rule 10b-5? Similarly,
should we amend General Instruction I.A.3(b) of Form S-3 to add
proposed Item 5.07 to the corresponding list of Items on Form 8-K with
respect to which a company's failure timely to file the Form 8-K will
not result in the loss of S-3 eligibility? Why or why not?

F. Proxy Solicitation Process

    We are proposing revisions to our rules governing the proxy
solicitation process to provide clarity and address issues that have
arisen. We believe these proposals, if adopted, would provide greater
certainty to soliciting parties, help shareholders receive timely and
complete information and facilitate shareholder voting.
    Specifically, the amendments would provide that:
     An unmarked copy of management's proxy card that is
requested to be returned directly to management is not a ``form of
revocation'' under Exchange Act Rule 14a-2(b)(1) \91\ so that a person
who furnishes such a duplicate proxy card is not disqualified from
relying on the exemption provided by that rule;
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    \91\ 17 CFR 240.14a-2(b)(1).
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     A person need not be a security holder of the class of
securities being solicited and a benefit need not be related to or
derived from any security holdings in the class being solicited for
Exchange Act Rule 14a-2(b)(1)(ix) \92\ to disqualify the person from
relying on the Exchange Act Rule 14a-2(b)(1) exemption;
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    \92\ 17 CFR 240.14a-2(b)(1)(ix).
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     A person soliciting in support of nominees who, if
elected, would constitute a minority of the board may seek authority to
vote for another soliciting person's nominees in addition to or instead
of the issuer's nominees to round out its short slate consistent with
Exchange Act Rule 14a-4(d)(4)'s limitations on proxy authority; \93\
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    \93\ 17 CFR 240.14a-4(d)(4).
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     The ``reasonable specified conditions'' under which the
shares represented by a proxy will not be voted under Exchange Act Rule
14a-4(e) must be objectively determinable; \94\ and
---------------------------------------------------------------------------

    \94\ 17 CFR 240.14a-4(e).
---------------------------------------------------------------------------

     The participant information required by Exchange Act Rule
14a-12(a)(1)(i) \95\ must be filed under cover of Schedule 14A in a
proxy statement or other soliciting materials no later than the time
the first soliciting communication is made.
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    \95\ 17 CFR 240.14a-12(a)(1)(i).
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1. Exchange Act Rule 14a-2(b)(1) Introductory Text
    Exchange Act Rule 14a-2(b)(1) exempts from the generally applicable
disclosure, filing and most other requirements of the proxy rules
solicitations by shareholders or other non-management parties who are
not seeking proxy authority and do not have a substantial interest in
the subject matter of the solicitation. When the

Commission adopted this rule in 1992, we stated that the purpose of the
rule was to remove obstacles to the free and unrestrained expression of
views by disinterested shareholders who do not seek authority for
themselves.\96\ Accordingly, the exemption is unavailable to, among
others, a person who ``furnish[es] or otherwise request[s], or act[s]
on behalf of a person who furnishes or requests, a form of
revocation.'' \97\
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    \96\ 1992 adopting release in note 23 above.
    \97\ Exchange Act Rule 14a-2(b)(1).
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    Over time, questions have arisen related to the scope of the term
``form of revocation,'' in particular, whether a person otherwise
qualified to rely on the exemption would be providing a ``form of
revocation'' and, therefore, be ineligible to rely on the exemption if
the person provided a solicited shareholder with an unmarked copy of
management's proxy card and asked that the card be returned directly to
management. Consistent with the purpose underlying the exemption, we
believe that a person providing a solicited shareholder with an
unmarked copy of management's proxy card requested to be returned
directly to management would not be seeking authority for itself.\98\
As a result, this action would not be providing a ``form of
revocation'' within the meaning of the rule even if a solicited
shareholder's use of that proxy card resulted in a revocation of the
shareholder's prior vote. We acknowledge that the U.S. Court of Appeals
for the Second Circuit has concluded that in the case of a proxy vote
to authorize a proposed merger under Delaware law, a duplicate of
management's proxy card, when included in a mailing opposing a proposed
merger, was a form of revocation under the rule.\99\
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    \98\ Indeed, the soliciting person has not foreclosed any voting
option available to the shareholder.
    \99\ See Mony Group, Inc. v. Highfields Capital Mgmt. L.P., 368
F.3d 138 (May 13, 2004). The Second Circuit reversed the district
court's decision that, consistent with the staff's views, the
unmarked copy of management's proxy card was not a ``form of
revocation'' within the meaning of Exchange Act Rule 14a-2(b)(1).
See Mony Group, Inc. v. Highfields Capital Mgmt. L.P., 2004 U.S.
Dist. LEXIS 1840 (S.D.N.Y., Feb. 11, 2004).
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    We propose to clarify the rule to align with our view by amending
it to provide expressly that a ``form of revocation'' does not include
an unmarked copy of management's proxy card that the soliciting
shareholder requests be returned directly to management.\100\ This
amendment would aid efforts by persons not seeking proxy authority to
facilitate voting by shareholders sharing their views on matters
submitted for shareholder approval--such as in a ``just vote no''
campaign--without having to incur the costs and efforts of conducting a
fully-regulated proxy solicitation and provide shareholders a
convenient opportunity to indicate their votes after hearing those
views without having to request another proxy card from
management.\101\
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    \100\ This clarification is consistent with advice the staff
informally has provided in response to related inquiries since the
rule was adopted.
    \101\ Providing shareholders with a marked copy of a proxy card
would be inconsistent with the availability of the Rule 14a-2(b)(1)
exemption because it would be an attempt to indirectly solicit proxy
authority. Providing shareholders with a marked copy of a proxy card
in a non-exempt solicitation would be impermissible because it would
violate the requirement of Rule 14a-4(b) [17 CFR 240.14a-4(b)] to
provide shareholders the opportunity to specify a choice.
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Request for Comment

     Is the proposed amendment appropriate, or should a form of
proxy provided in this setting be treated as a form of revocation,
thereby disqualifying the soliciting person from relying upon the
exemption?
     Should a soliciting person that provides an unmarked copy
of management's proxy card be required to file a Notice of Exempt
Solicitation \102\ even if the person does not meet the thresholds for
filing such notice under Exchange Act Rule 14a-6(g)? \103\ Should such
a soliciting person be required to file and provide to solicited
persons any other information about itself, such as any relationships
with the registrant or its affiliates, the amount of shares it holds,
whether such person intends to hold its shares through the date of the
meeting at which the vote will take place, or other information?
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    \102\ 17 CFR 240.14a-103.
    \103\ 17 CFR 240.14a-6(g).
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     Should the determination as to whether an unmarked
management proxy card is a ``form of revocation'' depend on whether a
non-management soliciting person requests that shareholders return the
proxy card directly to management, as proposed, or should this
treatment be available even if the card is returned to the soliciting
person?
     Would the proposed amendment have an effect on shareholder
communications in general or the practices of shareholders and
companies with regard to unmarked proxy cards in particular?
     Would the proposed amendment raise concerns under
applicable State law?
2. Exchange Act Rule 14a-2(b)(1)(ix)
    Exchange Act Rule 14a-2(b)(1)(ix) provides that the Rule 14a-
2(b)(1) exemption is not available to ``[a]ny person who, because of a
substantial interest in the subject matter of the solicitation, is
likely to receive a benefit from a successful solicitation that would
not be shared pro rata by all other holders of the same class of
securities, other than a benefit arising from the person's employment
with the registrant.'' A question has arisen as to whether this
limitation applies only when both the person is a security holder of
the class being solicited and the benefit relates to or is derived from
such holdings, or is generally applicable to any person with a
substantial interest as described in the rule. We believe the nature of
the ``substantial interest'' contemplated by the rule is broader, and
propose to amend the rule to clarify this point.\104\
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    \104\ In adopting this provision, the Commission noted in the
1992 adopting release that the substantial interest ``standard is
similar to that used in Item 5 of Schedule 14A, which requires
specified persons conducting solicitations to describe briefly any
substantial interest in the matter to be acted upon, other than an
interest as a shareholder.'' Specifically, Item 5 required at the
time of the 1992 adopting release and requires now a description of
``any substantial interest, direct or indirect, by security holdings
or otherwise, * * * in any matter to be acted upon, other than
elections to office.''
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    If a soliciting person has a substantial interest in the matter, we
believe shareholders should have the benefit of the disclosure required
by our rules when deciding how to vote. We do not believe it is
appropriate to limit this disclosure obligation to cases when the
soliciting party is a shareholder.\105\ Otherwise, a solicited holder
may not have sufficient information to make an informed voting decision
if the holder is not aware of the soliciting person's substantial
interest in the matter. Consistent with our intent to limit the
exemption to disinterested persons and to provide clarity and certainty
to those wishing to rely on the exemption, we propose to amend the rule
to clarify that a person need not be a security holder of the class of
securities being solicited and a benefit need not be related to or
derived from any security holdings in the class being solicited for a
person to be disqualified from relying on the exemption.
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    \105\ For example, a soliciting party could have a significant
financial interest in the subject matter of a solicitation without
owning any shares of the company whose shareholders are solicited if
the solicitation relates to a merger with a company that the
soliciting party wishes to acquire.
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Request for Comment

     Does the proposed amendment clearly specify when the Rule
14a-2(b)(1) exemption would be unavailable? Is additional detail
necessary to understand when the

exemption would be unavailable? If so, please provide examples of
details that would be helpful.
     Would the proposed amendment inappropriately narrow or
broaden the scope of the Rule 14a-2(b)(1) exemption and, if so, how?
3. Exchange Act Rule 14a-4(d)(4)
    Exchange Act Rule 14a-4(d)(1) requires that, in order to solicit
authority to vote for the election of a person to office, the person
must be a bona fide nominee who consents to being named in the
soliciting person's proxy statement and to serving if elected. Exchange
Act Rule 14a-4(d)(4) is an exception to the bona fide nominee
requirement. This exception permits a person soliciting support for
nominees who, if elected, would constitute a minority of the board of
directors (commonly referred to as a ``short slate''), to round out its
short slate of nominees up to the total number of director positions
then subject to election by seeking authority to vote for nominees
named in the registrant's proxy statement.\106\ We adopted the
exception in 1992 to permit a form of proxy that allows persons
soliciting in support of a short slate to exercise their State law
right to nominate and run independently their own nominees and vote for
both company and shareholder nominees.\107\ The current form of the
rule expressly permits rounding out a short slate by seeking authority
to vote for nominees named in the registrant's proxy statement, but
does not address nominees named in other soliciting persons' proxy
statements.
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    \106\ See Exchange Act Rule 14a-4(d)(4).
    \107\ 1992 adopting release in note 23 above at 48288.
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    Recently, however, questions have arisen regarding non-management
groups that each sought to solicit support of a short slate and wished
to round out its short slate with nominees named in the other group's
and the registrant's proxy statement.\108\ We propose to revise the
rule so the short slate rounding exception to the bona fide nominee
requirement is available whether a non-management soliciting person
attempts to round out its short slate by seeking authority to vote for
nominees named in the registrant's or any other persons' proxy
statements.
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    \108\ See Eastbourne Capital, L.L.C., SEC No-Action Letter (Mar.
30, 2009) and Icahn Associates Corp., SEC No-Action Letter (Mar. 30,
2009) at http://www.sec.gov/divisions/corpfin/cf-noaction.shtml. The
Division issued a letter to each of two non-management groups
stating that, based on the facts and representations presented, and
conditioned on the two groups' acting and continuing to act
independently of each other, the Division would not recommend
enforcement action under Exchange Act Rule 14a-4(d)(4) and Section
14(a) of the Exchange Act [15 U.S.C. 78m(a)] if the group solicited
votes for its own short slate and sought the authority to round out
its short slate by voting for nominees of the other group as well as
management's nominees. While the Division would continue to consider
issuing such letters in the absence of the adoption of the proposed
amendment, only the parties to whom the letters were addressed can
rely upon them.
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    Our intention in adopting the short slate exception was to
eliminate unnecessary impediments to short slate elections and
ameliorate ``the difficulty experienced by shareholders in gaining a
voice in determining the composition of the board of directors,''
especially those seeking minority representation.\109\ We recognized
the need to address an unintended consequence of the ``bona fide
nominee'' rule that effectively forced security holders to choose
between voting for the management slate in order to exercise their full
voting rights or voting for a less than full complement of
directors.\110\ Under the current rule, however, only the registrant's
nominees may be used to fill out the non-management slate and, as a
result, are effectively advantaged, as security holders may vote for
them on two or more proxy cards where non-management nominees can only
be voted for on one. To modify the rule as we propose is, therefore,
consistent with our intention in adopting the rule.
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    \109\ 1992 adopting release in note 23 above at 48288.
    \110\ 1992 adopting release in note 23 above at 48287-48288.
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    The proposed exception would be available only when non-management
parties are not acting together. Persons acting together may incur
reporting obligations under Sections 13(d) \111\ and 13(g) \112\ of the
Exchange Act. In this regard, a non-management person who actively
recommends or whose proxy solicitor actively recommends nominees in
addition to those for whom the non-management person expressly solicits
support would be considered to be soliciting in support of both sets of
nominees for purposes of determining whether the non-management person
were soliciting in support of nominees who, if elected, would
constitute more than a minority of the board.\113\ Similarly, a non-
management person would be considered to be soliciting in support of
not only the nominees for whom it expressly solicits support but also
the nominees for whom any other non-management person solicits support
if the non-management persons are not acting independently of one
another. Accordingly, a non-management soliciting person that seeks to
round out its short slate with any nominee named in another non-
management person's proxy statement would be required by the proposed
rule to represent in its proxy statement that it has not agreed and
will not agree to act, directly or indirectly, as a group or otherwise
engage in any activities that would be deemed to cause the formation of
a group as determined under Section 13(d)(3) \114\ and in Regulation
13D-G \115\ with the other non-management person.
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    \111\ 15 U.S.C. 78m(d).
    \112\ 15 U.S.C. 78m(g).
    \113\ A non-management person and its proxy solicitor would not