[Federal Register: December 23, 2009 (Volume 74, Number 245)]
[Rules and Regulations]
[Page 68333-68367]
[DOCID:fr23de09-18]

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Part II

Securities and Exchange Commission

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17 CFR Parts 229, 239, 240, et al.

Proxy Disclosure Enhancements; Final Rule

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-9089; 34-61175; IC-29092; File No. S7-13-09]
RIN 3235-AK28

Proxy Disclosure Enhancements

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting amendments to our rules that will enhance
information provided in connection with proxy solicitations and in
other reports filed with the Commission. The amendments will require
registrants to make new or revised disclosures about: compensation
policies and practices that present material risks to the company;
stock and option awards of executives and directors; director and
nominee qualifications and legal proceedings; board leadership
structure; the board's role in risk oversight; and potential conflicts
of interest of compensation consultants that advise companies and their
boards of directors. The amendments to our disclosure rules will 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 transferring from Forms 10-
Q and 10-K to Form 8-K the requirement to disclose shareholder voting
results.

DATES: Effective Date: February 28, 2010.

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 investment companies, Alberto Zapata, Senior
Counsel, Division of Investment Management, at<PHONE_NUMBER>, U.S.
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549.

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

I. Background and Overview of the Amendments
II. Discussion of the Amendments
    A. Enhanced Compensation Disclosure
    1. Narrative Disclosure of the Company's Compensation Policies
and Practices as They Relate to the Company's Risk Management
    a. Proposed Amendments
    b. Comments on the Proposed Amendments
    c. Final Rule
    2. Revisions to the Summary Compensation Table
    a. Proposed Amendments
    b. Comments on the Proposed Amendments
    c. Final Rule
    d. Transition
    e. Comment Responses Regarding Rulemaking Petition and Other
Requests for Comment
    B. Enhanced Director and Nominee Disclosure
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Rule
    C. New Disclosure About Board Leadership Structure and the
Board's Role in Risk Oversight
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Rule
    D. New Disclosure Regarding Compensation Consultants
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Rule
    E. Reporting of Voting Results on Form 8-K
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Rule
III. Paperwork Reduction Act
IV. Cost-Benefit Analysis
V. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority and Text of the Amendments

I. Background and Overview of the Amendments

    On July 10, 2009, we proposed a number of revisions to our rules
that were designed to improve the disclosure shareholders of public
companies receive regarding compensation and corporate governance.\15\
As discussed in detail below, we have taken into consideration the
comments received on the proposed amendments and are adopting several
amendments to our rules. Among other improvements, the new disclosure
requirements adopted today enhance the information provided in annual
reports, and proxy and information statements to better enable
shareholders to evaluate the leadership of public companies.
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    \15\ See Release No. 33-9052 (July 10, 2009) [74 FR 35076]
(``Proposing Release'').
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    As discussed more fully in the Proposing Release, during the past
few years, investors 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. The disclosure enhancements we are adopting respond to this
focus, and will significantly improve the information companies provide
to shareholders with regard to the following:
     Risk: By requiring disclosure about the board's role in
risk oversight and, to the extent that risks arising from a company's
compensation policies and practices are reasonably likely to have a
material adverse effect on the company, disclosure about such policies
and practices as they relate to risk management;
     Governance and Director Qualifications: By requiring
expanded disclosure of the background and qualifications of directors
and director nominees and new disclosure about a company's board
leadership structure, and accelerating the reporting of information
regarding voting results; and
     Compensation: By revising the reporting of stock and
option awards in the Summary Compensation Table \16\ and Director
Compensation Table,\17\ and requiring disclosure of potential conflicts
of interest of compensation consultants in certain circumstances. We
believe that providing a more transparent view of these key risk,
governance and compensation matters

will help shareholders make more informed voting and investment
decisions.
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    \16\ Item 402(c) and 402(n) of Regulation S-K [17 CFR 229.402(c)
and 229.402(n)].
    \17\ Item 402(k) and 402(r) of Regulation S-K [17 CFR 229.402(k)
and 229.402(r)].
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    We received over 130 comment letters in response to the proposed
amendments.\18\ These letters came from corporations, pension funds,
professional associations, trade unions, accounting firms, law firms,
consultants, academics, individual investors and other interested
parties. In general, the commenters supported the objectives of the
proposed new requirements. Most investors supported the manner in which
we proposed to achieve these objectives and, in some cases, urged us to
require additional disclosure from companies. Other commenters,
however, opposed some of the proposed revisions and suggested
modifications to the proposals.
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    \18\ The public comments we received are available on our Web
site at http://www.sec.gov/comments/s7-13-09/s71309.shtml. Comments
are also available for Web site viewing 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.
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    We have reviewed and considered all of the comments that we
received on the proposed amendments. The adopted rules reflect changes
made in response to many of these comments. We discuss our revisions
with respect to each proposed rule amendment in more detail throughout
this release. The amendments that we are adopting will require:
     To the extent that risks arising from a company's
compensation policies and practices for employees are reasonably likely
to have a material adverse effect on the company, discussion of the
company's compensation policies or practices as they relate to risk
management and risk-taking incentives that can affect the company's
risk and management of that risk;
     Reporting of the aggregate grant date fair value of stock
awards and option awards granted in the fiscal year in the Summary
Compensation Table and Director Compensation Table to be computed in
accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718, Compensation--Stock Compensation
(``FASB ASC Topic 718''),\19\ rather than the dollar amount recognized
for financial statement purposes for the fiscal year, with a special
instruction for awards subject to performance conditions;
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    \19\ Both our rule proposal and the former disclosure
requirement used the nomenclature Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 123 (revised
2004) Share-Based Payment (FAS 123R). We are updating our references
in this release and the final rules to reflect that 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.
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     New disclosure of the qualifications of directors and
nominees for director, and the reasons why that person should serve as
a director of the company at the time at which the relevant filing is
made with the Commission; the same information would be required in the
proxy materials prepared with respect to nominees for director
nominated by others;
     Additional disclosure of any directorships held by each
director and nominee at any time during the past five years at any
public company or registered investment company;
     New disclosure regarding the consideration of diversity in
the process by which candidates for director are considered for
nomination by a company's nominating committee;
     Additional disclosure of other legal actions involving a
company's executive officers, directors, and nominees for director, and
lengthening the time during which such disclosure is required from five
to ten years;
     New disclosure about a company's board leadership
structure and the board's role in the oversight of risk;
     New disclosure about the fees paid to compensation
consultants and their affiliates under certain circumstances; and
     Disclosure of the vote results from a meeting of
shareholders on Form 8-K generally within four business days of the
meeting.
    With respect to management investment companies that are registered
under the Investment Company Act (``funds''),\20\ the amendments we are
adopting will require expanded disclosure regarding director and
nominee qualifications; past directorships held by directors and
nominees; and legal proceedings involving directors, nominees, and
executive officers to funds; and new disclosure about leadership
structure and the board's role in the oversight of risk.
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    \20\ 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].
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    The Proposing Release also included several proposed amendments to
our rules governing the proxy solicitation process. We have decided to
defer consideration of those proposed amendments at this time, pending
our consideration of our proposal intended to facilitate shareholder
director nominations in companies' proxy materials.\21\
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    \21\ See Release No. 33-9046 (June 10, 2009) [74 FR 29024].
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II. Discussion of the Amendments

A. Enhanced Compensation Disclosure

1. Narrative Disclosure of the Company's Compensation Policies and
Practices as They Relate to the Company's Risk Management
    We proposed amendments to our Compensation Discussion and Analysis
(``CD&A'') requirements to broaden their scope to include a new section
regarding how the company's overall compensation policies for employees
create incentives that can affect the company's risk and management of
that risk. We are adopting the disclosure requirements generally as
proposed, but we are revising the placement of the new required
disclosures and the disclosure threshold, as suggested by commenters.
a. Proposed Amendments
    Under the amendments we proposed, companies would be required to
discuss and analyze their 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. As we stated in
the Proposing Release, we believe that disclosure of a company's
compensation policies and practices 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.
    The proposed amendments enumerated a non-exclusive list of
situations where compensation programs may raise material risks to
companies, and several examples of the types of issues that would be
appropriate for a company to discuss and analyze. The illustrative
examples, consistent with the principles-based approach of the CD&A,
were intended to help identify the types of situations in which the
disclosure may be required.
b. Comments on the Proposed Amendments
    Comments on the proposal were mixed. Individual investors, trade
unions, institutional investors and pension funds supported the
proposals.\22\ Some of these commenters

believed the new CD&A disclosure would improve the ability of investors
to make informed investment decisions.\23\ Other commenters believed
the amendments would significantly improve shareholders' understanding
of both the process by which pay is set and the substantive policies
that guide companies' risk assessment or incentive considerations in
structuring compensation policies or awarding compensation.\24\
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    \22\ See, e.g., letters from American Federation of Labor and
Congress of Industrial Organizations (``AFL-CIO''), American
Association of Retired Persons (``AARP''), Grahall Partners LLC,
Institute of Internal Auditors (``IIA''), Pfizer Inc., Risk and
Insurance Management Society, Inc. (``RIMS''), State of Connecticut
Treasurer's Office (``CTO''), State of Wisconsin Investment Board
(``SWIB''), Ralph S. Saul, Teachers Insurance and Annuity
Association of America--College Retirement and Equities Fund
(``TIAA-CREF''), and Mark Whitton.
    \23\ See, e.g., letters from California State Teachers'
Retirement System (``CalSTRS''), and RIMS.
    \24\ See, e.g., letters from Service Employees International
Union (``SEIU''), and Walden Asset Management.
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    Most companies, law firms and bar groups opposed the proposal.\25\
Concerns that were expressed included, for example, that the proposed
amendments would not lead to meaningful disclosures,\26\ and that the
CD&A was already long and the proposed amendments would add length
without a corresponding benefit to shareholders.\27\ Another concern
expressed by commenters was that the linkage between risk-taking and
executive compensation is not well understood, and that the disclosures
provided under the proposed amendments would likely be boilerplate that
could give investors a false sense of comfort regarding risk and risk-
taking.\28\
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    \25\ See, e.g., letters from the American Bar Association
(``ABA''), Robert Ahrenholz, American Electric Power, Business
Roundtable, StanCorp Financial Group, and Wisconsin Electric
Corporation.
    \26\ See, e.g., letters from Association Corporate Counsel
(``ACC''), BorgWarner Inc., NACCO Industries, Inc. (``NACCO''), and
Sullivan & Cromwell (``S&C'').
    \27\ See, e.g., letters from National Association of Corporate
Directors (``NACD'') and S&C.
    \28\ See, e.g., letters from ABA and DolmatConnell Partners,
Inc. (``DolmatConnell'').
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    Other commenters argued that it was not appropriate to expand the
CD&A beyond the named executive officers to include disclosure of the
company's broader compensation policies and overall compensation
practices for employees generally.\29\ Some of these commenters argued
that expanding the CD&A would represent a fundamental shift in the
approach to the CD&A.\30\ Concerns were also expressed that risk
management, risk-taking incentives and related business strategy are
complex subjects that could not be adequately analyzed in CD&A without
adding voluminous text to an already lengthy proxy statement.\31\
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    \29\ See, e.g., letters from BorgWarner, NACCO and the Society
of Corporate Secretaries and Corporate Governance Professionals
(``SCSGP'').
    \30\ See, e.g., letters from BorgWarner and NACCO.
    \31\ See e.g., letter of NACD.
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    Comments also were mixed on the illustrative examples included with
the proposed amendments. Some commenters supported the list, noting
that the additional disclosures would provide investors with a better
understanding of a company's compensation policies and how such
policies can create incentives that could affect the company's risk
profile and ability to manage that risk.\32\ Other commenters asserted
that the proposed revisions would lead to boilerplate disclosures and
information that would not be meaningful to investors.\33\
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    \32\ See, e.g., letters from CalSTRS, Council of Institutional
Investors (``CII''), Glass Lewis & Co (``Glass Lewis''), and RIMS.
    \33\ See e.g., letters of Business Roundtable and Cleary
Gottlieb Steen & Hamilton LLP (``Cleary Gottlieb'').
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    Several commenters recommended that we revise the disclosure
threshold in the proposed amendments, which we proposed as ``may have a
material effect'' on the company.\34\ Suggested alternatives included
changing the standard to ``likely to have a material effect,''
``reasonably likely to have a material effect,'' or ``will likely have
a material effect.'' \35\ Some commenters believed the ``may have a
material effect'' standard was too speculative and that basing the
disclosure standard on whether the risks are ``reasonably likely to
have a material effect'' would give companies more certainty and
provide investors with more meaningful disclosure.\36\ Commenters also
noted that, to avoid voluminous and extraneous disclosure, the
requirement should focus on compensation arrangements that are likely
to promote risk-taking behavior that could have a significant and
damaging impact on the company's operations.\37\
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    \34\ See letters from ACC, BorgWarner, Davis Polk & Wardwell LLP
(``Davis Polk''), Honeywell International Inc. (``Honeywell''),
NACCO, and SCSGP.
    \35\ See letters from ABA, ACC, BorgWarner, Davis Polk,
Honeywell, NACCO, and SCSGP.
    \36\ See letters from ABA and Davis Polk.
    \37\ See letters from ABA and Pearl Meyer & Partners (``Pearl
Meyer'').
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c. Final Rule
    After considering the comments, we are adopting the disclosure
requirement substantially as proposed with some modifications. We
continue to believe that it is important for investors to be informed
of the compensation policies and practices that are likely to expose
the company to material risk, but we recognize that, consistent with
the comments received, we should revise our proposals. We have tailored
the final amendments to address many of the concerns expressed by
commenters, consistent with the purposes to be advanced by the
disclosure.
    The final rule requires a company to address its compensation
policies and practices for all employees, including non-executive
officers, if the compensation policies and practices create risks that
are reasonably likely to have a material adverse effect on the
company.\38\ As noted above, the proposed rules would have required
discussion and analysis of compensation policies if risks arising from
those compensation policies ``may have a material effect on the
company.'' We agree with the suggestions of several commenters that the
new requirements should have a ``reasonably likely'' disclosure
threshold. Companies are familiar with the ``reasonably likely''
disclosure threshold used in our Management Discussion and Analysis
(``MD&A'') rules,\39\ and this approach would parallel the MD&A
requirement, which requires risk-oriented disclosure of known trends
and uncertainties that are material to the business. We believe that
the ``reasonably likely'' threshold also addresses concerns of some
commenters that the proposed requirements might have caused companies
attempting compliance to burden shareholders and investors with
voluminous disclosure of potentially insignificant and unnecessarily
speculative information about their compensation policies. By focusing
on risks that are ``reasonably likely to have a material adverse
effect'' on the company, the amendments are intended to elicit
disclosure about incentives in the company's compensation policies and
practices that would be most relevant to investors.\40\ This change
from the proposal also addresses concerns some commenters raised that
the proposal did not allow companies to consider compensating or
offsetting steps or controls designed to limit risks of certain
compensation arrangements.\41\ If a company has compensation policies
and practices for different groups that

mitigate or balance incentives, these could be considered in deciding
whether risks arising from the company's compensation policies and
practices for employees are reasonably likely to have a material
adverse effect on the company as a whole.
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    \38\ See new Item 402(s) of Regulation S-K. As we noted in the
Proposing Release, to the extent that 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.
    \39\ See Item 303 of Regulation S-K [17 CFR 229.303].
    \40\ See note 36 above and accompanying text.
    \41\ See letters from ABA and Center on Executive Compensation.
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    In addition, we have modified the proposal to provide that
disclosure is only required if the compensation policies and practices
are reasonably likely to have a material ``adverse'' effect on the
company, as opposed to any ``material effect'' as proposed. As noted in
the Proposing Release, well-designed compensation policies can enhance
a company's business interests by encouraging innovation and
appropriate levels of risk-taking. By focusing the disclosure on
material adverse effects, the final rule should help avoid voluminous
and unnecessary discussion of compensation arrangements that may
mitigate inappropriate risk-taking incentives.
    We are also moving the new requirements into a separate paragraph
in Item 402 of Regulation S-K.\42\ As adopted, the new disclosure
requirements will not be a part of the CD&A.\43\ We were persuaded by
commenters who asserted that it would be potentially confusing to
expand the CD&A beyond the named executive officers to include
disclosure of the company's broader compensation policies and practices
for employees. CD&A provides discussion and analysis of the
compensation of the named executive officers and the information
contained in the Summary Compensation Table and other required tables,
and the new disclosure requirements would be inconsistent with that
approach because they would cover all employees, not just the named
executive officers.\44\
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    \42\ See new Item 402(s) of Regulation S-K.
    \43\ In making this change, we also revised the final rule from
what was proposed by eliminating the term ``generally.'' Previously,
we believed this term was helpful to distinguish the proposed
amendments from the CD&A for the named executive officers by
emphasizing that it also applied to non-executive officers. Because
we are moving the new requirements into a separate paragraph, we do
not believe the term is needed. Moreover, one commenter noted that
the term could be confusing in light of the examples listed in the
rule. See letter from ABA.
    \44\ See letters from BorgWarner, NACCO and SCSGP.
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    The final rule will contain, as proposed, the non-exclusive list of
situations where compensation programs may have the potential to raise
material risks to companies, and the examples of the types of issues
that would be appropriate for a company to address. Under the
amendments, the situations that would require disclosure will vary
depending on the particular company and its compensation program. We
believe situations that potentially could trigger discussion 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 a business unit that is significantly more profitable
than others within the company;
     At a business unit where the compensation expense is a
significant percentage of the unit's revenues; and
     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.
There may be other features of a company's compensation policies and
practices that have the potential to incentivize its employees to
create risks that are reasonably likely to have a material adverse
effect on the company. However, disclosure under the amendments is only
required if the compensation policies and practices create risks that
are reasonably likely to have a material adverse effect on the company.
We note that in the situations listed above, a company may under
appropriate circumstances conclude that its compensation policies and
practices are not reasonably likely to have a material adverse effect
on the company.
    We are adopting, as proposed, the illustrative examples of the
issues that would potentially be appropriate for a company to address.
As we stated in the Proposing Release, the examples are non-exclusive
and that the application of an example should be tailored to the facts
and circumstances of the company. We believe that a principles-based
approach, similar to our CD&A requirements, utilizing illustrative
examples strikes an appropriate balance that will effectively elicit
meaningful disclosure. If a company determines that disclosure is
required, we believe examples of the issues that companies may need to
address regarding their compensation policies or practices include the
following:
     The general design philosophy of the company's
compensation policies and practices for employees whose behavior would
be most affected by the incentives established by the policies and
practices, as such policies and practices relate to or affect risk
taking by those employees on behalf of the company, and the manner of
their implementation;
     The company's risk assessment or incentive considerations,
if any, in structuring its compensation policies and practices or in
awarding and paying compensation;
     How the company's compensation policies and practices
relate to the realization of risks resulting from the actions of
employees in both the short term and the long term, such as through
policies requiring claw backs or imposing holding periods;
     The company's policies regarding adjustments to its
compensation policies and practices to address changes in its risk
profile;
     Material adjustments the company has made to its
compensation policies and practices as a result of changes in its risk
profile; and
     The extent to which the company monitors its compensation
policies and practices to determine whether its risk management
objectives are being met with respect to incentivizing its employees.
    We believe using illustrative examples helps to identify the types
of disclosure that may be applicable. However, companies must assess
the information that is identified by the example in light of the
company's particular situation. Thus, for example, we would not expect
to see generic or boilerplate disclosure that the incentives are
designed to have a positive effect, or that compensation levels may not
be sufficient to attract or retain employees with appropriate skills in
order to enable the company to maintain or expand operations.
    Consistent with the approach taken in the proposals, smaller
reporting companies will not be required to provide the new disclosure,
even though the new rule will not be part of CD&A.\45\ At this time, we
believe that such companies are less likely to have the types of
compensation policies and practices that are intended to be addressed
in this rulemaking.\46\
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    \45\ Because smaller reporting companies are not required to
provide CD&A disclosure, we did not propose to require that they
provide the new disclosure.
    \46\ See, e.g., letter of Committee on Securities Law of the
Business Law Section of the Maryland State Bar Association (``In our
view smaller reporting companies and their compensation structures
generally are not geared towards the kind of disclosure that would
be required by the proposal''). The amendments will not alter the
reporting requirements for smaller reporting companies under Item
402. Specifically, smaller reporting companies are permitted to
provide the scaled disclosures specified in Items 402(l) through (r)
of Regulation S-K, rather than the disclosure specified in Items
402(a) through (k) of Regulation S-K.

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    In the Proposing Release, we requested comment on whether we should
require a company to affirmatively state that it has determined that
the risks arising from its compensation policies are not reasonably
expected to have a material effect on the company if it has concluded
that disclosure was not required. Commenters were mixed in their
response to this request. Several commenters believed that companies
should be required to affirmatively state that they have determined
that the risks arising from their broader compensation policies are not
reasonably expected to have a material effect.\47\ Others believed that
the proposed amendments should not require an affirmative statement
because it would not provide investors with useful information and
would create potential liability for companies.\48\ Another commenter
noted that our disclosure rules have not traditionally required
companies to address affirmatively matters that the company has
determined are not applicable to it.\49\ We believe an approach
consistent with our prior practice is appropriate and the final rule
does not require a company to make an affirmative statement that it has
determined that the risks arising from its compensation policies and
practices are not reasonably likely to have a material adverse effect
on the company.
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    \47\ See, e.g., letters from Calvert Group, Ltd. (``Calvert''),
Grahall Partners and Integrated Governance Solutions.
    \48\ See, e.g., letters from the Business Roundtable, Honeywell,
Pfizer and S&C.
    \49\ See letter from ABA.
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2. Revisions to the Summary Compensation Table
    We proposed to amend Item 402 of Regulation S-K to 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 FASB ASC Topic
718. The revised disclosure \50\ would replace previously mandated
disclosure of the dollar amount recognized for financial statement
reporting purposes for the fiscal year in accordance with FASB ASC
Topic 718, and would affect the calculation of total compensation,
including for purposes of determining who is a named executive
officer.\51\ We are adopting the revisions substantially as proposed
with some changes in response to comments.
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    \50\ Items 402(c)(2)(v) and (vi), 402(k)(2)(iii) and (iv),
402(n)(2)(v) and (vi), and 402(r)(2)(iii) and (iv) of Regulation S-
K.
    \51\ Items 402(a)(3)(iii) and (iv) and 402(m)(2)(ii) and (iii)
of Regulation S-K.
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a. Proposed Amendments
    As we stated in the Proposing Release, we proposed these amendments
because of comments we previously received 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. Investors may consider compensation decisions
made during the fiscal year, which usually are reflected in the full
grant date fair value measure but not in the financial statement
recognition measure, to be material to voting and investment decisions.
    We also proposed to rescind the requirement to report the full
grant date fair value of each individual equity award in the Grants of
Plan-Based Awards Table \52\ and the corresponding footnote disclosure
to the Director Compensation Table \53\ because these disclosures may
be considered duplicative of the aggregate grant date fair value to be
provided in the amended Summary Compensation Table. In addition, we
proposed to amend Instruction 2 to the salary and bonus columns of the
Summary Compensation Table so that companies would not be required to
report in those columns the amount of salary or bonus forgone at a
named executive officer's election, and the non-cash awards received
instead of salary or bonus would be reported in the column applicable
to the form of award elected. As proposed, the Summary Compensation
Table disclosure would reflect the form of compensation ultimately
received by the named executive officer.
---------------------------------------------------------------------------

    \52\ Item 402(d)(2)(viii) of Regulation S-K and Instruction 7 to
Item 402(d).
    \53\ Instruction to Item 402(k)(2)(iii) and (iv) of Regulation
S-K.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    A broad spectrum of commenters supported the proposal to revise the
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.\54\ Most commenters agreed
that because aggregate grant date fair value disclosure better reflects
compensation committee decisions with respect to stock and option
awards,\55\ it is more informative to voting and investment decisions
\56\ and a better measure for purposes of identifying named executive
officers.\57\ However, some commenters objected that use of grant date
fair value to identify named executive officers may result in
relatively frequent changes in the named executive officer group based
on grants of ``one time'' multi-year awards to newly hired executives
or special awards to enhance retention.\58\
---------------------------------------------------------------------------

    \54\ See, e.g., letters from AARP, Business Roundtable, State of
Wisconsin Investment Board (``SWIB''), Pfizer, SCSGP, S&C, United
Brotherhood of Carpenters and Joiners of America (``United
Brotherhood of Carpenters''), United States Proxy Exchange
(``USPX'').
    \55\ See, e.g., letters from Business Roundtable (``Generally,
we support the Proposed Rules, as they likely will produce
disclosure that, in most situations, is more in line with how
compensation committees view annual equity compensation--that is,
disclosure of the equity compensation that a company grants in a
particular year.''); and SCSGP (``We support this change. The
aggregate grant date fair value is generally used by compensation
committees in determining the amount of stock and options to award,
whereas the current disclosure requirement confusingly focuses on
accounting considerations that may have no bearing on compensation
decisions.'').
    \56\ See, e.g., letter of United Brotherhood of Carpenters
(``The proposed SCT reporting of equity awards will help inform
investment decisions, as well as important investor voting decisions
regarding executive compensation and director performance.'').
    \57\ See, e.g., letter of Mercer (``Because the value included
in the SCT determines the identification of at least three of the
named executive officers (other than the principal executive officer
and the principal financial officer), disclosure of the full grant-
date fair value would also better align the identification of these
officers with company compensation decisions.'').
    \58\ See, e.g., letter of Protective Life Corporation.
---------------------------------------------------------------------------

    As discussed in detail below, many commenters expressed concern
that the amount to be reported in the table for performance awards
would be calculated without regard to the likelihood of achieving the
relevant performance objectives, which could discourage companies from
granting these awards.\59\ Others, however, suggested that the design
of equity awards is driven by numerous considerations, and companies
would continue to make equity awards subject to performance
conditions.\60\
---------------------------------------------------------------------------

    \59\ See, e.g., letters from ABA, Business Roundtable, Center on
Executive Compensation, Cleary Gottlieb, Compensia, Honeywell,
Frederic W. Cook & Co., Inc., Pearl Meyer, Protective Life
Corporation, Securities Industry and Financial Markets Association
(SIFMA), SCSGP, and Towers Perrin.
    \60\ See, e.g., letter from Hewitt Associates LLC (``Hewitt'').

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

    With respect to the proposal to rescind the requirement to report
the full grant date fair value of each individual equity award in the
Grants of Plan-Based Awards Table, the comments were mixed. While some
commenters supported this proposal,\61\ others stated that retaining
disclosure of the grant date fair value of individual awards would
continue to provide investors valuable information. Because different
companies may vary in the assumptions they apply to compute grant date
fair value, some commenters noted that retaining this disclosure makes
it easier for investors to assess how companies determined fair value
for individual grants.\62\ Further, different types of equity awards
can have different incentive effects, making it important that
shareholders understand the value associated with each type of award
granted and the mix of values among various award types.\63\ Commenters
pointed out that reporting the separate value of multiple individual
awards provides investors more information regarding the specific
decisions of the compensation committee, so that investors can better
evaluate those decisions and understand pay for performance.\64\
---------------------------------------------------------------------------

    \61\ See letters from Buck Consultants, Chadbourne Park, Mercer,
Pfizer, Protective Life Corporation, and S&C.
    \62\ See letters from AFL-CIO, Compensia and Graef Crystal.
    \63\ See letters from Compensia, Frederic W. Cook & Co., Inc.,
and Risk Metrics.
    \64\ See letters from Center on Executive Compensation, Hewitt,
Pearl Meyer, Towers Perrin, and Universities Superannuation Scheme,
et al.
---------------------------------------------------------------------------

    We also received a wide range of comments on our proposal to amend
Instruction 2 to the salary and bonus columns of the Summary
Compensation Table. Some commenters favored this amendment because, as
stated in the Proposing Release, it would report compensation in the
form actually received.\65\ Other commenters, however, said it is
important to report the form of compensation that the compensation
committee originally awarded, so that investors can understand the
overall compensation strategy and the intended distribution of risk
among different types of compensation.\66\
---------------------------------------------------------------------------

    \65\ See, e.g., letters from Pfizer and RiskMetrics.
    \66\ See letters from Center on Executive Compensation, and
Pearl Meyer.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments received, we are adopting the
proposed amendments to 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 FASB ASC Topic 718, with a special
instruction for awards subject to performance conditions as described
below. We agree with commenters that aggregate grant date fair value
disclosure better reflects the compensation committee's decision with
regard to stock and option awards. We remain of the view that it is
more meaningful to shareholders if company compensation decisions--
including decisions to grant large ``one time'' multi-year awards--
cause the named executive officers to change. In circumstances where
such a large ``new hire'' or ``retention'' grant results in the
omission from the Summary Compensation Table of another executive
officer whose compensation otherwise would have been subject to
reporting, the company can consider including compensation disclosure
for that executive officer to supplement the required disclosures.
    Based on comments received, we are clarifying how performance
awards \67\ are disclosed. Most commenters stated that reporting the
aggregate grant date fair value of performance awards based on maximum
performance could discourage companies from granting these awards.\68\
Noting that compensation committees take performance-contingent
conditions into account when granting such awards, commenters said that
the grant date fair value reported for awards with a performance
condition should instead be based on the probable outcome of the
performance conditions, consistent with the recognition criteria in the
accounting literature.\69\ As commenters stated, because performance
awards generally are designed to incentivize attainment of target
performance and set a higher maximum performance level as a ``cap'' on
attainable compensation, requiring disclosure of an award's value to
always be based on maximum performance would overstate the intended
level of compensation and result in investor misinterpretation of
compensation decisions. This could also discourage the grant of awards
with difficult--or any--performance conditions, and lead to inflated
benchmarking values used to set equity award or total compensation
levels at other companies.
---------------------------------------------------------------------------

    \67\ Performance awards include only those awards that are
subject to performance conditions as defined in the Glossary to FASB
ASC Topic 718.
    \68\ See, e.g., letters from ABA, Business Roundtable, Center on
Executive Compensation, Cleary Gottlieb, Compensia, Honeywell,
Frederic W. Cook & Co., Inc., Pearl Meyer, Protective Life
Corporation, SIFMA, SCSGP, and Towers Perrin.
    \69\ FASB ASC Topic 718.
---------------------------------------------------------------------------

    We are persuaded that the value of performance awards reported in
the Summary Compensation Table, Grants of Plan-Based Awards Table and
Director Compensation Table should be computed based upon the probable
outcome of the performance condition(s) as of the grant date because
that value better reflects how compensation committees take
performance-contingent vesting conditions into account in granting such
awards. We are adopting new Instructions to these tables to clarify
that this amount will be consistent with the grant date estimate of
compensation cost to be recognized over the service period, excluding
the effect of forfeitures.\70\ To provide investors additional
information about an award's potential maximum value subject to changes
in performance outcome, we will also require in the Summary
Compensation Table and Director Compensation Table footnote disclosure
of the maximum value assuming the highest level of performance
conditions is probable.\71\ Such footnote disclosure will permit
investors to understand an award's maximum value without raising the
concerns associated with requiring its tabular disclosure.\72\
---------------------------------------------------------------------------

    \70\ See Instruction 3 to Item 402(c)(2)(v) and (vi),
Instruction 8 to Item 402(d), and Instruction 3 to Item 402(n)(2)(v)
and (vi).
    \71\ See Instruction 3 to Item 402(c)(2)(v) and (vi), and
Instruction 3 to Item 402(n)(2)(v) and (vi).
    \72\ See, e.g., letter from ABA.
---------------------------------------------------------------------------

    We are requiring disclosure of awards granted during the year, as
proposed. A number of commenters responded to our request for comment
by indicating that they would prefer disclosure of the aggregate grant
date fair value of equity awards granted for services in the relevant
fiscal year, even if granted after fiscal year end, rather than awards
granted during the relevant fiscal year, as proposed.\73\ Other
commenters expressed concern that revising the proposal in this way
would result in a lack of uniformity that would confuse investors,
would be inconsistent with the FASB ASC Topic 718 grant date, and could
invite manipulated

reporting.\74\ We recognize that a ``performance year'' standard for
reporting equity awards in securities in the relevant fiscal year may
sometimes better align compensation disclosure with compensation
decision making, and may be more consistent with Summary Compensation
Table salary and bonus disclosure.\75\ However, because it appears that
multiple subjective factors, which could vary significantly from
company to company, influence equity awards granted after fiscal year
end, we are concerned that changing the approach to reporting could
result in inconsistencies that would erode comparability. One commenter
noted that many companies make equity awards after the end of the
fiscal year based on executive performance during the last completed
fiscal year, but determining whether an equity award was granted
primarily for services performed during the last completed fiscal year
can be a highly subjective determination and the factors that influence
the decision of when to report an equity award may vary significantly
from company to company.\76\ Companies should continue to analyze in
CD&A their decisions to grant post-fiscal year end equity awards where
those decisions could affect a fair understanding of named executive
officers' compensation for the last fiscal year,\77\ and consider
including supplemental tabular disclosure where it facilitates
understanding the CD&A.
---------------------------------------------------------------------------

    \73\ See, e.g., letters from ACC, Ameriprise Financial, Inc.,
BorgWarner, Business Roundtable, Cleary Gottlieb, Committee on
Securities Law of the Business Law Section of the Maryland State Bar
Association, Frederic W. Cook & Co., Inc., Graef Crystal, Davis
Polk, General Mills, Inc., Glass Lewis, Grahall Partners, LLC.,
Honeywell, JP Morgan Chase & Co., RiskMetrics, SCSGP, SIFMA, and
S&C. These commenters suggested this approach would better align the
amounts reported in the Summary Compensation Table with the
compensation decisions discussed in CD&A, and clarify the
relationship between pay and performance.
    \74\ See letters from Buck Consultants, Compensia, Pearl Meyer,
Protective Life Corporation, and United Brotherhood of Carpenters.
    \75\ Instruction 1 to Item 402(c)(2)(iii) and (iv) provides that
if the amount of salary or bonus earned for the fiscal year cannot
be calculated as of the most recent practicable date, footnote
disclosure of this fact and the date the amount is expected to be
determined is required. When determined, the omitted amount and a
recalculated total compensation figure must be reported in a filing
under Item 5.02(f) of Form 8-K [17 CFR 249.308].
    \76\ See letter from Compensia.
    \77\ Instruction 2 to Item 402(b).
---------------------------------------------------------------------------

    Although we proposed to revise Instruction 2 to the salary and
bonus column of the Summary Compensation Table so that companies would
not be required to report in those columns the amount of salary or
bonus forgone at a named executive officer's election and the non-cash
awards received instead of salary or bonus would be reported in the
column applicable to the form of award elected, we have decided not to
adopt this amendment. We agree with commenters that disclosing the
amounts of salary and bonus that the compensation committee awarded
better enables investors to understand the relative weights the company
applied to annual incentives and salary.\78\ This information provides
investors more insight into the extent to which a company's
compensation strategy pays for performance, may be heavily weighted in
salary, or may be heavily weighted in annual incentives. Consistent
with our decision to amend our rules to require disclosure enabling
investors to better understand the risks involved in compensation
programs, we are retaining the current version of this instruction, so
that investors can understand overall compensation strategy and the
intended distribution of risk among different types of compensation.
Companies will continue to report the forgone amounts in the salary or
bonus column, with footnote disclosure of the receipt of non-cash
compensation that refers to the Grants of Plan-Based Awards Table where
the stock, option or non-equity incentive plan awarded the named
executive officer elected is reported.\79\
---------------------------------------------------------------------------

    \78\ See, e.g., letters from Center on Executive Compensation
and Pearl Meyer.
    \79\ Instruction 2 to Item 402(c)(2)(iii) and (iv).
---------------------------------------------------------------------------

    Finally, based on the comments received, we have decided not to
rescind, as was proposed, the requirement to report the full grant date
fair value of each equity award in the Grants of Plan-Based Awards
Table and the Director Compensation Table. We agree with commenters
that, because this disclosure reveals the value associated with each
type of equity award granted and the mix of values among various awards
with different incentive effects, retaining it will help investors
better evaluate the decisions of the compensation committee.\80\
---------------------------------------------------------------------------

    \80\ See letters from Center on Executive Compensation and Pearl
Meyer.
---------------------------------------------------------------------------

d. Transition
    To facilitate year-to-year comparisons, consistent with our
proposal, we will implement the Summary Compensation Table amendments
by requiring companies providing Item 402 disclosure for a fiscal year
ending on or after December 20, 2009 to present recomputed disclosure
for each preceding fiscal year required to be included in the table, so
that the stock awards and option awards columns present the applicable
full grant date fair values, and the total compensation column is
correspondingly recomputed.\81\ The stock awards and option awards
columns amounts should be computed based on the individual award grant
date fair values reported in the applicable year's Grants of Plan-Based
Awards Table, except that awards with performance conditions should be
recomputed to report grant date fair value based on the probable
outcome as of the grant date, consistent with FASB ASC Topic 718. In
addition, 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, the named executive officer's
compensation for each of those three fiscal years must be reported
pursuant to the amendments.\82\ However, companies are not required to
include different named executive officers for any preceding fiscal
year based on recomputing total compensation for those years pursuant
to the amendments, or to amend prior years' Item 402 disclosure in
previously filed Forms 10-K or other filings.
---------------------------------------------------------------------------

    \81\ Commenters generally favored this approach as a means of
ensuring year-to-year comparability, and said it would not be
difficult to comply. See, e.g., letters from Glass Lewis, Mercer,
and Pfizer.
    \82\ 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.
---------------------------------------------------------------------------

e. Comment Responses Regarding Rulemaking Petition and Other Requests
for Comment
    We requested comment regarding a rulemaking petition recommending
Summary Compensation Table disclosure of stock and option awards based
on the annual change in value of awards.\83\ We also requested comment
on whether any potential amendments to the Grants of Plan-Based Awards
Table or the Outstanding Equity Awards at Fiscal Year-End Table should
be considered to better illustrate the relationship between pay and
company performance. Most commenters did not support the petition's
recommendation because they believed it would not report the board's
compensation decisions, on which investors focus in making voting and
investment decisions, and could result in disclosure of negative
numbers.\84\ However, several commenters recommended other tabular
revisions to highlight how compensation may be related to the company's
performance.\85\ Most of these suggestions were in anticipation that
legislation establishing an annual ``say-on-pay'' shareholder advisory
vote may be enacted.\86\ Commenters most

frequently recommended adding a column to the Outstanding Equity Awards
at Fiscal Year-End Table to report the fiscal year end intrinsic value
of outstanding options and stock appreciation rights (``SARs'').\87\
---------------------------------------------------------------------------

    \83\ 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.
    \84\ See, e.g., letters from Protective Life Corporation,
RiskMetrics.
    \85\ See, e.g., letters from Center on Executive Compensation,
Graef Crystal, Paul Hodgson, Don Meiers and Dan Gode.
    \86\ The United States House of Representatives has passed H.R.
3269, the Corporate and Financial Institution Compensation Fairness
Act of 2009, which would provide shareholders an advisory vote to
approve the compensation of executives in any proxy, consent, or
authorization for an annual meeting.
    \87\ See, e.g., letters from Cleary Gottlieb, Compensia, Grant
Thornton, Hewitt, Pearl Meyer, and Towers Perrin. We would not
object if companies voluntarily add a column captioned ``Value of
unexercised in-the-money options/SARs at fiscal year end ($)'' to
the Outstanding Awards at Fiscal Year-End Table to report these
fiscal year end intrinsic values.
---------------------------------------------------------------------------

    In addition, we solicited comment on whether there are other
initiatives we should consider proposing to improve executive
compensation disclosure, such as including disclosure of each executive
officer's compensation, not just the named executive officers;
eliminating the instruction providing that performance targets can be
excluded based on the potential adverse competitive effect on the
company of their disclosure; making the CD&A part of the Compensation
Committee Report, and requiring the report to be ``filed;'' additional
disclosure regarding ``hold to retirement'' and/or claw back
provisions; and internal pay ratios.\88\ Commenters who addressed these
topics expressed mixed views.\89\
---------------------------------------------------------------------------

    \88\ See Proposing Release at Section II.H.
    \89\ Commenters who addressed these topics generally opposed
expanding executive compensation disclosure beyond the named
executive officers, stating that it would not add meaningful
information. See, e.g., letters from BorgWarner, Business
Roundtable, Hewitt, Pearl Meyer, SCSGP and SIFMA. Some commenters
opposed eliminating the ability to omit disclosure of performance
targets based on competitive harm to the company, stating that
disclosure would discourage use of performance targets or that
adverse consequences to the company would outweigh the targets'
informative value to investors. See, e.g., letters from BorgWarner,
Business Roundtable, SCSGP, and Pearl Meyer (supporting disclosure
of the percentage of target awards actually earned). Other
commenters supported requiring retrospective disclosure of
performance targets for awards in completed periods. See letters
from RiskMetrics, SEIU, State Board of Administration of Florida,
and Towers Perrin (supporting the competitive harm exclusion for
performance cycles in effect when the proxy statement is
distributed). Some commenters supported making CD&A part of the
Compensation Committee Report as a means to improve CD&A disclosure
quality, often recommending that the combined document be ``filed.''
See letters from AFL-CIO, Jesse M. Brill, United Brotherhood of
Carpenters, Hodak Value Advisors, RiskMetrics, and SEIU. Others
supported retaining the current disclosure roles and status of the
CD&A and Compensation Committee Report, finding no compelling
reasons to change them. See, e.g., letters from Ameriprise
Financial, Pearl Meyer, and SIFMA. Some commenters favored requiring
enhanced disclosure of hold-to-retirement and clawback policies to
demonstrate whether compensation practices foster a long-term value
approach. See letters from Jesse M. Brill, SEIU, and State Board of
Administration of Florida. Others opposed adding specific
requirements, often noting that if such policies are material to
compensation decisions, principles-based CD&A currently subjects
them to disclosure. See, e.g., letters from Buck Consultants,
Business Roundtable, Pearl Meyer, and Towers Perrin. Commenters
similarly divided about requiring disclosure of internal pay ratios.
See letters from Jesse M. Brill, Pearl Meyer, SCSGP and SIFMA. One
commenter opposed all of the potential initiatives on which we
solicited comment, stating that they ``would generate extensive
disclosures of questionable relevance.'' See letter from Pfizer.
---------------------------------------------------------------------------

    Our goal at this stage is to adopt discrete amendments to improve
compensation disclosure in proxy statements, such as the changes to
option reporting in the Summary Compensation Table and Director
Compensation Table, that can be implemented for the 2010 proxy season.
Therefore, we are not adopting any other changes to executive
compensation disclosure at this time. However, we will consider the
comments received in connection with future rulemaking initiatives on
compensation disclosure.

B. Enhanced Director and Nominee Disclosure

    We proposed to amend 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 period for disclosure of legal proceedings involving directors,
nominees and executive officers. We are adopting the changes generally
as proposed, but have made revisions in response to comments.
1. Proposed Amendments
    Under the proposed amendments, a company would be required to
disclose for each director and any nominee for director the particular
experience, qualifications, attributes or skills that qualified that
person to serve as a director of the company, and as a member of any
committee that the person serves on or is chosen to serve on, in light
of the company's business. In addition to the expanded narrative
disclosure regarding director and nominee qualifications, the proposed
amendments would require disclosure of any directorships held by each
director and nominee at any time during the past five years at public
companies and registered investment companies, and would lengthen the
time during which disclosure of legal proceedings involving directors,
director nominees and executive officers is required from five to ten
years. As proposed, 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 another
proponent in its proxy materials.
    We proposed that the disclosures under the Item 401 amendments
would appear in proxy and information statements on Schedules 14A and
14C, annual reports on Form 10-K and registration statements on Form 10
under the Exchange Act, as well as in registration statements under the
Securities Act.
    We also proposed 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
funds. Specifically, we proposed to amend 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, and 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.\90\
---------------------------------------------------------------------------

    \90\ 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.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Comments on the proposal were mixed. Individual investors, trade
unions, institutional investors and pension funds supported the
proposals. Several of these commenters noted that the amendments would
be a helpful step forward in providing investors and shareholders with
additional information they need to make more informed investment and
voting decisions relating to corporate governance and the election of
directors.\91\ Most companies, law firms and bar groups opposed the
proposal. Many of the commenters opposed to the proposed amendments
expressed concern about requiring companies to disclose the
qualifications, attributes and skills of directors and nominees on a
person-by-person basis.\92\ Some of

these commenters believed that requiring disclosure of the
qualifications, attributes and skills of directors and nominees on a
person-by-person basis would not elicit meaningful disclosure. They
asserted that well-assembled boards usually consist of a diverse
collection of individuals who bring a variety of complementary skills
that nominating committees and boards generally consider in the broader
context of the board's overall composition, with a view toward
constituting a board that, as a body, possesses the appropriate skills
and experience to oversee the company's business. Another concern
expressed by commenters opposed to the proposed amendments was that the
disclosure of specialized knowledge or background of particular
directors could lead to heightened liability.\93\
---------------------------------------------------------------------------

    \91\ See, e.g., letters from Board of Directors Network, Forum
of Executive Women, Integrated Governance Solutions, Norges Bank
Investment Management (``Norges Bank''), and Ralph Saul.
    \92\ See, e.g., letters from ABA, Ameriprise, Business
Roundtable, BorgWarner, Davis Polk, Honeywell, JPMorgan, Southern
Company (``Southern''), and Wisconsin Energy.
    \93\ See, e.g., letters from ABA, Ameriprise and Business
Roundtable.
---------------------------------------------------------------------------

    Commenters also objected to the use of term ``qualify'' in the
proposed amendment. They noted that the term ``qualify'' would only be
relevant to the extent that a company's governing instruments create
minimum qualifications for directors, such as a requirement to own a
certain amount of shares in the company.\94\ Other commenters believed
that ``risk assessment skills'' should not be singled out for specific
discussion, but rather should be considered as part of the discussion
of the board's aggregate skills and attributes.\95\ These commenters
stated that a better alternative may be to address risk as separate
disclosure topic to elicit more detailed disclosure about risk.
---------------------------------------------------------------------------

    \94\ See letter from ABA.
    \95\ See, e.g., letters from Honeywell and Protective Life
Corporation.
---------------------------------------------------------------------------

    Several commenters believed that it would be inappropriate to
require disclosure of the specific experience, qualifications or skills
that qualify a person to serve as a member of a particular board
committee.\96\ According to these commenters, other than having at
least one member of the board with ``financial expertise'' satisfying
the requirements for the audit committee, companies generally do not
select individuals to serve on the board based on what committee they
will serve on. These commenters noted that in many instances, companies
will rotate directors among several committee positions during their
tenure on the board.\97\
---------------------------------------------------------------------------

    \96\ See letters from SCSGP, S&C and Southern.
    \97\ See, e.g., letters from SCSGP and S&C.
---------------------------------------------------------------------------

    On the question of how frequently the disclosure should be
required, many commenters supported having the disclosure provided on
an annual basis for all continuing directors and new nominees.\98\
These commenters noted that the overall composition of the board
changes when new nominees are introduced and annual disclosure would
facilitate shareholders' assessments of the quality of the board as a
whole, which must be analyzed in relation to any changes in the
company's strategy, relevant risks, operations and organization.
However, several other commenters stated that if the requirements are
adopted, they should only be required when a director is first
nominated.\99\
---------------------------------------------------------------------------

    \98\ See, e.g., letters from IIA, Norges Bank, Pax World
Management Corporation, and RiskMetrics.
    \99\ See letters from BorgWarner, Business Roundtable, Cleary
Gottlieb, SCSGP and S&C.
---------------------------------------------------------------------------

    A broad spectrum of commenters supported the proposed amendments to
require disclosure of any directorships at public companies held by
each director and nominee at any time during the past five years
instead of only currently held directorships, and to lengthen the time
during which disclosure of legal proceedings is required from five to
ten years.\100\ However, other commenters asserted that additional
disclosure of past directorships would become voluminous and tend to
obfuscate a nominee's most relevant credentials.\101\
---------------------------------------------------------------------------

    \100\ See, e.g., letters from AARP, AFL-CIO, CII, Evolution
Petroleum, Pfizer, RILA, SCSGP, TIAA-CREF, United Brotherhood of
Carpenters, and Universities Superannuation Scheme, et al. Cf.
letters from AFSCME and Florida State Board of Administration
(supporting the proposed amendment and also suggesting that the
disclosure of legal proceedings involving fraud should not be
subject to a time limit).
    \101\ See, e.g., letter from S&C.
---------------------------------------------------------------------------

    We requested comment on whether we should retain Item 407(c)(2)(v)
of Regulation S-K in light of the proposed amendments to Item 401 of
Regulation S-K. This item, among other things, requires disclosure of
any minimum qualifications that a nominating committee believes must be
met by someone nominated by a committee for a position on the board.
Several commenters believed we should retain the disclosure currently
required by Item 407(c)(2)(v) because this information allows
shareholders to gain an understanding of the overall quality of the
board and the board's priorities, and would improve the ability of
shareholders to compare a nominee's background to the standards set by
the board itself and to further evaluate board and committee
composition.\102\
---------------------------------------------------------------------------

    \102\ See, e.g., letters from ABA and CII.
---------------------------------------------------------------------------

    We also requested comment on whether there were 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, and we listed
several possible additions to the current list. Several commenters
agreed that the disclosure about the additional legal proceedings noted
was important information that reflected on an individual's competence
and integrity and as such, should be disclosed.\103\ Other commenters
believed the current disclosure requirements were adequate.\104\
---------------------------------------------------------------------------

    \103\ See, e.g., letters from AARP, Colorado Public Employees'
Retirement Association (``COPERA''), and Interfaith Center on
Corporate Responsibility.
    \104\ See, e.g., letters from American Electric Power and S&C.
---------------------------------------------------------------------------

3. Final Rule
    After considering the comments, we are adopting the amendments to
Item 401, but with several revisions. We believe the amendments will
provide investors with more meaningful disclosure that will help them
in their voting decisions by better enabling them to determine whether
and why a director or nominee is an appropriate choice for a particular
company.
    The final rules require companies to disclose for each director and
any nominee for director the particular experience, qualifications,
attributes or skills that led the board to conclude that the person
should serve as a director for the company as of the time that a filing
containing this disclosure is made with the Commission.\105\ The same
disclosure, with respect to any nominee for director put forward by
another proponent, would be required in the proxy soliciting materials
of that proponent. This new disclosure will be required for all
nominees and for all directors, including those not up for reelection
in a particular year. The final rule requires this disclosure to be
made annually because the composition of the entire board is important
information for voting decisions. Although we are adopting the
amendments to Item 401, we are not eliminating the disclosure
requirements in Item 407(c)(2)(v) of Regulation S-K regarding the
specific minimum qualifications and specific qualities or skills used
by the nominating committee. We agree with commenters that this
requirement should be retained because it will allow investors to
compare and evaluate the skills and qualifications of each director

and nominee against the standards established by the board.\106\
---------------------------------------------------------------------------

    \105\ Consistent with the comments, we are revising the
requirement to delete the term ``qualify,'' and instead we are
focusing on the reasons for the decision that the person should
serve as a director.
    \106\ See, e.g., letter from CII.
---------------------------------------------------------------------------

    The final rules do not require disclosure of the specific
experience, qualifications or skills that qualify a person to serve as
a committee member. In making this change from the proposal, we were
persuaded by commenters who noted that many companies rotate directors
among different committee positions to allow directors to gain
different perspectives of the company.\107\ However, if an individual
is chosen to be a director or a nominee to the board because of a
particular qualification, attribute or experience related to service on
a specific committee, such as the audit committee, then this should be
disclosed under the new requirements as part of the individual's
qualifications to serve on the board.
---------------------------------------------------------------------------

    \107\ See, e.g., letters from Davis Polk and Pfizer.
---------------------------------------------------------------------------

    The final amendments do not specify the particular information that
should be disclosed. We believe companies and other proponents should
be afforded flexibility in determining the information about a
director's or nominee's skills, qualifications or particular area of
expertise that would benefit the company and should be disclosed to
shareholders. Accordingly, we have deleted the reference to ``risk
assessment skills'' that was included in the proposed amendments.\108\
However, we note that if particular skills, such as risk assessment or
financial reporting expertise, were part of the specific experience,
qualifications, attributes or skills that led the board or proponent to
conclude that the person should serve as a director, this should be
disclosed.
---------------------------------------------------------------------------

    \108\ See, e.g., letters from Honeywell and Protective Life
Corporation.
---------------------------------------------------------------------------

    We are adopting substantially as proposed the amendments to require
disclosure of any directorships at public companies and registered
investment companies held by each director and nominee at any time
during the past five years. Item 401 presently 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,\109\ or subject to the requirements of Section 15(d)
of that Act,\110\ or any company registered as an investment company
under the Investment Company Act. We believe that expanding this
disclosure to include service on boards of those companies for the past
five years (even if the director or nominee no longer serves on that
board) will allow investors to better evaluate the relevance of a
director's or nominee's past board experience, as well as professional
or financial relationships that might pose potential conflicts of
interest (such as past membership on boards of major suppliers,
customers, or competitors).
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78l.
    \110\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    In addition to these amendments, we are adopting amendments as
proposed to lengthen the time during which disclosure of legal
proceedings involving directors, director nominees and executive
officers is required from five to ten years. We believe it is
appropriate to extend the required reporting period from five to ten
years as a means of providing investors with more extensive information
regarding an individual's competence and character. We were persuaded
by commenters who believed that disclosures of legal proceedings during
the ten-year period would provide investors with additional important
information.\111\ We are also adopting amendments to expand the list of
legal proceedings involving directors, executive officers, and nominees
covered under Item 401(f) of Regulation S-K. Some commenters agreed
that certain legal proceedings can reflect on an individual's
competence and integrity to serve as a director, and that the
additional disclosure noted in the proposing release would provide
investors with valuable information for assessing the competence,
character and overall suitability of a director, nominee or executive
officer.\112\
---------------------------------------------------------------------------

    \111\ See, e.g., letters from ABA, AARP and COPERA.
    \112\ See, e.g., letters from AARP, CII, COPERA, SEIU, and USPX.
---------------------------------------------------------------------------

    In addition, consistent with our request for comment and comments
received,\113\ we are amending Item 401(f) to require disclosure of
additional legal proceedings. These new legal proceedings include:
---------------------------------------------------------------------------

    \113\ See note 103 above and accompanying text.
---------------------------------------------------------------------------

     Any judicial or administrative proceedings resulting from
involvement in mail or wire fraud or fraud in connection with any
business entity;
     Any judicial or administrative proceedings based on
violations of Federal or State securities, commodities, banking or
insurance laws and regulations, or any settlement \114\ to such
actions; and
---------------------------------------------------------------------------

    \114\ This does not include disclosure of a settlement of a
civil proceeding among private parties. We are including an
instruction as part of the amendments to clarify this.
---------------------------------------------------------------------------

     Any disciplinary sanctions or orders imposed by a stock,
commodities or derivatives exchange or other self-regulatory
organization.

We believe this amendment will provide investors with information that
is important to an evaluation of an individual's competence and
character to serve as a public company official.\115\
---------------------------------------------------------------------------

    \115\ Consistent with the current disclosure requirement
regarding legal proceedings, the additional legal proceedings
included in the new requirements will not need to be disclosed if
they are not material to an evaluation of the ability or integrity
of the director or director nominee. See 17 CFR 229.401(f).
---------------------------------------------------------------------------

    In the Proposing Release, we also requested comment on whether we
should amend our rules to require disclosure of additional factors
considered by a nominating committee when selecting someone for a board
position, such as board diversity. A significant number of commenters
responded that disclosure about board diversity was important
information to investors.\116\ Many of these commenters believed that
requiring this disclosure would provide investors with information on
corporate culture and governance practices that would enable investors
to make more informed voting and investment decisions.\117\ Commenters
also noted that there appears to be a meaningful relationship between
diverse boards and improved corporate financial performance, and that
diverse boards can help companies more effectively recruit talent and
retain staff.\118\ We agree that it is useful for investors to
understand how the board considers and addresses diversity, as well as
the board's assessment of the implementation of its diversity policy,
if any. Consequently, we are adopting amendments to Item 407(c) of
Regulation S-K to require disclosure of whether, and if so how, a
nominating committee considers diversity in identifying nominees for
director.\119\ In addition, if the nominating committee (or the board)
has a policy with regard to the consideration of diversity in

identifying director nominees, disclosure would be required of how this
policy is implemented, as well as how the nominating committee (or the
board) assesses the effectiveness of its policy. We recognize that
companies may define diversity in various ways, reflecting different
perspectives. For instance, some companies may conceptualize diversity
expansively to include differences of viewpoint, professional
experience, education, skill and other individual qualities and
attributes that contribute to board heterogeneity, while others may
focus on diversity concepts such as race, gender and national origin.
We believe that for purposes of this disclosure requirement, companies
should be allowed to define diversity in ways that they consider
appropriate. As a result we have not defined diversity in the
amendments.
---------------------------------------------------------------------------

    \116\ See, e.g., letters from Board of Directors Network, Boston
Common Asset Management, CalPERS, CalSTRS, Calvert, Council of Urban
Professionals, Ernst & Young LLP (``E&Y''), Greenlining Institute,
Hispanic Association on Corporate Responsibility, Interfaith Center
on Corporate Responsibility, InterOrganization Network, Latino
Business Chamber of Greater Los Angeles, Pax World Management
Corporation, Prout Group, Inc., RiskMetrics, Sisters of Charity BVM,
Sisters of St. Joseph Carondelet, and Trillium Asset Management
Corporation.
    \117\ See, e.g., letters from the Boston Club, Boston Common
Asset Management, CalPERS, Pax World Management Corporation,
Trillium Asset Management Corporation, and Social Investment Forum.
    \118\ See, e.g., letters from Catalyst and the Social Investment
Forum.
    \119\ See Item 407(c)(2)(vi) of Regulation S-K. Funds will be
subject to the diversity disclosure requirement of Item
407(c)(2)(vi) of Regulation S-K under Item 22(b)(15)(ii)(A) of
Schedule 14A. See 17 CFR 240.14a-101, Item 22(b)(15)(ii)(A).
---------------------------------------------------------------------------

C. New Disclosure About Board Leadership Structure and the Board's Role
in Risk Oversight

    We proposed a new disclosure requirement to Item 407 of Regulation
S-K and a corresponding amendment to Item 7 of Schedule 14A to require
disclosure of the company's leadership structure and why the company
believes it is the most appropriate structure for it at the time of the
filing. The proposal also required disclosure about the board's role in
the company's risk management process. We are adopting the proposals
with some changes.
1. Proposed Amendments
    Under the proposed amendments, companies would be required to
disclose their leadership structure and the reasons why they believe
that it is an appropriate structure for the company. As part of this
proposed disclosure, companies would be required to disclose whether
and why they have chosen to combine or separate the principal executive
officer and board chair positions. In addition, 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. For these companies, the proposed amendments
would require disclosure of 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 noted 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. Irrespective of the type of
leadership structure selected by a company, the proposed requirements
were intended to provide investors with insights about why the company
has chosen that particular leadership structure.
    We also proposed to require additional disclosure in proxy and
information statements about the board's role in the company's risk
management process. Disclosure about the board's approach to risk
oversight 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 also proposed that funds provide the new Item 407 disclosure
about leadership structure and the board's role in the risk management
process in proxy and information statements and similar disclosure as
part of registration statements on Forms N-1A, N-2 and N-3. The
proposed amendments were tailored 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. We proposed
that 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.
2. Comments on the Proposed Amendments
    Comments were mostly supportive of the proposals.\120\ Commenters
believed the disclosure regarding a company's leadership structure and
the board's role in risk management process would provide useful
information to investors and improve investor understanding of the role
of the board in a company's risk management practices.\121\ Some
commenters opposed the disclosures. Many of these commenters believed
that the proposed amendments were too vague and would likely elicit
boilerplate descriptions of a company's management hierarchy and risk
management that would not provide significant insight or meaning to
investors.\122\
---------------------------------------------------------------------------

    \120\ See, e.g., letters from AFL-CIO, Chairmen's Forum,
Calvert, CII, CalSTRS, the General Board of Pension and Health
Benefits of the United Methodist Church, Hermes, Norges Bank,
Pfizer, RiskMetrics, and SEIU.
    \121\ See, e.g., letters from CII, the General Board of Pension
and Health Benefits of the United Methodist Church, IGS, and RIMS.
    \122\ See, e.g., letters from Cleary Gottlieb, S&C and
Theragenics.
---------------------------------------------------------------------------

    Many commenters suggested revisions to the proposed disclosure
requirements. For instance, several commenters recommended that we use
the phrase ``board leadership structure'' rather than ``company
leadership structure'' and noted that the discussion of the board
leadership structure and the board's role in risk management are two
separate disclosure items.\123\ These commenters believed that the use
of the phrase ``company leadership structure'' could be misinterpreted
to require a discussion of a company's management leadership
structures. Other commenters suggested that we replace the phrase
``risk management'' with ``risk oversight'' because the board's role is
to oversee management, which is responsible for the day-to-day issues
of risk management.\124\
---------------------------------------------------------------------------

    \123\ See, e.g., letters from Business Roundtable and Honeywell.
    \124\ See, e.g., letters from GovernanceMetrics and PLC.
---------------------------------------------------------------------------

    Several commenters believed disclosure of the board's role in risk
management would be more effective as part of a comprehensive
discussion of a company's risk management processes, rather than as
stand-alone disclosure.\125\ They suggested that companies be allowed
to provide the required disclosure in the MD&A discussion included in
the Form l0-K, and to incorporate by reference this information in the
proxy statement rather than repeat the information.
---------------------------------------------------------------------------

    \125\ See, e.g., letters from ABA and JPMorgan.
---------------------------------------------------------------------------

    With respect to funds, commenters addressing the issue generally
supported the proposal that funds disclose whether the board chair is
an ``interested person'' as defined under the Investment Company
Act.\126\ In addition, commenters noted the importance of fund board
oversight of risk management,\127\ but commenters were split regarding
whether we should require disclosure about fund board oversight of risk
management.\128\
---------------------------------------------------------------------------

    \126\ See, e.g., letters from Independent Directors Council
(``IDC'') and Mutual Fund Directors Forum (``MFDF'').
    \127\ See, e.g., letters from IDC and MFDF.
    \128\ See letters from Calvert and MFDF (supporting disclosure).
But see letters from the Investment Company Institute and IDC
(opposing disclosure).
---------------------------------------------------------------------------

3. Final Rule
    After consideration of the comments, we are adopting the proposals
substantially as proposed with a few technical revisions in response to
comments. We believe that, in making voting and investment decisions,

investors should be provided with meaningful information about the
corporate governance practices of companies.\129\ As we noted in the
Proposing Release, one important aspect of a company's corporate
governance practices is its board's leadership structure. Disclosure of
a company's board leadership structure and the reasons the company
believes that its board leadership structure is appropriate will
increase the transparency for investors as to how the board functions.
---------------------------------------------------------------------------

    \129\ See, e.g., 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.'').
---------------------------------------------------------------------------

    As stated above, the amendments were designed to provide
shareholders with disclosure of, and the reasons for, the leadership
structure of a company's board concerning the principal executive
officer, the board chairman position and, where applicable, the lead
independent director position. We agree with commenters that the phrase
``board leadership structure'' instead of ``company leadership
structure'' would avoid potential misunderstanding that the amendments
require a discussion of the structure of a company's management
leadership.\130\ We also agree with commenters that the phrase ``risk
oversight'' instead of ``risk management'' would be more appropriate in
describing the board's responsibilities in this area.\131\
---------------------------------------------------------------------------

    \130\ See letter from Honeywell.
    \131\ See, e.g., letters from Ameriprise Financial and
Protective Life Corporation.
---------------------------------------------------------------------------

    Under the amendments, a company is required to disclose whether and
why it has chosen to combine or separate the principal executive
officer and board chairman positions, and the reasons why the company
believes that this board leadership structure is the most appropriate
structure for the company at the time of the filing. In addition, 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. In these circumstances,
the amendments will require disclosure of 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. As we
previously stated in the Proposing Release, these amendments are
intended to provide investors with more transparency about the
company's corporate governance, but are not intended to influence a
company's decision regarding its board leadership structure.
    The final rules also require companies to describe the board's role
in the oversight of risk. We were persuaded by commenters who noted
that risk oversight is a key competence of the board, and that
additional disclosures would improve investor and shareholder
understanding of the role of the board in the organization's risk
management practices.\132\ Companies face a variety of risks, including
credit risk, liquidity risk, and operational risk. As we noted in the
Proposing Release, similar to disclosure about the leadership structure
of a board, disclosure about the board's involvement in the oversight
of 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. This disclosure requirement gives
companies the flexibility to describe how the board administers its
risk oversight function, such as through the whole board, or through a
separate risk committee or the audit committee, for example. Where
relevant, companies may want to address whether the individuals who
supervise the day-to-day risk management responsibilities report
directly to the board as a whole or to a board committee or how the
board or committee otherwise receives information from such
individuals.
---------------------------------------------------------------------------

    \132\ See, e.g., letters from Norges Bank and RIMS.
---------------------------------------------------------------------------

    The final rules also require funds to provide disclosure about the
board's role in risk oversight. Funds face a number of risks, including
investment risk, compliance, and valuation; and we agree with
commenters who favored disclosure of board risk oversight by
funds.\133\ As with corporate issuers, we believe that additional
disclosures would improve investor understanding of the role of the
board in the fund's risk management practices. Furthermore, the
disclosure should provide important information to investors about how
a fund perceives the role of its board and the relationship between the
board and its advisor in managing material risks facing the fund.
---------------------------------------------------------------------------

    \133\ See letters from Calvert and MFDF.
---------------------------------------------------------------------------

D. New Disclosure Regarding Compensation Consultants

    We proposed amendments to Item 407 of Regulation S-K to require,
for the first time, disclosure about the fees paid to compensation
consultants and their affiliates when they played a role in determining
or recommending the amount or form of executive and director
compensation, and they also provided additional services to the
company. The proposed amendments also would have required a description
of the additional services provided to the company by the compensation
consultants and any affiliates of the consultants. We are adopting the
amendments with changes in response to comments.
1. Proposed Amendments
    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 and director compensation,
and also provided additional services, then the company would be
required to disclose the following:
     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 the other services provided by the compensation
consultant in addition to executive compensation services.
    The proposed disclosure requirements would have applied to all
services provided by a compensation consultant and its affiliates if
the compensation consultant played any role in determining or
recommending the amount or form of executive and director compensation.
The proposed amendments did not distinguish between consultants engaged
by the board and consultants engaged by management. We provided an
exception from the proposed disclosure requirements for those
situations in which the compensation consultant's role in recommending
the amount or form of executive and director compensation was limited
to consulting on broad-based plans that did not discriminate in favor
of executive officers or directors of the company, such as 401(k) plans
or health insurance

plans. We believed that when a compensation consultant's services were
limited to consulting on broad-based, non-discriminatory plans, these
services did not give rise to the type of potential conflict of
interest intended to be addressed by our proposed amendments.\134\
---------------------------------------------------------------------------

    \134\ We also proposed to amend Item 407 along the same lines to
clarify that the current disclosure requirements under the item were
not triggered for a compensation consultant whose only services with
regard to executive or director compensation were limited to these
types of broad-based, non-discriminatory plans. Many commenters
supported this amendment and we are adopting it as proposed.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    A significant number of commenters generally supported the proposed
amendments to Item 407 of Regulation S-K to require disclosure of the
fees paid to compensation consultants as well as a description of other
services provided by compensation consultants.\135\ Many of these
commenters believed investors would benefit from disclosure regarding
the potential conflicts of interests of compensation consultants when
they advise on the amount or form of executive and director
compensation and also provide additional services to the company.\136\
These commenters believed that disclosure of the fees paid to
compensation consultants would go a long way towards minimizing
potential conflicts of interests and would allow shareholders to assess
the potential conflicts of interest in regard to the compensation
advice given to companies.
---------------------------------------------------------------------------

    \135\ See, e.g., letters from AFL-CIO, AFSCME, Business
Roundtable, CalSTRS, CII, COPERA, Evolution Petroleum, Glass Lewis,
Grahall, Hermes Equity Ownership Services, NACD, Oppenheimer Funds,
Pax World Management Corporation, State of Connecticut Treasurer's
Office, TIAA-CREF, Trillium Asset Management Corporation, and Walden
Asset Management.
    \136\ See, e.g., letters from AFL-CIO, Frank Inman, Hermes
Equity Ownership Services Ltd., TIAA-CREF, and Trillium Asset
Management.
---------------------------------------------------------------------------

    However, several commenters, primarily multi-service compensation
consulting firms, opposed the proposed amendments.\137\ These
commenters believed the proposed amendments were too narrowly focused
on fees paid to multi-service consulting firms and ignored important
considerations relating to the consultant's qualifications, selection,
and role.\138\ They also asserted that the proposed disclosure could
give investors a distorted view of how companies use and select
compensation consultants. Because the role of consultants is not
uniform and varies considerably from company to company, these
commenters asserted that investors should be given an understanding not
only of the role consultants serve for each company, but also of the
board's or compensation committee's selection process. This would
include how it assessed the consultant's qualifications and how any
potential conflicts of interest that may have been identified are
mitigated by formal processes, or by the internal controls and
processes maintained by the consulting firm.\139\
---------------------------------------------------------------------------

    \137\ See letters from ABA, Hewitt, Mercer, Pfizer, Protective
Life Corporation, Radford, Towers Perrin, Value Alliance, and Watson
Wyatt.
    \138\ See, e.g., letters from Hewitt, Mercer and Towers Perrin.
    \139\ See, e.g., letter from Hewitt.
---------------------------------------------------------------------------

    Several commenters opposed to the proposed amendments asserted that
the amendments would decrease the compensation consulting resources
available to companies.\140\ Other commenters asserted that the
proposed amendments would cause competitive harm to multi-service
consulting firms who provide services other than executive compensation
consulting, as companies would be discouraged from using multi-service
compensation consulting firms in more than one capacity.\141\ These
commenters also claimed that the proposed amendments would cause
competitive harm because disclosure of the nature and extent of all
additional services provided by the consultant would reveal
confidential and competitively sensitive pricing information that could
allow competitors to determine the fee structure for these additional
services.\142\
---------------------------------------------------------------------------

    \140\ See, e.g., letters from Hewitt and Mercer.
    \141\ See, e.g., letters from Mercer, Towers Perrin and Watson
Wyatt.
    \142\ See, e.g., letter from Mercer.
---------------------------------------------------------------------------

    These commenters also expressed concern that the proposed
amendments did not address potential conflicts of interest that may
occur when a compensation consultant that only provides executive-
compensation related services to the board is overly reliant on the
fees it receives from a particular client. They suggested an
alternative rule that would require disclosure of fees paid to a
compensation consultant when a significant portion of the annual
revenues of the compensation consultant were generated from any one
client.\143\
---------------------------------------------------------------------------

    \143\ See, e.g., letters from Hewitt, Mercer, Towers Perrin and
Watson Wyatt.
---------------------------------------------------------------------------

    Several commenters expressed concern that the scope of the proposed
amendments was too broad. These commenters believed that when a
compensation committee engages its own compensation consultant, it
mitigates any concerns about potential conflicts of interest involving
consultants engaged by management.\144\ According to these commenters,
from that perspective, a compensation consulting firm that provides
executive compensation consulting services to the company, and also
provides other services to the company, would not present a conflict of
interest issue when the compensation committee retains a different
consultant.\145\ Noting that management should have broad access to
compensation experts and other third parties when developing executive
pay proposals for board consideration, and that it is the board's
responsibility to evaluate management's compensation proposals when
determining whether or not to approve them, some commenters expressed
concerns about the potential effect of the proposed disclosure on the
board's discharge of its oversight responsibility.\146\
---------------------------------------------------------------------------

    \144\ See, e.g., letters from E&Y and Deloitte.
    \145\ Id.
    \146\ See letters from Hewitt and E&Y.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether there
were other consulting services that do not give rise to potential
conflicts of interest that should be excluded from the proposed
disclosure requirements similar to the proposed exemption for
consulting services that are limited to broad-based, non-discriminatory
plans. Several commenters responded by suggesting that we exclude
consulting services where the compensation consultant only provides the
board with peer surveys that provide general information regarding the
forms and amounts of compensation typically paid to executive officers
and directors within a particular industry.\147\ Another commenter
suggested that surveys that are either not customized for a particular
company, or that are customized based on parameters that are not
developed by the compensation consultant, should be excluded from the
amendments.\148\ These commenters believed that in situations where the
compensation consultant's services provided to a company were limited
to providing those types of surveys, such services did not raise the
potential conflicts of interest that the proposed amendments were
intended to address.\149\
---------------------------------------------------------------------------

    \147\ See, e.g., letters from BorgWarner, Davis Polk, Honeywell,
JPMorgan and Wisconsin Energy.
    \148\ See letter from ABA.
    \149\ See, e.g., letters from BorgWarner, Davis Polk and
Honeywell.
---------------------------------------------------------------------------

    We also requested comment on whether we should 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. Several commenters recommended that the proposed amendments
should include a disclosure threshold, including many who suggested
that we should require disclosure only if the aggregate fees for all
additional services provided by the consultant and its affiliates
exceeded $120,000.\150\
---------------------------------------------------------------------------

    \150\ See, e.g., letters from ACC, Business Roundtable, Davis
Polk, and SCSGP. Some commenters also suggested a disclosure
threshold based on tests in effect under rules with a similar focus
in self-regulatory organizations, such as the 2% (for New York Stock
Exchange-listed companies) or 5% (for NASDAQ-listed companies) of
gross revenues test for disclosure of business relationships between
a company and a director-affiliated entity. See, e.g., letter from
Cleary Gottlieb. See also, letter from ABA (suggesting a percentage
threshold set at a level where the effect of such fees diminishes
the possible appearance of a conflict of interest).
---------------------------------------------------------------------------

3. Final Rule
    After considering the comments received, we are adopting a modified
version of the proposed amendments. We believe the new disclosure
requirements will provide investors with information that will enable
them to better assess the potential conflicts a compensation consultant
may have in recommending executive compensation, and the compensation
decisions made by the board. As we noted in the Proposing Release, many
companies engage compensation consultants to make recommendations on
appropriate executive and director compensation levels, to design and
implement incentive plans, and to provide information on industry and
peer group pay practices. The services offered by compensation
consultants, however, are often not limited to recommending executive
and director compensation plans or policies. Many compensation
consultants, or their affiliates, are retained by management to provide
a broad range of additional services, such as benefits administration,
human resources consulting and actuarial services. The fees generated
by these additional services may be more significant than the fees
earned by the consultants for their executive and director compensation
services. The extent of the fees and provision of additional services
by a compensation consultant or its affiliate may create the risk of a
conflict of interest that may call into question the objectivity of the
consultant's advice and recommendations on executive compensation.
    At the same time, we are persuaded that there are circumstances
where this disclosure should not be required either because of the
limited nature of the additional services or because of other factors
that mitigate the concern that the board may be receiving advice
potentially influenced by a conflict of interest.
a. Summary of the Final Rule
    As more fully described below, under our final rule, in addition to
the requirement under the current rule to describe the role of the
compensation consultant in determining or recommending the amount or
form of executive and director compensation, fee disclosure related to
the retention of a compensation consultant will be required in certain
circumstances. The final rules can be summarized generally as follows:
     If the board, compensation committee or other persons
performing the equivalent functions (collectively, ``board'') has
engaged its own consultant to provide advice or recommendations on the
amount or form of executive and director compensation and the board's
consultant or its affiliates provide other non-executive compensation
consulting services to the company, fee and related disclosure is
required, provided the fees for the non-executive compensation
consulting services exceed $120,000 during the company's fiscal year.
Disclosure is also required of whether the decision to engage the
compensation consultant or its affiliates for non-executive
compensation consulting services was made or recommended by management,
and whether the board has approved these non-executive compensation
consulting services provided by the compensation consultant or its
affiliate;
     If the board has not engaged its own consultant, fee
disclosures are required if there is a consultant (including its
affiliates) providing executive compensation consulting services and
non-executive compensation consulting services to the company, provided
the fees for the non-executive compensation consulting services exceed
$120,000 during the company's fiscal year;
     Fee and related disclosure for consultants that work with
management (whether for only executive compensation consulting
services, or for both executive compensation consulting and other non-
executive compensation consulting services) is not required if the
board has its own consultant; and
     Services involving only broad-based non-discriminatory
plans or the provision of information, such as surveys, that are not
customized for the company, or are customized based on parameters that
are not developed by the consultant, are not treated as executive
compensation consulting services for purposes of the compensation
consultant disclosure rules.
b. Disclosure Required if the Board's Compensation Consultant Provides
Additional Services to the Company
    If the board has engaged a compensation consultant to advise the
board as to executive and director compensation, and such consultant or
its affiliates provides other non-executive compensation consulting
services to the company, the disclosures specified by the new rules are
required. We believe that in that situation, the receipt of fees for
non-executive compensation consulting services by the board's
consultant presents the potential conflict of interest intended to be
highlighted for investors by our new rules. Subject to the disclosure
threshold discussed below, the final rule requires disclosure of the
aggregate fees paid for services provided to either the board or the
company with regard to determining or recommending the amount or form
of executive and director compensation, and the aggregate fees paid for
any non-executive compensation consulting services provided by the
compensation consultant or its affiliates.
    In addition, the new rules require disclosure of whether the
decision to engage the compensation consultant or its affiliates for
the non-executive compensation consulting services was made, or
recommended by, management, and whether the board approved such other
services.\151\
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    \151\ Item 407(e)(3)(iii)(A) of Regulation S-K.
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c. Disclosure Required if the Board Does Not Have a Compensation
Consultant, but the Company Receives Executive Compensation and Non-
Executive Compensation Services From Its Consultant
    The new rule also requires disclosure of fees in situations where
the board has not engaged a compensation consultant, but management or
the company received executive compensation consulting services and
other non-executive compensation consulting services from a consultant
or its affiliates, and the fees from the non-executive compensation
consulting services provided by that consultant or its affiliates
exceed $120,000 for the company's fiscal year.\152\ We recognize that
in that situation the board, which generally is primarily responsible
for determining the compensation paid to

senior executives, may not be relying on the consultant used by
management, and, therefore, conflicts of interest may be less of a
concern. However, we believe that when management has a compensation
consultant and the board does not have its own compensation consultant
to help filter any advice provided by management's compensation
consultant, the concerns about board reliance on consultants that may
have a conflict are sufficiently present to require this approach.
Consequently, the final rule provides that in this fact pattern, fee
disclosure is required if the fees from the non-executive compensation
consulting services provided by the compensation consultant exceed the
disclosure threshold described below.
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    \152\ Item 407(e)(3)(iii)(B).
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d. Disclosure Not Required if the Board and Management Have Different
Compensation Consultants, Even if Management's Consultant Provides
Additional Services to the Company
    In some instances, the board may engage a compensation consultant
to advise it on executive or director compensation, and management may
engage a separate consultant to provide executive compensation
consulting services and one or more additional non-executive
compensation consulting services. We believe there is less potential
for a conflict of interest to arise when the board has retained its own
compensation consultant, and the company or management has a different
consultant to provide executive compensation consulting and other non-
executive compensation consulting services.\153\ When the board engages
its own compensation consultant, it mitigates concerns about potential
conflicts of interest involving compensation consultants engaged by
management.\154\ Accordingly, the final rules provide a limited
exception to the disclosure requirements for fees paid to other
compensation consultants retained by the company if the board has
retained its own consultant that reports to the board. In addition to
limiting disclosure to circumstances that are more likely to present
potential conflicts of interests, we believe this approach should
address some concerns about competitive harm that were raised by
commenters. The exception would be available without regard to whether
management's consultant participates in board meetings. Where the
board's compensation consultant provides additional non-executive
compensation consulting services to the company, the rule would, as
described above, require fee and other related disclosures, which
should address concerns about conflicts of interest by that consultant.
Fee disclosure for services provided by management's compensation
consultant would be less relevant in this situation because the board
is able to rely on its own compensation consultant's advice, rather
than the advice provided by management's compensation consultant, when
making its executive compensation decisions.
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    \153\ See, e.g., letters from Hewitt and E&Y.
    \154\ See letter from E&Y.
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e. Disclosure Required Only if Fees for Additional Services Exceed
$120,000 During the Company's Last Completed Fiscal Year
    As noted previously, we agree with commenters that the final rule
should have a disclosure threshold.\155\ We believe that when aggregate
fees paid for the non-executive compensation consulting services are
limited, the potential conflict of interest is likely to be
commensurately reduced. A disclosure threshold would also reduce the
compliance burdens on companies when the potential conflict of interest
is minimal. Under the rule as adopted, if the board has engaged a
compensation consultant to provide executive and director compensation
consulting services to the board or if the board has not retained a
consultant but there is a firm providing executive compensation
consulting services, fee disclosure is required if the consultant or
its affiliates also provides other non-executive compensation
consulting services to the company, and the fees paid for the other
services exceed $120,000 for the company's fiscal year. We believe fees
for other non-executive compensation consulting services below that
threshold are less likely to raise potential conflicts of interest
concerns, and note this disclosure threshold should reduce the
recordkeeping burden on companies. This threshold is similar to the
disclosure threshold for transactions with related persons in Item 404
of Regulation S-K, which also deals with potential conflicts of
interest on the part of related persons who have financial transactions
or arrangements with the company, and therefore provides some
regulatory consistency.\156\
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    \155\ See, e.g., letters from ACC, Davis Polk and SCSGP. This
threshold requirement should also help address some of the
competitive concerns expressed by some commenters. See, e.g., note
150 above and accompanying text.
    \156\ See 17 CFR 229.404.
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f. Disclosure of Nature and Extent of Additional Services Not Required
    The rule, as adopted, does not require disclosure of the nature and
extent of additional services provided by the compensation consultant
and its affiliates to the company, as we proposed. We made this change
from the proposal because we are persuaded by commenters who noted that
requiring this disclosure could cause competitive harm by revealing
confidential and sensitive pricing information, and we believe that the
critical information about the potential conflict is adequately
conveyed through the fee disclosure requirement. Although we are not
adopting this requirement, companies may at their discretion include a
description of any additional non-executive compensation consulting
services provided by the compensation consultant and its affiliates
where such information would facilitate investor understanding of the
existence or nature of any potential conflict of interest.
g. Exceptions to the Disclosure Requirement for Consulting on Broad-
Based Plans and Provision of Survey Information
    We are adopting substantially as proposed the exception from the
disclosure requirements for 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. In addition, in response to comments
received, we are expanding the exception to include situations where
the compensation consultant's services are limited to providing
information, such as surveys, that either is not customized for a
particular company, or that is customized based on parameters that are
not developed by the compensation consultant.\157\ We are persuaded by
commenters who noted that surveys that provide general information
regarding the form and amount of compensation typically paid to
executive officers and directors within a particular industry generally
do not raise the potential conflicts of interest that the amendments
are intended to address.\158\ However, the exception would not be
available if the compensation consultant provides advice or
recommendations in connection with the information provided in the
survey.
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    \157\ See, e.g., letters from ABA, Mercer and Towers Perrin.
    \158\ See letters from Davis Polk and Mercer.

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h. Other Concerns
    We did not propose, and do not at this time adopt, disclosure of
consulting fees based on a percentage of revenues received from a
company. We have considered the concern expressed by some commenters
that compensation consultants, even if they are only retained by the
board for executive compensation related services and do not provide
any additional services to the company, may become overly reliant on a
single client for revenues, which could affect the advice the
consultant provides to the board.\159\ However, we are not currently
persuaded that such reliance would cause a consultant to provide advice
to the board that inappropriately reflects management's influence as a