[Federal Register: September 8, 2006 (Volume 71, Number 174)]
[Rules and Regulations]
[Page 53157-53266]
[DOCID:fr08se06-25]

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Part II

Securities and Exchange Commission

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17 CFR Parts 228, 229 et al.

Executive Compensation and Related Person Disclosure; Final Rule and
Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 232, 239, 240, 245, 249 and 274

[Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06]
RIN 3235-AI80

Executive Compensation and Related Person Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments
to the disclosure requirements for executive and director compensation,
related person transactions, director independence and other corporate
governance matters and security ownership of officers and directors.
These amendments apply to disclosure in proxy and information
statements, periodic reports, current reports and other filings under
the Securities Exchange Act of 1934 and to registration statements
under the Exchange Act and the Securities Act of 1933. We are also
adopting a requirement that disclosure under the amended items
generally be provided in plain English. The amendments are intended to
make proxy and information statements, reports and registration
statements easier to understand. They are also intended to provide
investors with a clearer and more complete picture of the compensation
earned by a company's principal executive officer, principal financial
officer and highest paid executive officers and members of its board of
directors. In addition, they are intended to provide better information
about key financial relationships among companies and their executive
officers, directors, significant shareholders and their respective
immediate family members. In Release No. 33-8735, published elsewhere
in the proposed rules section of this issue of the Federal Register, we
also request additional comments regarding the proposal to require
compensation disclosure for three additional highly compensated
employees.

DATES: Effective Date: November 7, 2006.
    Comment Date: Comments regarding the request for comment in Section
II.C.3.b. of this document should be received on or before October 23,
2006.
    Compliance Dates: Companies must comply with these disclosure
requirements in Forms 8-K for triggering events that occur on or after
November 7, 2006 and in Forms 10-K and 10-KSB for fiscal years ending
on or after December 15, 2006. Companies other than registered
investment companies must comply with these disclosure requirements in
Securities Act registration statements and Exchange Act registration
statements (including pre-effective and post-effective amendments), and
in any proxy or information statements filed on or after December 15,
2006 that are required to include Item 402 and 404 disclosure for
fiscal years ending on or after December 15, 2006. Registered
investment companies must comply with these disclosure requirements in
initial registration statements and post-effective amendments that are
annual updates to effective registration statements on Forms N-1A, N-2
(except those filed by business development companies) and N-3, and in
any new proxy or information statements, filed with the Commission on
or after December 15, 2006.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml.
): or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-03-06 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-03-06. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/final/shtml). Comments are

also available for public inspection and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC, 20549. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Carolyn Sherman, or
Daniel Greenspan, at<PHONE_NUMBER>, in the Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-3010 or, with respect to questions regarding
investment companies, Kieran Brown in the Division of Investment
Management, at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: We are amending: Items 201,\1\ 306,\2\
401,\3\ 402,\4\ 403 \5\ and 404 \6\ of Regulations S-K \7\ and S-B,\8\
Item 601 \9\ of Regulation S-K, Item 1107 \10\ of Regulation AB,\11\
Item 304 \12\ of Regulation S-T,\13\ and Rule 100 \14\ of Regulation
BTR.\15\ We are also adding new Item 407 to Regulations S-K and S-B. In
addition, we are amending Rules 13a-11,\16\ 14a-3,\17\ 14a-6,\18\ 14c-
5,\19\ 15d-11 \20\ and 16b-3 \21\ under the Securities Exchange Act of
1934.\22\ We are adding Rules 13a-20 and 15d-20 under the Exchange Act.
We are further amending Schedule 14A \23\ under the Exchange Act, as
well as Exchange Act Forms 8-K,\24\ 10,\25\ 10SB,\26\ 10-Q,\27\ 10-
QSB,\28\ 10-K,\29\ 10-KSB \30\ and 20-F.\31\ Finally, we are amending
Forms SB-2,\32\ S-1,\33\ S-3,\34\ S-4 \35\ and S-11 \36\ under the
Securities Act of 1933,\37\ Forms N-

1A,\38\ N-2,\39\ and N-3 \40\ under the Securities Act and the
Investment Company Act of 1940,\41\ and Form N-CSR \42\ under the
Investment Company Act and the Exchange Act.
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    \1\ 17 CFR 229.201 and 17 CFR 228.201.
    \2\ 17 CFR 229.306 and 17 CFR 228.306.
    \3\ 17 CFR 229.401 and 17 CFR 228.401.
    \4\ 17 CFR 229.402 and 17 CFR 228.402.
    \5\ 17 CFR 229.403 and 17 CFR 228.403.
    \6\ 17 CFR 229.404 and 17 CFR 228.404.
    \7\ 17 CFR 229.10 et seq.
    \8\ 17 CFR 228.10 et seq.
    \9\ 17 CFR 229.601.
    \10\ 17 CFR 229.1107.
    \11\ 17 CFR 229.1100 et seq.
    \12\ 17 CFR 232.304.
    \13\ 17 CFR 232.10 et seq.
    \14\ 17 CFR 245.100.
    \15\ 17 CFR 245.100 et seq.
    \16\ 17 CFR 240.13a-11.
    \17\ 17 CFR 240.14a-3.
    \18\ 17 CFR 240.14a-6.
    \19\ 17 CFR 240.14c-5.
    \20\ 17 CFR 240.15d-11.
    \21\ 17 CFR 240.16b-3.
    \22\ 15 U.S.C. 78a et seq.
    \23\ 17 CFR 240.14a-101.
    \24\ 17 CFR 249.308.
    \25\ 17 CFR 249.210.
    \26\ 17 CFR 249.210b.
    \27\ 17 CFR 249.308a.
    \28\ 17 CFR 249.308b.
    \29\ 17 CFR 249.310.
    \30\ 17 CFR 249.310b.
    \31\ 17 CFR 249.220f.
    \32\ 17 CFR 239.10.
    \33\ 17 CFR 239.11.
    \34\ 17 CFR 239.13.
    \35\ 17 CFR 239.25.
    \36\ 17 CFR 239.18.
    \37\ 15 U.S.C. 77a et seq.
    \38\ 17 CFR 239.15A and 274.11A.
    \39\ 17 CFR 239.14 and 274.11a-1.
    \40\ 17 CFR 239.17a and 274.11b.
    \41\ 15 U.S.C. 80a-1 et seq.
    \42\ 17 CFR 249.331 and 274.128.
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Table of Contents

I. Background and Overview
II. Executive and Director Compensation Disclosure
    A. Options Disclosure
    1. Background
    2. Required Option Disclosures
    a. Tabular Disclosures
    b. Compensation Discussion and Analysis
    i. Timing of Option Grants
    ii. Determination of Exercise Price
    B. Compensation Discussion and Analysis
    1. Intent and Operation of the Compensation Discussion and
Analysis
    2. Instructions to Compensation Discussion and Analysis
    3. ``Filed'' Status of Compensation Discussion and Analysis and
the ``Furnished'' Compensation Committee Report
    4. Retention of the Performance Graph
    C. Compensation Tables
    1. Compensation to Named Executive Officers in the Last Three
Completed Fiscal Years--The Summary Compensation Table and Related
Disclosure
    a. Total Compensation Column
    b. Salary and Bonus Columns
    c. Plan-Based Awards
    i. Stock Awards and Option Awards Columns
    ii. Non-Equity Incentive Plan Compensation Column
    d. Change in Pension Value and Nonqualified Deferred
Compensation Earnings Column
    i. Earnings on Deferred Compensation
    ii. Increase in Pension Value
    e. All Other Compensation Column
    i. Perquisites and Other Personal Benefits
    ii. Additional All Other Compensation Column Items
    f. Captions and Table Layout
    2. Supplemental Grants of Plan-Based Awards Table
    3. Narrative Disclosure to Summary Compensation Table and Grants
of Plan-Based Awards Table
    a. Narrative Description of Additional Material Factors
    b. Request for Additional Comment on Compensation Disclosure for
up to Three Additional Employees
    4. Exercises and Holdings of Previously Awarded Equity
    a. Outstanding Equity Awards at Fiscal Year-End Table
    b. Option Exercises and Stock Vested Table
    5. Post-Employment Compensation
    a. Pension Benefits Table
    b. Nonqualified Deferred Compensation Table
    c. Other Potential Post-Employment Payments
    6. Officers Covered
    a. Named Executive Officers
    b. Identification of Most Highly Compensated Executive Officers;
Dollar Threshold for Disclosure
    7. Interplay of Items 402 and 404
    8. Other Changes
    9. Compensation of Directors
    D. Treatment of Specific Types of Issuers
    1. Small Business Issuers
    2. Foreign Private Issuers
    3. Business Development Companies
    E. Conforming Amendments
III. Revisions to Form 8-K and the Periodic Report Exhibit
Requirements
    A. Items 1.01 and 5.02 of Form 8-K
    1. Item 1.01--Entry into a Material Definitive Agreement
    2. Item 5.02--Departure of Directors or Certain Officers;
Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers
    B. Extension of Limited Safe Harbor under Section 10(b) and Rule
10b-5 to Item 5.02(e) of Form 8-K and Exclusion of Item 5.02(e) from
Form S-3 Eligibility Requirements
    C. General Instruction D to Form 8-K
    D. Foreign Private Issuers
IV. Beneficial Ownership Disclosure
V. Certain Relationships and Related Transactions Disclosure
    A. Transactions with Related Persons
    1. Broad Principle for Disclosure
    a. Indebtedness
    b. Definitions
    2. Disclosure Requirements
    3. Exceptions
    B. Procedures for Approval of Related Person Transactions
    C. Promoters and Control Persons
    D. Corporate Governance Disclosure
    E. Treatment of Specific Types of Issuers
    1. Small Business Issuers
    2. Foreign Private Issuers
    3. Registered Investment Companies
    F. Conforming Amendments
    1. Regulation Blackout Trading Restriction
    2. Rule 16b-3 Non-Employee Director Definition
    3. Other Conforming Amendments
VI. Plain English Disclosure
VII. Transition
VIII. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections
    C. Summary of Comment Letters and Revisions to Proposals
    D. Revisions to Paperwork Reduction Act Burden Estimates
    1. Securities Act Registration Statements, Exchange Act
Registration Statements, Exchange Act Annual Reports, Proxy
Statements and Information Statements
    2. Exchange Act Current Reports
IX. Cost-Benefit Analysis
    A. Background
    B. Summary of Amendments
    C. Benefits
    D. Costs
X. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
XI. Final Regulatory Flexibility Act Analysis
    A. Need for the Rules and Amendments
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Rules and Amendments
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Agency Action to Minimize Effect on Small Entities
XII. Statutory Authority and Text of the Amendments

I. Background and Overview

    On January 27, 2006, we proposed revisions to our rules governing
disclosure of executive compensation, director compensation, related
party transactions, director independence and other corporate
governance matters, current reporting regarding compensation
arrangements and beneficial ownership.\43\ We received over 20,000
comment letters in response to our proposals. In general, commenters
supported the proposals and their objectives. We are adopting the rules
and amendments substantially as proposed, with certain modifications to
address a number of points that commenters raised.
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    \43\ Executive Compensation and Related Party Disclosure,
Release No. 33-8655 (Jan. 27, 2006) [71 FR 6542] (the ``Proposing
Release'').
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    The amendments to the compensation disclosure rules are intended to
provide investors with a clearer and more complete picture of
compensation to principal executive officers, principal financial
officers, the other highest paid executive officers and directors.
Closely related to executive officer and director compensation is the
participation by executive officers, directors, significant
shareholders and other related persons in financial transactions and
relationships with the company. We are also adopting revisions to our
disclosure rules regarding related party transactions and director
independence and board committee functions.
    Finally, some compensation arrangements must be disclosed under our
rules relating to current reports on Form 8-K. Accordingly, we are
reorganizing and more appropriately focusing our requirements on the
type of compensation information that should be disclosed on a real-
time basis.
    Since the enactment of the Securities Act and the Exchange Act,\44\
the

Commission has on a number of occasions explored the best methods for
communicating clear, concise and meaningful information about executive
and director compensation and relationships with the company.\45\ The
Commission also has had to reconsider executive and director
compensation disclosure requirements in light of changing trends in
executive compensation. Most recently, in 1992, the Commission adopted
amendments to the disclosure rules that eschewed a mostly narrative
disclosure approach adopted in 1983 in favor of formatted tables that
captured all compensation, while categorizing the various elements of
compensation and promoting comparability from year to year and from
company to company.\46\
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    \44\ Initially, disclosure requirements regarding executive and
director compensation were set forth in Schedule A to the Securities
Act and Section 12(b) of the Exchange Act, which list the type of
information to be included in Securities Act and Exchange Act
registration statements. Item 14 of Schedule A called for disclosure
of the ``remuneration, paid or estimated to be paid, by the issuer
or its predecessor, directly or indirectly, during the past year and
ensuing year to (a) the directors or persons performing similar
functions, and (b) its officers and other persons, naming them
wherever such remuneration exceeded $25,000 during any such year.''
Section 12(b) of the Exchange Act as enacted required disclosure of
``(D) the directors, officers, and underwriters, and each security
holder of record holding more than 10 per centum of any class of any
equity security of the issuer (other than an exempted security),
their remuneration and their interests in the securities of, and
their material contracts with, the issuer and any person directly or
indirectly controlling or controlled by, or under direct or indirect
common control with, the issuer;'' and ``(E) remuneration to others
than directors and officers exceeding $20,000 per annum.''
    \45\ In 1938, the Commission promulgated its first executive and
director compensation disclosure rules for proxy statements. Release
No. 34-1823 (Aug. 11, 1938) [3 FR 1991]. At different times
thereafter, the Commission has adopted rules mandating narrative,
tabular, or combinations of narrative and tabular disclosure as the
best method for presenting compensation disclosure in a manner that
is clear and useful to investors. See, e.g., Release No. 34-3347
(Dec. 18, 1942) [7 FR 10653] (introducing first tabular disclosure);
Release No. 34-4775 (Dec. 11, 1952) [17 FR 11431] (introducing
separate table for pensions and deferred remuneration); Uniform and
Integrated Reporting Requirements: Management Remuneration, Release
No. 33-6003 (Dec. 4, 1978) [43 FR 58151] (the ``1978 Release'')
(expanding tabular disclosure to cover all forms of compensation);
and Disclosure of Executive Compensation, Release No. 33-6486 (Sept.
23, 1983) [48 FR 44467] (the ``1983 Release'') (limiting tabular
disclosure to cash remuneration).
    \46\ Executive Compensation Disclosure, Release No. 33-6962
(Oct. 16, 1992) [57 FR 48126] (the ``1992 Release''); See also
Executive Compensation Disclosure; Securityholder Lists and Mailing
Requests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010] (the
``1993 Release''), at Section II.
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    We believe this tabular approach remains a sound basis for
disclosure. However, especially in light of the complexity of and
variations in compensation programs, the very formatted nature of those
rules has resulted in too many cases in disclosure that does not inform
investors adequately as to all elements of compensation. In those cases
investors may lack material information that we believe they should
receive.
    We are thus today adopting an approach that builds on the strengths
of the requirements adopted in 1992 rather than discarding them.
However, today's amendments do represent a thorough rethinking of the
rules in place prior to these amendments, combining a broader-based
tabular presentation with improved narrative disclosure supplementing
the tables. This approach will promote clarity and completeness of
numerical information through an improved tabular presentation,
continue to provide the ability to make comparisons using tables, and
call for material qualitative information regarding the manner and
context in which compensation is awarded and earned.
    The amendments that we publish today require that all elements of
compensation must be disclosed. We also have sought to structure the
revised requirements sufficiently broadly so that they will continue to
operate effectively as new forms of compensation are developed in the
future.
    Under the amendments, compensation disclosure will now begin with a
narrative providing a general overview. Much like the overview that we
have encouraged companies to provide with their Management's Discussion
and Analysis of Financial Condition and Results of Operations
(MD&A),\47\ the new Compensation Discussion and Analysis calls for a
discussion and analysis of the material factors underlying compensation
policies and decisions reflected in the data presented in the tables.
This overview addresses in one place these factors with respect to both
the separate elements of executive compensation and executive
compensation as a whole. We are adopting the overview substantially as
proposed, but, in response to comments, we are requiring a separate
report of the compensation committee similar to the report required of
the audit committee,\48\ which will be considered furnished and not
filed.\49\
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    \47\ Item 303 of Regulation S-K [17 CFR 229.303]. See also
Commission Guidance Regarding Management's Discussion and Analysis
of Financial Condition and Results of Operations, Release No. 33-
8350 (Dec. 19, 2003) [68 FR 75055], at Section III.A.
    \48\ The Audit Committee Report, required by Item 306 of
Regulations S-B [17 CFR 228.306] and S-K [17 CFR 229.306] prior to
these amendments, will now be required by Item 407(d) of Regulations
S-B and S-K.
    \49\ The Compensation Committee Report that we adopt today is
not deemed to be ``soliciting material'' or to be ``filed'' with the
Commission or subject to Regulation 14A or 14C [17 CFR 240.14a-1 et
seq. or 240.14c-1 et seq.], other than as specified, or to the
liabilities of Section 18 of the Exchange Act [15 U.S.C. 78r],
except to the extent a company specifically requests that the report
be treated as filed or as soliciting material or specifically
incorporates it by reference into a filing under the Securities Act
or the Exchange Act, other than by incorporating by reference the
report from a proxy or information statement into the Form 10-K.
Instructions 1 and 2 to Item 407(e)(5).
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    Following the Compensation Discussion and Analysis, we have
organized detailed disclosure of executive compensation into three
broad categories:
     Compensation with respect to the last fiscal year (and the
two preceding fiscal years), as reflected in an amended Summary
Compensation Table that presents compensation paid currently or
deferred (including options, restricted stock and similar grants) and
compensation consisting of current earnings or awards that are part of
a plan, and as supplemented by a table providing back-up information
for certain data in the Summary Compensation Table;
     Holdings of equity-related interests that relate to
compensation or are potential sources of future gains, with a focus on
compensation-related equity interests that were awarded in prior years
and are ``at risk,'' whether or not these interests are in-the-money,
as well as recent realization on these interests, such as through
vesting of restricted stock or the exercise of options and similar
instruments; and
     Retirement and other post-employment compensation,
including retirement and deferred compensation plans, other retirement
benefits and other post-employment benefits, such as those payable in
the event of a change in control.
    We are requiring improved tabular disclosure for each of the above
three categories and appropriate narrative disclosure that provides
material information necessary to an understanding of the information
presented in the individual tables.\50\ We have made some modifications
from the proposal in response to comments.
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    \50\ This narrative disclosure, together with the Compensation
Discussion and Analysis noted above, will replace the narrative
discussion that was required in the Board Compensation Report on
Executive Compensation prior to these amendments. The narrative
disclosure, along with the rest of the amended executive officer and
director compensation disclosure, other than the new Compensation
Committee Report, will be company disclosure filed with the
Commission.
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    In Release No. 33-8735, published elsewhere in the proposed rules
section of this issue of the Federal Register and for which comments
are due on or before October 23, 2006, we also solicit additional
comments regarding the proposed disclosure requirement of the total
compensation and job description of up to an additional three most
highly compensated employees who are not

executive officers or directors but who earn more than the named
executive officers. In particular, we have specific requests for
comment as to whether the proposal should be modified to apply only to
large accelerated filers who would disclose the total compensation for
the most recent fiscal year and a description of the job position for
each of their three most highly compensated employees whose total
compensation is greater than any of the named executive officers,
whether or not such persons are executive officers. Under this
approach, employees who have no responsibility for significant policy
decisions within either the company, a significant subsidiary or a
principal business unit, division, or function, would be excluded from
the determination of the three most highly compensated employees and no
disclosure regarding them would be required.
    Finally, we are adopting a director compensation table that is
similar to the amended Summary Compensation Table.\51\
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    \51\ We had proposed similar amendments, which we did not act
on, regarding director compensation in 1995. Streamlining and
Consolidation of Executive and Director Compensation Disclosure,
Release No. 33-7184 (Aug. 6, 1995) [60 FR 35633] (the ``1995
Release''), at Section I.B.
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    We also highlight in the release that the principles-based
disclosure rules we are adopting today, including but not limited to
the Compensation Discussion and Analysis section, may require
disclosure of various aspects of a company's use of options in
compensating its executives and directors, including any programs,
plans or practices a company may have with regard to the timing or
dating of option grants.
    We are also modifying, as proposed, some of the Form 8-K
requirements regarding compensation. Form 8-K requires disclosure
within four business days of the entry into, amendment of, and
termination of, material definitive agreements that are entered into
outside of the ordinary course of business. Under our definition of
material contracts in Item 601 of Regulation S-K for the purposes of
determining what exhibits are required to be filed, many agreements
regarding executive compensation are deemed to be material agreements
entered into outside the ordinary course. When, in 2004, for purposes
of consistency, we looked to this definition for use in the Form 8-K
requirements, we incorporated all of these executive compensation
agreements into the Form 8-K disclosure requirements. Therefore, many
agreements regarding executive compensation, including some not related
to named executive officers, have been required to be disclosed on Form
8-K within four business days of the applicable triggering event.
Consistent with our intent that Form 8-K capture only events that are
unquestionably or presumptively material to investors, we are today
amending the Form 8-K requirements substantially as proposed.
    We believe that executive and director compensation is closely
related to financial transactions and relationships involving companies
and their directors, executive officers and significant shareholders
and respective immediate family members. Disclosure requirements
regarding these matters historically have been interconnected, given
that relationships among these parties and the company can include
transactions that involve compensation or analogous features. Such
disclosure also represents material information in evaluating the
overall relationship with a company's executive officers and directors.
Further, this disclosure provides material information regarding the
independence of directors. The related party transaction disclosure
requirements were adopted piecemeal over the years and were combined
into one disclosure requirement beginning in 1982.\52\ In light of many
developments since then, including the increasing focus on corporate
governance and director independence, we believe it is necessary to
revise our requirements. Today's amendments update, clarify and
somewhat expand the related party transaction disclosure requirements.
The amendments fold into the disclosure requirements for related party
transactions what had been a separate disclosure requirement regarding
indebtedness of management and directors.\53\ Further, we are adopting
a requirement that calls for a narrative explanation of the
independence status of directors under a company's director
independence policies. We intend this requirement to be consistent with
recent significant changes to the listing standards of the nation's
principal securities trading markets.\54\ We also are consolidating
this and other corporate governance disclosure requirements regarding
director independence and board committees, including new disclosure
requirements about the compensation committee, into a single expanded
disclosure item.\55\
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    \52\ Disclosure of Certain Relationships and Transactions
Involving Management, Release No. 33-6441 (Dec. 2, 1982) [47 FR
55661] (the ``1982 Release'').
    \53\ Prior to these amendments, related party transactions were
disclosed under Item 404(a) of Regulations S-K and S-B, while
indebtedness was separately required to be disclosed under Item
404(c) of Regulation S-K.
    \54\ See, e.g., NASD and NYSE Rulemaking: Relating to Corporate
Governance, Release No. 34-48745 (Nov. 4, 2003) [68 FR 64154] (the
``NASD and NYSE Listing Standards Release''). This new requirement
will replace the disclosure requirement about director relationships
that could affect independence specified in Item 404(b) of
Regulation S-K prior to these amendments.
    \55\ New Item 407 of Regulations S-K and S-B.
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    In order to ensure that these amended requirements result in
disclosure that is clear, concise and understandable for investors, we
are adding Rules 13a-20 and 15d-20 under the Exchange Act to require
that most of the disclosure provided in response to the amended items
be presented in plain English. This extends the plain English
requirements currently applicable to portions of registration
statements under the Securities Act to the disclosure required under
the items that we have amended, which impose requirements for Exchange
Act reports and proxy or information statements incorporated by
reference into those reports.
    Finally, we are amending our beneficial ownership disclosure
requirements as proposed to require disclosure of shares pledged by
named executive officers, directors and director nominees, as well as
directors' qualifying shares.\56\
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    \56\ Item 403(b) of Regulations S-K and S-B.
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II. Executive and Director Compensation Disclosure

    Executive and director compensation disclosure has been required
since 1933, and the Commission has had disclosure rules in this area
applicable to proxy statements since 1938. In 1992, the Commission
proposed and adopted substantially revised rules that embody our
current requirements.\57\ In doing so, the Commission moved away from
narrative disclosure and back to using tables that permit comparability
from year to year and from company to company. As we noted in the
Proposing Release, although the reasoning behind this approach remains
fundamentally sound, significant changes are appropriate. Much of the
concern with the tables adopted in 1992 had also been their strength:
they were highly formatted and rigid.\58\ Thus, information not
specifically called for in the tables had sometimes not been provided.
For example, the highly formatted and specific approach had led some to

suggest that items that did not fit squarely within a ``box'' specified
by the rules need not have been disclosed.\59\ As another example,
because the tables did not call for a single figure for total
compensation, that information had generally not been provided prior to
today's amendments, although there had been considerable commentary
indicating that a single total figure is high on the list of
information that some investors wish to have. To preserve the strengths
of the former approach and build on them, we are taking several steps
in adopting amendments to Item 402,\60\ substantially as we proposed:
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    \57\ 1992 Release.
    \58\ See, e.g., Council of Institutional Investors' Discussion
Paper on Executive Pay Disclosure, Executive Compensation
Disclosure: How it Works Now, How It Can Be Improved, at 11
(available at http://www.cii.org/site_files/pdfs/CII%20pay%20primer%20edited.pdf
).

    \59\ For examples, see, e.g., The Corporate Counsel (Sept.-Oct.
2005) at 6-7; The Corporate Counsel (Sept.-Oct. 2004) at 7; but see
Alan L. Beller, Director, Division of Corporation Finance, U.S.
Securities and Exchange Commission, Remarks Before Conference of the
NASPP, The Corporate Counsel and the Corporate Executive (Oct. 20,
2004), available at http://www.sec.gov/news/speech/spch102004alb.htm.

    \60\ The discussion that follows focuses on amendments to Item
402 of Regulation S-K, with Section II.D.1. explaining the different
amendments to Item 402 of Regulation S-B. References throughout the
following discussion are to Items of Regulation S-K, unless
otherwise indicated.
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     First, we are retaining the tabular approach to provide
clarity and comparability while improving the tabular disclosure
requirements;
     Second, we are confirming that all elements of
compensation must be included in the tables;
     Third, we are providing a format for the amended Summary
Compensation Table that requires disclosure of a single figure for
total compensation; and
     Finally, we are requiring narrative disclosure comprising
both a general discussion and analysis of compensation and specific
material information regarding tabular items where necessary to an
understanding of the tabular disclosure.

A. Options Disclosure

1. Background
    Many companies use stock options to compensate their employees,
including executives. In a simple stock option, a company may grant an
employee the right to purchase a specified number of shares of the
company's stock at a specific price, called the exercise price and
usually set as the market price of the company's stock on the grant
date. While some options require no future service from the employee,
most include vesting provisions, such that the employee does not earn
the option unless he remains employed by the company for a specified
period of service. Often a company will grant a specific number of
options that will then vest proportionately in staggered increments
over a set time period. For example, if the grant vests at a rate of
20% per year for five years, the option for the last 20% is earned by
the employee's provision of five years of services. Most options become
exercisable upon vesting and remain exercisable until their stated
expiration. Generally, upon termination of the employment relationship,
however, an employee loses unvested options, and has a limited term
(e.g., 90 days) to exercise vested options.\61\
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    \61\ More complex stock options can include provisions that
alter the terms of the instrument based on whether performance or
other targets are met.
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    Options have most often been issued ``at-the-money''--i.e., with an
exercise price equal to the market price of the underlying stock at the
date of grant--but may also be issued either ``in-the-money''--i.e.,
with an exercise price below the market price of the underlying stock
at the date of grant--or ``out-of-the-money''--i.e., with an exercise
price above the market price of the underlying stock at the date of
grant. An option holder benefits only when the company's stock price is
above the exercise price when the employee exercises the option. Hence,
setting a lower exercise price increases the value of the option.
    As some commentators have observed, using options for compensation
purposes may have advantages. These commentators point out that, unlike
salary and bonus compensation, stock option compensation does not
require the payment of cash by the company, and therefore can be
particularly attractive to companies for which cash is a scarce
resource. Stock option compensation may also provide an incentive for
employees to work to increase the company's stock price. Additionally,
some companies may be able to use stock option compensation to help
retain employees, because an employee with unvested in-the-money
options forfeits their potential value if he leaves the company's
employ.
    At the same time, other commentators stress that option
compensation is not without costs and disadvantages. Options granted to
employees, if ultimately exercised with the resulting issuance of the
underlying stock, give rise to a dilution of the interests in the
company held by existing stockholders. Options that are not in-the-
money may not provide a retention benefit, and some managers believe
that options that fall out-of-the-money (or are ``underwater'') not
only fail to motivate employees but, in fact, can result in poor
employee morale and resultant turnover, especially at companies where
option compensation is an important component of total compensation. In
addition, options with shorter vesting periods or longer term options
approaching their vesting dates may provide incentives to employees to
focus on increasing the company's stock price in the short term rather
than working toward achieving longer term business goals and objectives
that would enable the company to achieve and sustain future success.
    The Commission does not seek to encourage or discourage the use of
stock options or any other particular form of executive compensation.
The federal securities laws, however, do require full and fair
disclosure of compensation information to the extent material or
required by Commission rule.
2. Required Option Disclosures
    The Commission acknowledged the importance to investors of proper
disclosure of executives' option compensation throughout the Proposing
Release. The existing body of rules regarding disclosure of executive
stock option grants, however, has not previously contained a line-item
requirement with respect to information regarding programs, plans or
practices concerning the selection of stock option grant dates or
exercise prices.\62\ The disclosure we proposed in January, along with
related disclosure we also adopt today, should provide investors with
more information about option compensation.\63\ We have summarized

below the various provisions of the rules that we adopt today that
relate to options disclosure.\64\
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    \62\ Our existing rules for companies' disclosure do prohibit
material misrepresentations of option grant dates, as well as any
resulting material misstatements of affected financial statements.
Companies are also required under our existing rules to disclose any
material information that may be necessary to make their other
disclosures, in the light of the circumstances under which they are
made, not misleading. See, e.g., Rule 12b-20 under the Exchange Act
[17 CFR 240.12b-20].
    \63\ We note that Exchange Act Rule 16a-3 [17 CFR 240.16a-3]
setsforth the general reporting requirements under Exchange Act
Section 16(a). Prior to August 2002, a number of transactions
between an issuer and its officers or directors--such as the
granting of options--were required to be disclosed following the end
of the fiscal year in which the transaction took place although
individuals could disclose those transactions earlier if they chose
to. In implementing Section 403(a) of the Sarbanes-Oxley Act of
2002, in August 2002, the Commission required immediate disclosure
of these transactions for the first time. As a result, since August
2002, grants, awards and other acquisitions of equity-based
securities from the issuer, including those pursuant to employee
benefit plans (which were previously reportable on an annual basis
on Form 5) have been required to be reported by officers and
directors on Form 4 within two business days. Ownership Reports and
Trading by Officers, Directors and Principal Security Holders,
Release No. 34-46421 (Aug. 27, 2002) [56 FR 56461] at Section II.B.
    \64\ We also note that under our rules regarding disclosure of
director compensation, the concerns and considerations for
disclosure of option timing or dating practices in the executive
compensation realm would also apply when the recipients of the stock
option grants are directors of the company.
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a. Tabular Disclosures
    The following disclosures are required in the tables we adopt
today. These provisions are discussed in more detail later in the
section relating to each particular table.
     As proposed and adopted, grants of stock options will be
disclosed in the Summary Compensation Table at their fair value on the
date of grant, as determined under FAS 123R. By basing the executive
compensation disclosure on the full grant date fair value computed in
accordance with FAS 123R, companies will give shareholders an accurate
picture of the value of options at the time they are actually granted
to the highest-paid executive officers.\65\
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    \65\ Item 402(c)(2)(vi).
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     A separate table including disclosure of equity awards,
the Grants of Plan-Based Awards Table, requires disclosure of the grant
date as determined pursuant to FAS 123R.\66\ The grant date is
generally considered the day the decision is made to award the option
as long as recipients of the award are notified promptly. Even if the
option's exercise price is set based on trading prices as of an earlier
date or dates, the grant date does not change.
---------------------------------------------------------------------------

    \66\ Item 402(d)(2)(ii) and Item 402(a)(6)(iv).
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     If the exercise price is less than the closing market
price of the underlying security on the date of the grant, a separate,
adjoining column would have to be added to this table showing that
market price on the date of the grant.\67\
---------------------------------------------------------------------------

    \67\ Item 402(d)(2)(vii).
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     If the grant date is different from the date the
compensation committee or full board of directors takes action or is
deemed to take action to grant an option, a separate, adjoining column
would have to be added to this table showing the date the compensation
committee or full board of directors took action or was deemed to take
action to grant the option.\68\
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    \68\ Item 402(d)(2)(ii).
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    Further, if the exercise or base price of an option grant is not
the closing market price per share on the grant date, we require a
description of the methodology for determining the exercise or base
price.\69\
---------------------------------------------------------------------------

    \69\ Instruction 3 to Item 402(d).
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b. Compensation Discussion and Analysis
    Companies will also be required to address matters relating to
executives' option compensation in the new Compensation Discussion and
Analysis section, particularly as they relate to the timing and pricing
of stock option grants. Without being an exhaustive list, several of
the examples provided in Item 402(b)(2) illustrate how these types of
issues and questions might be covered in a company's disclosure. For
example, Item 402(b)(2)(iv) shows that how the determination is made as
to when awards are granted could be required disclosure. This example
was included in part to note that material information to be disclosed
under Compensation Discussion and Analysis may include the reasons a
company selects particular grant dates for awards, such as for stock
options. Similarly, other examples we provide in Item 402(b)(2)
illustrate how the material information to be disclosed under
Compensation Discussion and Analysis might need to include the methods
a company uses to select the terms of awards, such as the exercise
prices of stock options.
i. Timing of Option Grants
    We understand that some companies grant options in coordination
with the release of material non-public information. If the company had
since the beginning of the last fiscal year, or intends to have during
the current fiscal year, a program, plan or practice to select option
grant dates for executive officers in coordination with the release of
material non-public information, the company should disclose that in
the Compensation Discussion and Analysis section. For example, a
company may grant awards of stock options while it knows of material
non-public information that is likely to result in an increase in its
stock price, such as immediately prior to a significant positive
earnings or product development announcement. Such timing could occur
in at least two ways:
     The company grants options just prior to the release of
material non-public information that is likely to result in an increase
in its stock price (whether the date of that release of material non-
public information is a regular date or otherwise pre-announced, or
not); or
     The company chooses to delay the release of material non-
public information that is likely to result in an increase in its stock
price until after a stock option grant date.
    Although the facts would be slightly different, a company also may
coordinate its grant of stock options with the release of negative
material non-public information. Again, such timing could occur in at
least two ways:
     The company delays granting options until after the
release of material non-public information that is likely to result in
a decrease in its stock price; or
     The company chooses to release material non-public
information that is likely to result in a decrease in its stock price
prior to an upcoming stock option grant.
    The Commission does not express a view as to whether or not a
company may or may not have valid and sufficient reasons for such
timing of option grants, consistent with a company's own business
purposes. Some commentators have expressed the view that following
these practices may enable a company to receive more benefit from the
incentive or retention effect of options because recipients may value
options granted in this manner more highly or because doing so provides
an immediate incentive for employee retention because an employee who
leaves the company forfeits the potential value of unvested, in-the-
money options. Other commentators believe that timing option grants in
connection with the release of material non-public information may
unfairly benefit executives and employees.
    Regardless of the reasons a company or its board may have, the
Commission believes that in many circumstances the existence of a
program, plan or practice to time the grant of stock options to
executives in coordination with material non-public information would
be material to investors and thus should be fully disclosed in keeping
with the rules we adopt today. Consistent with principles-based
disclosure, companies should consider their own facts and circumstances
and include all relevant material information in their corresponding
disclosures.\70\ If the company has such a program, plan or practice,
the company should disclose that the board of directors or compensation
committee may grant options at times when the board or committee is in
possession of material non-public information. Companies might also
need to consider disclosure about how the board or compensation
committee takes such information into

account when determining whether and in what amount to make those
grants.
---------------------------------------------------------------------------

    \70\ Relevant material information might include disclosure in
response to the examples in Item 402(b)(2) in the Compensation
Discussion and Analysis section, discussed below.
---------------------------------------------------------------------------

    Although it is not an exhaustive list, there are some elements and
questions about option timing to which we believe a company should pay
particular attention when drafting the appropriate corresponding
disclosure.
     Does a company have any program, plan or practice to time
option grants to its executives in coordination with the release of
material non-public information?
     How does any program, plan or practice to time option
grants to executives fit in the context of the company's program, plan
or practice, if any, with regard to option grants to employees more
generally?
     What was the role of the compensation committee in
approving and administering such a program, plan or practice? How did
the board or compensation committee take such information into account
when determining whether and in what amount to make those grants? Did
the compensation committee delegate any aspect of the actual
administration of a program, plan or practice to any other persons?
     What was the role of executive officers in the company's
program, plan or practice of option timing?
     Does the company set the grant date of its stock option
grants to new executives in coordination with the release of material
non-public information?
     Does a company plan to time, or has it timed, its release
of material non-public information for the purpose of affecting the
value of executive compensation?
    Disclosure would also be required where a company has not
previously disclosed a program, plan or practice of timing option
grants, but has adopted such a program, plan or practice or has made
one or more decisions since the beginning of the past fiscal year to
time option grants.
ii. Determination of Exercise Price
    Separate from these timing issues, some companies may have a
program, plan or practice of awarding options and setting the exercise
price based on the stock's price on a date other than the actual grant
date. Such a program, plan or practice would also require disclosure,
including, as appropriate, in the tables described in II.A.2.a above
and in the Compensation Discussion and Analysis section. Again, as with
the timing matters discussed above, companies should consider their own
facts and circumstances and include all relevant material information
in their corresponding disclosures.
    Similar to such a practice of setting the exercise price based on a
date other than the actual grant date, some companies have provisions
in their option plans or have followed practices for determining the
exercise price by using formulas based on average prices (or lowest
prices) of the company's stock in a period preceding, surrounding or
following the grant date. In some cases these provisions may increase
the likelihood that recipients will be granted in-the-money options. As
these provisions or practices relate to a material term of a stock
option grant, they should be discussed in the Compensation Discussion
and Analysis section.

B. Compensation Discussion and Analysis

    We are adopting a new Compensation Discussion and Analysis
section.\71\ As we proposed, this section will be an overview providing
narrative disclosure that puts into context the compensation disclosure
provided elsewhere.\72\ Commenters generally supported the new
Compensation Discussion and Analysis section.\73\ This overview will
explain material elements of the particular company's compensation for
named executive officers by answering the following questions:
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    \71\ Item 402(b). In addition to the narrative Compensation
Discussion and Analysis, we are amending the rules so that, to the
extent material, additional narrative disclosure will be provided
following certain tables to supplement the disclosure in the table.
See, e.g., Section II.C.3.a., discussing the narrative disclosure to
the Summary Compensation Table and the Grants of Plan-Based Awards
Table. We are also requiring disclosure of compensation committee
procedures and processes as well as information regarding
compensation committee interlocks and insider participation in
compensation decisions as part of new Item 407 of Regulation S-K.
See Section V.D., below.
    \72\ See Jeffrey N. Gordon, Executive Compensation: What's the
Problem, What's the Remedy? The Case for Compensation Discussion and
Analysis, 30 J. Corp. L. 695 (2005) (arguing that the Commission
should require proxy disclosure that includes a ``Compensation
Discussion and Analysis'' section that collects and summarizes all
the compensation elements for senior executives, providing a
``bottom line assessment'' of the different compensation elements
and an explanation as to why the board thinks such compensation is
warranted).
    \73\ See, e.g., letters from British Columbia Investment
Management Corporation (``BCIMC''); Leo J. Burns (``L. Burns''); CFA
Centre for Financial Market Integrity, dated April 13, 2006 (``CFA
Centre 1''); Chamber of Commerce of the United States of America
(``Chamber of Commerce''); Board of Fire and Police Pension
Commissioners of the City of Los Angeles (``F&P Pension Board'');
F&C Asset Management; Foley & Lardner LLP (``Foley''); Hermes
Investment Management Limited; Governance for Owners USA, Inc.
(``Governance for Owners''); International Association of Machinists
and Aerospace Workers (``IAM''); Board of Trustees of the
International Brotherhood of Electrical Workers Pension Benefit Fund
(``IBEW PBF''); International Brotherhood of Teamsters
(``Teamsters''); Remuneration Committee of the International
Corporate Governance Network; Investment Company Institute
(``ICI''); Institutional Shareholder Services (``ISS''); jointly,
California Public Employees' Retirement System, California State
Teachers' Retirement System, Co-operative Insurance Society--UK, F&C
Asset Management--UK, Illinois State Board of Investment, London
Pensions Fund Authority--UK, New York State Common Retirement Fund,
New York City Pension Funds, Ontario Teachers' Pension Plan, PGGM
Investments--Netherlands, Public Sector and Commonwealth Super (PSS/
CSS)--Australia, RAILPEN Investments--UK, State Board of
Administration (SBA) of Florida, Stichting Pensioenfonds ABP--
Netherlands, UniSuper Limited--Australia, and Universities
Superannuation Scheme--UK (``Institutional Investors Group''); The
Pension Boards--United Church of Christ (``PB-UCC''); State of
Wisconsin Investment Board; and T. Rowe Price Associates, Inc.
---------------------------------------------------------------------------

     What are the objectives of the company's compensation
programs?
     What is the compensation program designed to reward?
     What is each element of compensation?
     Why does the company choose to pay each element?
     How does the company determine the amount (and, where
applicable, the formula) for each element?
     How do each element and the company's decisions regarding
that element fit into the company's overall compensation objectives and
affect decisions regarding other elements?
    As proposed, the second question also asked what the compensation
program is designed not to reward. Commenters stated that compensation
committees often may not consider this objective in developing
compensation programs, expressing concern that the question could
generate potentially limitless disclosure that would not add meaning to
disclosure of what the compensation program is designed to award.\74\
In response to this concern, we have not included this question in the
rule as adopted.
---------------------------------------------------------------------------

    \74\ See, e.g., letters from American Bar Association, Committee
on Federal Regulation of Securities (``ABA''); Committee on
Securities Regulation of the New York City Bar (``NYCBA''); and
WorldatWork (``WorldatWork'').
---------------------------------------------------------------------------

1. Intent and Operation of the Compensation Discussion and Analysis
    The purpose of the Compensation Discussion and Analysis disclosure
is to provide material information about the compensation objectives
and policies for named executive officers without resorting to
boilerplate disclosure. The Compensation Discussion and Analysis is
intended to put into perspective for investors the numbers and
narrative that follow it.

    As described in the Proposing Release and as adopted, the
Compensation Discussion and Analysis requirement is principles-based,
in that it identifies the disclosure concept and provides several
illustrative examples. Some commenters suggested that a principles-
based approach would be better served without examples, on the theory
that ``laundry lists'' would lead to boilerplate.\75\ Other commenters
expressed the opposite view--that more specific description of required
disclosure topics would more effectively elicit meaningful
disclosure.\76\
---------------------------------------------------------------------------

    \75\ See, e.g., letter from Curt Kollar (``C. Kollar'').
    \76\ See, e.g., letters from CFA Centre 1 and Hewitt Associates
LLC (``Hewitt'').
---------------------------------------------------------------------------

    As we explained in the Proposing Release, overall we designed the
proposals to state the requirements sufficiently broadly to continue
operating effectively as future forms of compensation develop, without
suggesting that items that do not fit squarely within a ``box''
specified by the rules need not be disclosed. We believe that the
adopted principles-based Compensation Discussion and Analysis,
utilizing a disclosure concept along with illustrative examples,
strikes an appropriate balance that will effectively elicit meaningful
disclosure, even as new compensation vehicles develop over time.
    We wish to emphasize, however, that the application of a particular
example must be tailored to the company and that the examples are non-
exclusive. We believe using illustrative examples helps to identify the
types of disclosure that may be applicable. A company must assess the
materiality to investors of the information that is identified by the
example in light of the particular situation of the company. We also
note that in some cases an example may not be material to a particular
company, and therefore no disclosure would be required. Because the
scope of the Compensation Discussion and Analysis is intended to be
comprehensive, a company must address the compensation policies that it
applies, even if not included among the examples. The Compensation
Discussion and Analysis should reflect the individual circumstances of
a company and should avoid boilerplate disclosure.
    We have adopted, substantially as proposed, the following examples
of the issues that would potentially be appropriate for the company to
address in given cases in the Compensation Discussion and Analysis:
     Policies for allocating between long-term and currently
paid out compensation;
     Policies for allocating between cash and non-cash
compensation, and among different forms of non-cash compensation;
     For long-term compensation, the basis for allocating
compensation to each different form of award;
     How the determination is made as to when awards are
granted, including awards of equity-based compensation such as options;
     What specific items of corporate performance are taken
into account in setting compensation policies and making compensation
decisions;
     How specific elements of compensation are structured and
implemented to reflect these items of the company's performance and the
executive's individual performance;
     The factors considered in decisions to increase or
decrease compensation materially;
     How compensation or amounts realizable from prior
compensation are considered in setting other elements of compensation
(e.g., how gains from prior option or stock awards are considered in
setting retirement benefits);
     The impact of accounting and tax treatments of a
particular form of compensation;
     The company's equity or other security ownership
requirements or guidelines and any company policies regarding hedging
the economic risk of such ownership;
     Whether the company engaged in any benchmarking of total
compensation or any material element of compensation, identifying the
benchmark and, if applicable, its components (including component
companies); and
     The role of executive officers in the compensation
process.
    At the suggestion of a commenter,\77\ we have expanded the example
addressing how specific forms of compensation are structured to reflect
company performance to also address implementation. We have made a
similar change with regard to the example regarding the executive's
individual performance.\78\ As adopted, this example includes not only
whether discretion can be exercised (either to award compensation
absent attainment of the relevant performance goal(s) or to reduce or
increase the size of any award or payout), as proposed, but also
whether such discretion has been exercised. By doing this, we move to
the Compensation Discussion and Analysis overview an example of a
material factor that had been proposed for the narrative disclosure
that follows the Summary Compensation Table,\79\ and expand its scope
so that it is no longer limited to non-equity incentive plans. Because
of the policy significance of decisions to waive or modify performance
goals, we believe that they are more appropriately discussed in the
Compensation Discussion and Analysis.
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    \77\ See letter from ABA.
    \78\ We have also reordered this example, so it is clearer that
the items of company performance referenced are the ones noted in
the immediately preceding example.
    \79\ This example had been proposed as Item 402(f)(1)(iv).
---------------------------------------------------------------------------

    As discussed in Section II.A. above, a company's policies, programs
and practices regarding the award of stock options and other equity-
based instruments to compensate executives may require disclosure and
discussion in the Compensation Discussion and Analysis. As with all
disclosure in the Compensation Discussion and Analysis, a company must
evaluate the specific facts and circumstances of its grants of options
and equity-based instruments and provide such disclosure if it supplies
material information about the company's compensation objectives and
policies for named executive officers.
    Further in response to comment,\80\ we have revised the example
addressing how the determination is made as to when awards are granted
so that it is not limited to equity-based compensation, as was
proposed, but we clarify in the rule as adopted that it would include
equity-based compensation, such as stock options.\81\ Regarding the
example noting the impact of accounting and tax treatments of a
particular form of compensation, some commenters urged that companies
be required to continue to disclose their Internal Revenue Code Section
162(m) policy.\82\ The adoption of this example should not be construed
to eliminate this discussion. Rather, this example indicates more
broadly that any tax or accounting treatment, including but not limited
to Section 162(m), that is material to the company's compensation
policy or decisions with respect to a named

executive officer is covered by Compensation Discussion and Analysis.
Tax consequences to the named executive officers, as well as tax
consequences to the company, may fall within this example.
---------------------------------------------------------------------------

    \80\ See letter from ABA.
    \81\ This example is discussed in more detail above in Section
II.A., the discussion of stock option disclosure.
    \82\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co., Inc., dated March 9, 2006 (``Frederic W. Cook & Co.'');
Thomas Rogers; and WorldatWork. The Commission has construed the
Board Compensation Committee Report on Executive Compensation (which
had been required to be furnished by Item 402(k) prior to these
amendments) to require discussion of this policy. 1993 Release at
Section III.
---------------------------------------------------------------------------

    In addition, we have followed commenters' recommendations to add
the following specific examples addressing additional factors:
     Company policies and decisions regarding the adjustment or
recovery of awards or payments if the relevant company performance
measures upon which they are based are restated or otherwise adjusted
in a manner that would reduce the size of an award or payment; \83\ and
---------------------------------------------------------------------------

    \83\ See, e.g., letters from Amalgamated Bank Long-View Funds
(``Amalgamated''); CFA Centre 1; and Council of Institutional
Investors, dated March 29, 2006 (``CII''). Section 304 of the
Sarbanes-Oxley Act of 2002 [codified at 15 U.S.C. 7243] provides
that if a company is required to prepare an accounting restatement
due to the material noncompliance of the issuer, as a result of
misconduct, with any financial reporting requirement under the
securities laws, the principal executive officer and principal
financial officer of the company shall reimburse the company for any
bonus or other incentive-based or equity-based compensation received
by that person from the company during the 12-month period following
the first public issuance or filing with the Commission (whichever
first occurs) of the financial document embodying such financial
reporting requirement, and any profits realized from the sale of
securities of the company during that 12-month period. This example
would not necessarily be limited to policies covering only
situations contemplated by Section 304.
---------------------------------------------------------------------------

     The basis for selecting particular events as triggering
payment with respect to post-termination agreements (e.g., the
rationale for providing a single trigger for payment in the event of a
change-in-control).\84\
---------------------------------------------------------------------------

    \84\ See letter from Anonymous, dated April 10, 2006.
---------------------------------------------------------------------------

    Commenters also requested clarification as to whether Compensation
Discussion and Analysis is limited to compensation for the last fiscal
year, like the former Board Compensation Committee Report on Executive
Compensation that was required prior to these amendments.\85\ While the
Compensation Discussion and Analysis must cover this subject, the
Compensation Discussion and Analysis may also require discussion of
post-termination compensation arrangements, on-going compensation
arrangements, and policies that the company will apply on a going-
forward basis.\86\ Compensation Discussion and Analysis should also
cover actions regarding executive compensation that were taken after
the last fiscal year's end. Actions that should be addressed might
include, as examples only, the adoption or implementation of new or
modified programs and policies or specific decisions that were made or
steps that were taken that could affect a fair understanding of the
named executive officer's compensation for the last fiscal year.
Moreover, in some situations it may be necessary to discuss prior years
in order to give context to the disclosure provided.
---------------------------------------------------------------------------

    \85\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; and Mercer Human Resource Consulting, Inc., dated April 10,
2006 (``Mercer'').
    \86\ Forward looking information in the Compensation Discussion
and Analysis will fall within the safe harbors for disclosure of
such information. See, e.g., Securities Act Section 27A [15 U.S.C.
77z-2] and Exchange Act Section 21E [15 U.S.C. 78u-5].
---------------------------------------------------------------------------

    The Compensation Discussion and Analysis should be sufficiently
precise to identify material differences in compensation policies and
decisions for individual named executive officers where appropriate.
Where policies or decisions are materially similar, officers can be
grouped together. Where, however, the policy or decisions for a named
executive officer are materially different, for example in the case of
a principal executive officer, his or her compensation should be
discussed separately.
2. Instructions to Compensation Discussion and Analysis
    We are adopting instructions to make clear that the Compensation
Discussion and Analysis should focus on the material principles
underlying the company's executive compensation policies and decisions,
and the most important factors relevant to analysis of those policies
and decisions, without using boilerplate language or repeating the more
detailed information set forth in the tables and related narrative
disclosures that follow. The instructions also provide that the
Compensation Discussion and Analysis should concern the information
contained in the tables and otherwise disclosed.\87\ Because this
section is intended to provide meaningful analysis, it may specifically
refer to the tabular or other disclosures where helpful to make the
discussion more robust. A commenter raised a concern that the
instruction not to repeat information set forth in the other
disclosures might somehow limit the disclosure made in Compensation
Discussion and Analysis.\88\ We have revisited this instruction, which
is intended to encourage analysis and to forestall mere repetition of
the information in the tables, to provide that repetition and
boilerplate language should be avoided. The instruction does not
prohibit or discourage discussion of that specific information.
---------------------------------------------------------------------------

    \87\ Instruction 2 to Item 402(b).
    \88\ See letter from ABA.
---------------------------------------------------------------------------

    We are adopting an instruction to make clear that, as was the case
with the Board Compensation Committee Report on Executive Compensation
required prior to the adoption of these amendments, companies are not
required to disclose target levels with respect to specific
quantitative or qualitative performance-related factors considered by
the compensation committee or the board of directors, or any other
factors or criteria involving confidential trade secrets or
confidential commercial or financial information, the disclosure of
which would result in competitive harm to the company.\89\ Some
commenters objected that this instruction would impair the quality of
information disclosed by making it difficult to assess the link between
pay and company performance, and suggested that competitive harm would
be mitigated if disclosure were required on an after-the-fact basis,
after the performance related to the award is measured.\90\ Different
commenters stated that performance targets often are based on
confidential, competitively sensitive business plans, and that
requiring disclosure could encourage the use of more generic targets
that could hinder a company's goal of pay-for-performance.\91\ Other
commenters observed that companies rarely use a performance metric for
a single year or plan cycle, but select measures because of their
relevance to the company's business strategy over several years, so
that even disclosure on an after-the-fact basis could reveal
proprietary business information that would be useful to
competitors.\92\ Having considered these comments, we remain persuaded
that this disclosure, even on an after-the-fact basis could pose
significant risk of competitive harm and we are therefore not requiring
it in those cases in which the factors or criteria considered involve
confidential trade secrets or confidential commercial or financial
information, the disclosure of which would result in competitive harm
to the company.
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    \89\ Instruction 4 to Item 402(b). Prior to these amendments,
Instruction 2 to Item 402(k) had provided a similar exclusion for
this type of information.
    \90\ See, e.g., letters from American Federation of Labor and
Congress of Industrial Organizations, dated April 5, 2006 (``AFL-
CIO''); CII; Governance for Owners; IAM; and The Honorable Barney
Frank, United States Representative (MA).
    \91\ See, e.g., letter from Sullivan & Cromwell LLP
(``Sullivan'').
    \92\ See, e.g., letter from Mercer.
---------------------------------------------------------------------------

    As noted in the Proposing Release, in applying this instruction, we
intend the standard for companies to use in making a determination that
this information

does not have to be disclosed to be the same one that would apply when
companies request confidential treatment of confidential trade secrets
or confidential commercial or financial information that otherwise is
required to be disclosed in registration statements, periodic reports
and other documents filed with us.\93\ Under this approach, to the
extent a performance target has otherwise been disclosed publicly, non-
disclosure pursuant to this instruction would not be permitted. To make
these standards clearer and respond to commenters' concerns that
companies may exploit the instruction to exclude information in
inappropriate circumstances, we are revising this instruction as
adopted to clearly apply the same standard as for confidential
treatment requests. Companies will not be required, however, to submit
confidential treatment requests in order to rely on the
instruction.\94\ To mitigate commenters' concerns that omission of
specific performance targets would impair the quality of disclosure,
the instruction requires additional disclosure regarding the
significance of the undisclosed target. Specifically, if the company
uses target levels for specific quantitative or qualitative
performance-related factors, or other factors or criteria that it does
not disclose in reliance on the instruction, the company must discuss
how difficult it will be for the executive or how likely it will be for
the company to achieve the undisclosed target levels or other factors.
In addition, as discussed below, the Compensation Discussion and
Analysis will be considered soliciting material and will be filed with
the Commission. This disclosure will be subject to review by the
Commission and its staff. Therefore, if a company uses target levels
that otherwise would need to be disclosed but does not disclose them in
reliance on the instruction, the company may be required to demonstrate
to the Commission or its staff that the particular factors or criteria
involve confidential trade secrets or confidential commercial or
financial information and why disclosure would result in competitive
harm. If the Commission or its staff ultimately determines that a
company has not met these standards, then the company will be required
to disclose publicly the factors or criteria used. In response to a
commenter's concern,\95\ we have also added an instruction to clarify
that disclosure of a target level that applies a non-GAAP financial
measure will not be subject to the general rules regarding disclosure
of non-GAAP financial measures but the company must disclose how the
number is calculated from the audited financial statements.\96\
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    \93\ See Securities Act Rule 406 [17 CFR 230.406], Exchange Act
Rule 24b-2 [17 CFR 240.24b-2], Exemption 4 of the Freedom of
Information Act [5 U.S.C. 552(b)(4)], and Rule 80(b)(4) promulgated
under the Freedom of Information Act [17 CFR 200.80(b)(4)].
    \94\ While the instruction adopted today, like the instruction
that it replaces, does not require a company to seek confidential
treatment under the procedures in Securities Act Rule 406 and
Exchange Act Rule 24b-2 with regard to the exclusion of the
information from the disclosure provided in response to this item,
the standards specified in Securities Act Rule 406, Exchange Act
Rule 24b-2, Exemption 4 of the Freedom of Information Act and Rule
80(b)(4) promulgated under the Freedom of Information Act still
apply and are subject to review and comment by the staff of the
Commission.
    \95\ See letter from ABA.
    \96\ Instruction 5 to Item 402(b). The non-GAAP financial
measure provisions are specified in Regulation G [17 CFR 244.100-
102], Item 10(e) of Regulation S-K [17 CFR 229.10] and Item 10(h) of
Regulation S-B [17 CFR 228.10].
---------------------------------------------------------------------------

    One commenter stated that the Compensation Discussion and Analysis
of a new public company should be permitted to be a prospective-only
discussion.\97\ While we agree the most significant disclosure in that
situation may be future plans, we do not believe a prospective-only
discussion is appropriate. Instead, companies may emphasize the new
plans or policies.
---------------------------------------------------------------------------

    \97\ See letter from ABA.
---------------------------------------------------------------------------

3. ``Filed'' Status of Compensation Discussion and Analysis and the
``Furnished'' Compensation Committee Report
    We proposed that the Compensation Discussion and Analysis would be
considered a part of the proxy statement and any other filing in which
it was included. Unlike the Board Compensation Committee Report on
Executive Compensation that was required prior to these amendments, we
proposed that the Compensation Discussion and Analysis would be
soliciting material and would be filed with the Commission. Therefore,
it would be subject to Regulation 14A or 14C and to the liabilities of
Section 18 of the Exchange Act.\98\ In addition, to the extent that the
Compensation Discussion and Analysis and any of the other disclosure
regarding executive officer and director compensation or other matters
are included or incorporated by reference into a periodic report, the
disclosure would be covered by the certifications that principal
executive officers and principal financial officers are required to
make under the Sarbanes-Oxley Act of 2002.\99\ Likewise, a company's
disclosure controls and procedures \100\ apply to the preparation of
the company's proxy statement and Form 10-K, including the Compensation
Discussion and Analysis.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78r.
    \99\ Exchange Act Rules 13a-14 [17 CFR 240.13a-14] and 15d-14
[17 CFR 240.15d-14]. See also Certification of Disclosure in
Companies' Quarterly and Annual Reports, Release No. 34-46427 (Aug.
29, 2002) [67 FR 57275], at n. 35 (the ``Certification Release'')
(stating that ``the certification in the annual report on Form 10-K
or 10-KSB would be considered to cover the Part III information in a
registrant's proxy or information statement as and when filed'').
    \100\ Exchange Act Rules 13a-15 [17 CFR 240.13a-15] and 15d-15
[17 CFR 240.15d-15].
---------------------------------------------------------------------------

    We noted in the Proposing Release that in adopting the rules that
have applied since 1992, the Commission took into account comments that
the Board Compensation Committee Report on Executive Compensation
should be furnished rather than filed to allow for more open and robust
discussion in the reports.\101\ The Board Compensation Committee
Reports on Executive Compensation that were provided prior to today's
amendments in general did not suggest that this treatment resulted in
such discussion, nor the more transparent disclosure that the comments
suggested would result.\102\ Further, we noted that we believe that it
is appropriate for companies to take responsibility for disclosure
involving board matters as with other disclosure.
---------------------------------------------------------------------------

    \101\ 1992 Release, at Section II.H.
    \102\ See also Martin D. Mobley, Compensation Committee Reports
Post-Sarbanes-Oxley: Unimproved Disclosure for Executive
Compensation Policies and Practices, 2005 Colum. Bus. L. Rev. 111
(2005).
---------------------------------------------------------------------------

    Some commenters supported the proposal to have the Compensation
Discussion and Analysis filed, noting among other things that filing
should lead to increased accuracy and better disclosure.\103\ Other
commenters objected to this treatment, claiming that certification by
principal executive officers and principal financial officers with
regard to the disclosure included in the annual report on Form 10-K,
including particularly the Compensation Discussion and Analysis, would
inappropriately insert these officers into the compensation

committee's deliberative process, potentially calling into question the
committee's independence.\104\ Further, many commenters expressed the
view that the Compensation Discussion and Analysis should, in effect,
be the report of the compensation committee, submitted under the names
of its members, for which they should be accountable.\105\
---------------------------------------------------------------------------

    \103\ See, e.g., letters from AFL-CIO; American Federation of
State, County and Municipal Employees; California Public Employees'
Retirement System (``CalPERS''); Paul Hodgson, Senior Research
Associate, Executive and Board Compensation, the Corporate Library
(``Corporate Library''); Connecticut Retirement Plans and Trust
Funds, dated April 10, 2006 (``CRPTF''); Southwestern Pennsylvania
and Western Maryland Area Teamsters and Employers Pension Fund
(``Teamsters PA/MD''); Teamsters Local 671 Health Services and
Insurance Plan (``Teamsters Local 671''); Walden Asset Management
(``Walden''); and Western PA Teamsters & Employers Welfare Fund
(``Western PA Teamsters Fund'').
    \104\ See, e.g., letters from The Corporate & Securities Law
Committee and the Employment & Labor Law Committee of the
Association of Corporate Counsel (``ACC''); Compass Bancshares, Inc.
(``Compass Bancshares''); National Association of Manufacturers
(``NAM''); Peabody Energy Corporation (``Peabody Energy''); and
WorldatWork.
    \105\ See, e.g., letters from Jesse Brill, Chair of
CompensationStandards.com and Chair of the National Association of
Stock Plan Professionals, dated March 1, 2006 (``J. Brill 1''); CFA
Centre 1; CRPTF; Frederic W. Cook & Co.; and Hewitt.
---------------------------------------------------------------------------

    Some of these objections may reflect a misconception of the purpose
of the Compensation Discussion and Analysis. Although the Compensation
Discussion and Analysis discusses company compensation policies and
decisions, the Compensation Discussion and Analysis does not address
the deliberations of the compensation committee, and is not a report of
that committee. Consequently, in certifying the Compensation Discussion
and Analysis, principal executive officers and principal financial
officers will not need to certify as to the compensation committee
deliberations.
    However, in response to concerns of commenters that compensation
committees should continue to be focused on the executive compensation
disclosure process, we are adopting a Compensation Committee Report
similar to the Audit Committee Report.\106\ Drawing on commenters'
suggestions for a new Compensation Committee Report,\107\ the rules we
adopt today require the compensation committee to state whether:
---------------------------------------------------------------------------

    \106\ We are moving the audit committee report previously
required by Item 306 of Regulations S-K and S-B to Item 407(d) under
the amendments adopted today. See Section V.D., below.
    \107\ See, e.g., letters from J. Brill 1; California State
Teachers' Retirement System (``CalSTRS''); CFA Centre 1; and
Professor William J. Heisler.
---------------------------------------------------------------------------

     The compensation committee has reviewed and discussed the
Compensation Discussion and Analysis with management; and
     Based on the review and discussions, the compensation
committee recommended to the board of directors that the Compensation
Discussion and Analysis be included in the company's annual report on
Form 10-K and, as applicable, the company's proxy or information
statement.
    Unlike the Audit Committee Report, the Compensation Committee
Report will be required to be included or incorporated by reference
into the company's annual report on Form 10-K, so that it is presented
along with the Compensation Discussion and Analysis when that
disclosure is provided in the Form 10-K or incorporated by reference
from a proxy or information statement.\108\ Like the Audit Committee
Report, the Compensation Committee Report will only be required one
time during any fiscal year.\109\ The name of each member of the
company's compensation committee (or, in the absence of a compensation
committee, the persons performing equivalent functions or the entire
board of directors) must appear below the disclosure.\110\ This report
will be ``furnished'' rather than ``filed.'' The principal executive
officer and principal financial officer will be able to look to the
Compensation Committee Report in providing their certifications
required under Exchange Act Rules 13a-14 and 15d-14.\111\
---------------------------------------------------------------------------

    \108\ The audit committee report is only required in a company
proxy or information statement relating to an annual meeting of
security holders at which directors are to be elected (or special
meeting or written consents in lieu of such meeting). See
Instruction 3 to Item 407(d).
    \109\ Instruction 3 to Item 407(e)(5). The audit committee
instruction is specified in Instruction 2 to Item 407(d).
    \110\ Item 407(e)(5)(ii).
    \111\ We note that one commenter suggested that the Compensation
Discussion and Analysis should not be required of companies that
have only registered the offer and sale of debt securities. See
letter from Financial Security Assurance Holdings Ltd. The
Compensation Discussion and Analysis is intended to put into
perspective for investors the numbers and narrative that follow it.
This section will provide a broader discussion than just that of the
relationship of compensation to the performance of the company as
reflected by stock price. Therefore, we believe it is appropriate
for all companies that are not small business issuers or foreign
private issuers filing on forms specified for their use to include
the information.
---------------------------------------------------------------------------

4. Retention of the Performance Graph
    In light of the Compensation Discussion and Analysis requirement,
we proposed to eliminate both the Board Compensation Committee Report
on Executive Compensation and the Performance Graph.\112\ The report
and the graph were intended to be related and to show the relationship,
if any, between compensation and corporate performance, as reflected by
stock price. The rules we adopt today eliminate the Board Compensation
Committee Report on Executive Compensation, as we proposed, in favor of
the more comprehensive Compensation Discussion and Analysis and the new
Compensation Committee Report, as described immediately above.\113\
---------------------------------------------------------------------------

    \112\ Prior to these amendments, the Board Compensation
Committee Report on Executive Compensation had been required by Item
402(k) and the Performance Graph had been required by Item 402(l).
    \113\ Section II.B.3.
---------------------------------------------------------------------------

    Given the widespread availability of stock performance information
about companies, industries and indexes through business-related Web
sites or similar sources, we proposed to eliminate the requirement for
the Performance Graph in the belief that it was outdated, particularly
since the disclosure in the Compensation Discussion and Analysis
regarding the elements of corporate performance that a given company's
policies might reach is intended to allow broader discussion than just
that of the relationship of compensation to the performance of the
company as reflected by stock price. Many commenters objected to
eliminating the Performance Graph, however, stating that it provides an
easily accessible visual comparison of a company's performance relative
to its peers and the market, and provides a standardized source for
this type of information.\114\ In light of the significance of this
disclosure to a broad spectrum of commenters, we have decided to retain
the Performance Graph in the amendments we adopt today.
---------------------------------------------------------------------------

    \114\ See, e.g., letters from CalSTRS; CFA Centre 1; CII; IUE-
CWA Pension Fund and 401(k) Plan (``IUE-CWA''); John W. Hamm; NYCBA;
Standard Life Investments Limited (``Standard Life''); and Vivient
Consulting LLC.
---------------------------------------------------------------------------

    However, we remain of the view that the Performance Graph should
not be presented as part of executive compensation disclosure. In
particular, as noted above, the disclosure in the Compensation
Discussion and Analysis regarding the elements of corporate performance
that a given company's policies consider is intended to encourage
broader discussion than just that of the relationship of executive
compensation to the performance of the company as reflected by stock
price. Presenting the Performance Graph as compensation disclosure may
weaken this objective. Accordingly, we have decided to retain the
requirements for the Performance Graph, but have moved them to the
disclosure item entitled ``Market Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters.'' \115\ As

retained, the Performance Graph will continue to be ``furnished''
rather than ``filed.'' The Performance Graph will be required only in
the company's annual report to security holders that accompanies or
precedes a proxy or information statement relating to an annual meeting
of security holders at which directors are to be elected (or special
meeting or written consents in lieu of such meeting), and will not be
deemed to be soliciting material under the proxy rules or incorporated
by reference into any filing except to the extent that the company
specifically incorporates it.\116\
---------------------------------------------------------------------------

    \115\ New Item 201(e) of Regulation S-K [17 CFR 229.201(e)] will
require the Performance Graph. Consistent with our belief that the
Performance Graph should not be linked to the compensation
disclosure, we have not retained the portion of the language that
was included in Instruction 4 to Item 402(l) prior to these
amendments, which conditioned that other performance measures in
addition to total return may be included in the graph only so long
as the compensation committee (or persons performing equivalent
functions or the entire board if there is no such committee)
provided a description of the link between the measure and the level
of compensation in the Board Compensation Committee Report on
Executive Compensation. As a result, companies may include other
performance measures, such as return on average common shareholders'
equity, so long as the meaning of any such measures is clear from
the Performance Graph and any related legend or other disclosure.
    \116\ Instructions 7 and 8 to Item 201(e). A ``small business
issuer'' as defined in Regulation S-B, is not required to provide
the Performance Graph. Instruction 6 to Item 201(e). Because Nasdaq
has registered as a national securities exchange under Section 6 of
the Exchange Act [15 U.S.C. 78f], the former separate reference to
``Nasdaq market'' is not retained. See Release No. 34-53128 (Jan.
13, 2006) ordering that the application of The NASDAQ Stock Market
LLC for registration as a national securities exchange be granted.
We also adopt a conforming revision to Rules 304(d) and (e) of
Regulation S-T [17 CFR 232.304(d) and (e)], and we make technical
revisions to those rules to correctly reference Item 22(b)(7)(ii) of
Form N-1A and to eliminate the references to ``prospectuses.''
---------------------------------------------------------------------------

C. Compensation Tables

    To enhance the benefits of the tabular approach to eliciting
compensation disclosure,\117\ we proposed to reorganize and streamline
the tables to provide a clearer and more logical picture of total
compensation and its elements for named executive officers. We are
adopting reorganized compensation tables and related narrative
disclosure that cover three broad categories:
---------------------------------------------------------------------------

    \117\ The tabular disclosure and related narrative disclosure
under amended Item 402 applies, as it did prior to today's
amendments, to named executive officers, with amended Item 402(k)
applying to directors, as described in Section II.C.9. below. As
discussed below in Section II.C.6.a., we are adopting certain
changes to the definition of named executive officer.
---------------------------------------------------------------------------

    1. Compensation with respect to the last fiscal year (and the two
preceding fiscal years), as reflected in a revised Summary Compensation
Table that presents compensation paid currently or deferred (including
options, restricted stock and similar grants) and compensation
consisting of current earnings or awards that are part of a plan, and
as supplemented by one table providing back-up information for certain
data in the Summary Compensation Table; \118\
    2. Holdings of equity-based interests that relate to compensation
or are potential sources of future compensation, focusing on
compensation-related equity-based interests that were awarded in prior
years \119\ and are ``at risk,'' as well as recent realization on these
interests, such as through vesting of restricted stock or the exercise
of options and similar instruments; \120\ and
---------------------------------------------------------------------------

    \118\ The table supplementing the Summary Compensation Table is
the Grants of Plan-Based Awards Table, discussed below in Section
II.C.2., which combines into a single table the disclosure of the
proposed Grants of Performance-Based Awards Table and the proposed
Grants of All Other Equity Awards Table. The accompanying narrative
disclosure requirement is discussed below in Section II.C.3.a.
    \119\ Under the disclosure rules as adopted, these interests
will be disclosed as current compensation for those prior years.
    \120\ Information regarding holdings of such equity-based
interests that relate to compensation will be disclosed in the
Outstanding Equity Awards at Fiscal Year-End Table, discussed below
in Section II.C.4.a. Information regarding realization on holdings
of equity-based interests will be required in the Option Exercises
and Stock Vested Table discussed below in Section II.C.4.b.
---------------------------------------------------------------------------

    3. Retirement and other post-employment compensation, including
retirement and deferred compensation plans, other retirement benefits
and other post-employment benefits, such as those payable in the event
of a change in control.\121\
---------------------------------------------------------------------------

    \121\ Disclosure regarding retirement and post-employment
compensation is required in the Pension Benefits Table, discussed
below in Section II.C.5.a., the Nonqualified Deferred Compensation
Table, discussed below in Section II.C.5.b., and the narrative
disclosure requirement for other potential post-employment payments
discussed below in Section II.C.5.c.
---------------------------------------------------------------------------

    Reorganizing the tables along these themes should help investors
understand how compensation components relate to each other. At the
same time, we are retaining the ability for investors to use the tables
to compare compensation from year to year and from company to company.
    As we noted in the Proposing Release, by more clearly organizing
the compensation tables to explain how the elements relate to each
other, we may in some situations be requiring disclosure of both
amounts earned (or potentially earned) and amounts subsequently paid
out. This approach raises the possible perception of ``double
counting'' some elements of compensation in multiple tables. However, a
particular item of compensation only appears once in the Summary
Compensation Table. In order to explain the item of compensation, it
may also appear in one or more of the other tables. We believe the
possible perception of double disclosure is outweighed by the clearer
and more complete picture the disclosure in the additional tables will
provide to investors. We strongly encourage companies to use the
narrative following the tables (and where appropriate the Compensation
Discussion and Analysis) to explain how disclosures relate to each
other in their particular circumstances.
    Commenters stated their general support for the format and
presentation of the proposed tables.\122\ We are adopting the tables
substantially as proposed with some revisions, as noted below, in
response to comments.
---------------------------------------------------------------------------

    \122\ See, e.g., letters from CFA Centre 1; jointly, Jennifer
Clowes, Lindsey Erskine, Kendra Freeck and Kapri Malesich; F&P
Pension Board; IAM; IBEW PBF; Plumbers & Pipefitters National
Pension Fund; and Standard Life.
---------------------------------------------------------------------------

1. Compensation to Named Executive Officers in the Last Three Completed
Fiscal Years--The Summary Compensation Table and Related Disclosure
    Under today's amendments, the Summary Compensation Table continues
to serve as the principal disclosure vehicle regarding executive
compensation. This table, as amended, shows the named executive
officers' compensation for each of the last three years, whether or not
actually paid out. Consistent with the requirements prior to today's
amendments, the amended Summary Compensation Table continues to require
disclosure of compensation for each of the company's last three
completed fiscal years.\123\
---------------------------------------------------------------------------

    \123\ Prior to today's amendments, an instruction to Item 402(b)
permitted the exclusion of information for fiscal years prior to the
last completed fiscal year if the company was not a reporting
company pursuant to Exchange Act Section 13(a) or 15(d) at any time
during that year, unless the company previously was required to
provide information for any such year in response to a Commission
filing requirement. This instruction has been retained and
redesignated as Instruction 1 to Item 402(c) in the amended rule.
---------------------------------------------------------------------------

    As we proposed, the amendments add disclosure of a figure
representing total compensation, as reflected in other columns of the
Summary Compensation Table, and simplify the presentation from that of
the table prior to these amendments. As described in greater detail
below, the amendments also provide for a supplemental table disclosing
additional information about grants of plan-based awards. Narrative
disclosure will follow the two tables, providing disclosure of material
information necessary to an understanding of the information disclosed
in the tables.

                                                               Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Change in
                                                                                pension value
  Name and                                                                                Non-equity         and         All other
 principal        Year         Salary  ($)     Bonus  ($)     Stock awards    Option awards  incentive plan   nonqualified   compensation    Total  ($)
  position                                                         ($)             ($)        compensation      deferred         ($)
                                                                                ($)        compensation
                                                                                earnings  ($)
(a)          (b)             (c)             (d)             (e)             (f)             (g)             (h)            (i)            (j)
--------------------------------------------------------------------------------------------------------------------------------------------------------
PEO \124\

--------------------------------------------------------------------------------------------------------------------------------------------------------
PFO \125\

--------------------------------------------------------------------------------------------------------------------------------------------------------
A

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

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

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

a. Total Compensation Column
    We are modifying the Summary Compensation Table to provide a
clearer picture of total compensation. As we proposed, we are requiring
that all compensation be disclosed in dollars and that a total of all
compensation be provided.\126\ The new ``Total'' column aggregates the
total dollar value of each form of compensation quantified in the other
columns (revised columns (c) through (i)). This column responds to
concerns that investors, analysts and other users of Item 402
disclosure have not been able to compute aggregate amounts of
compensation using the disclosure in the table as specified prior to
these amendments in a manner that was accurate or comparable across
years or companies. Many commenters expressed their support for the
proposal to include a Total column.\127\
---------------------------------------------------------------------------

    \124\ ``PEO'' refers to principal executive officer. See Section
II.C.6.a. below for a description of the proposed named executive
officers for whom compensation disclosure is required.
    \125\ ``PFO'' refers to principal financial officer.
    \126\ Instruction 2 to Item 402(c) (requiring all compensation
values in the Summary Compensation Table to be reported in dollars
and rounded to the nearest dollar). Prior to today's amendments,
some stock-based compensation was disclosed in per share increments
rather than in dollar amounts. Instruction 2 to Item 402(c) further
requires, where compensation was paid or received in a different
currency, footnote disclosure identifying that currency and
describing the rate and methodology used for conversion to dollars.
    \127\ See, e.g., letters from CFA Centre 1; CII; Frederic W.
Cook & Co.; ISS; Standard Life; and Walden. In addition, over 20,000
form letters from individuals specifically supported this proposal.
See Letter Type A, available at http://www.sec.gov/rules/proposed/s70306.shtml
.

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

    Other commenters expressed concerns that, as proposed, the total
number was an amalgam of dissimilar types of compensation.\128\ These
concerns centered on the mix of compensation elements reported in the
Summary Compensation Table being measured at different times and having
different valuation methods, so that a Total column in effect would
combine ``apples'' with ``oranges.'' \129\ To address this issue, some
commenters suggested dividing the Total column into two separate
columns reporting Total Earned Compensation and Total Contingent
Compensation.\130\ Others recommended two separate Summary Compensation
Tables--one for compensation that had been earned or realized and
another for compensation that remained contingent or an
opportunity.\131\
---------------------------------------------------------------------------

    \128\ See, e.g., letters from Fenwick & West LLP (``Fenwick'');
Chamber of Commerce; and Hodak Value Advisors, LLC (``Hodak Value
Advisors'').
    \129\ See, e.g., letters from Caterpillar Inc. and Corporate
Library.
    \130\ See, e.g., letters from Business Roundtable (``BRT'') and
Mercer.
    \131\ See, e.g., letters from Eli Lilly and Company (``Eli
Lilly''); Hewitt; Society of Corporate Secretaries & Governance
Professionals (``SCSGP''); Towers Perrin, dated April 10, 2006
(``Towers Perrin''); and Watson Wyatt Worldwide (``Watson Wyatt'').
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the Summary Compensation
Table is designed to disclose all compensation. Each element of
compensation is only disclosed once in the Summary Compensation Table,
although it may also be disclosed in some of the other tables. We
realize that the timing of when particular items of compensation are
disclosed in the Summary Compensation Table varies depending on the
form of the compensation.\132\ Given the various forms and complexities
of compensation and the different periods they may be designed to
relate to,\133\ it is unavoidable that the timing of disclosure may
vary from element to element in this table.\134\
---------------------------------------------------------------------------

    \132\ Compensation is generally calculated in a manner that
reflects the cost of the compensation to the company and its
shareholders.
    \133\ See, e.g., letter from ABA (noting that option grants made
early in the year may be viewed by the compensation committee
primarily as an award for the prior year's performance or as an
incentive for future performance).
    \134\ The approach as to the timing of disclosure that we
proposed and that we adopt today is the same approach that has been
used in the Summary Compensation Table since it was first proposed
in 1992. See Executive Compensation Disclosure, Release No. 33-6940
(June 23, 1992) [57 FR 29582] (noting that the Summary Compensation
Table will ``provide shareholders a concise, comprehensive overview
of compensation awarded, earned or paid in the reporting period'').

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

    We note that some commenters were particularly concerned that non-
equity incentive plan awards are reported when earned, while equity
incentive plan awards are reported based on grant date value when
awarded.\135\ No single accepted standard for measuring non-equity
incentive plan awards at grant date currently exists. Some commenters
nonetheless suggested that we require grant date fair value estimates
of non-equity incentive plan awards in the Summary Compensation
Table.\136\ We do not believe it is appropriate at this time for us to
develop such a standard expressly for compensation disclosure purposes.
Nevertheless, we believe that the Summary Compensation Table that we
adopt today, including a total of all of the various elements
presented, provides meaningful disclosure to investors and allows for
comparability between companies and within a company.
---------------------------------------------------------------------------

    \135\ See, e.g., letters from ACC; Amalgamated; BDO Seidman, LLP
(``BDO Seidman''); CII; IUE-CWA; and Mercer.
    \136\ See, e.g., letters from CII; IUE-CWA; and CRPTF.
Information about the amounts that could be earned under non-equity
incentive plans is required to be disclosed in the Grants of Plan-
Based Awards Table when such awards are granted.
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    However, in response to comments, we have created a separate column
for the annual change in actuarial value of defined benefit plans and
earnings on nonqualified deferred compensation.\137\ As proposed, these
compensation elements would have been included in the aggregate amount
reported in the All Other Compensation column. We believe that
presenting these items in a separate column will permit investors and
other users of the Summary Compensation Table to readily identify
elements included in the Total column that may relate principally to
longevity of service. These items will not be used to determine the
officers included in the table.\138\
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    \137\ See Section II.C.1.d.i. below, which describes a
modification of the proposed Summary Compensation Table disclosure
of nonqualified deferred compensation earnings to present only the
above-market or preferential portion in this table.
    \138\ See Section II.C.6.b. below describing how in response to
commenters this column is excluded from total compensation for the
purpose of identifying named executive officers.
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    We proposed that the new column disclosing total compensation would
appear as the first column providing compensation information.\139\
Some commenters suggested moving this column to the right of the table,
so that it would follow--rather than precede--the relevant component
numbers.\140\ In response to these comments, we have moved the Total
column to the final column in the table.
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    \139\ Columns (a) and (b) specify the executive officer and the
year in question.
    \140\ See,e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; and SCSGP.
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b. Salary and Bonus Columns
    The first columns providing compensation information that we are
requiring are the salary and bonus columns (columns (c) and (d),
respectively), which are retained substantially in their previous form.
However, we are adopting some changes, as proposed, that will give an
investor a clearer picture of the total amount earned.
    As we proposed, compensation that is earned, but for which payment
will be deferred, must be included in the salary, bonus or other
column, as appropriate. A new instruction, applicable to the entire
Summary Compensation Table, provides that if receipt of any amount of
compensation is currently payable but has been deferred for any reason,
the amount so deferred must be included in the appropriate column.\141\
This treatment is no longer limited to salary and bonus, as it was
prior to these amendments, and under the amended rules this treatment
applies regardless of the reason for the deferral.\142\
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    \141\ Instruction 4 to Item 402(c).
    \142\ Prior to the amendments, this requirement was triggered
only if the officer elected the deferral. We are amending this
requirement as we proposed to cover all deferrals, no matter who has
initiated the deferrals.
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    We also proposed that the amount so deferred must be disclosed in a
footnote to the applicable column. As described below, the amount
deferred will also generally be reflected as a contribution in the
deferred compensation presentation.\143\ The proposed footnote
disclosure was intended to clarify the extent to which amounts
disclosed in the Nonqualified Deferred Compensation Table described
below represent compensation already reported, rather than additional
compensation. Because commenters thought it could lead to potential
double counting, we have not adopted this proposed footnote
requirement.\144\
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    \143\ See Section II.C.5.b., describing the Nonqualified
Deferred Compensation Table. Disclosure of these amounts as
contributions will now be required for nonqualified deferred
compensation plans. This disclosure will not be required for
qualified plans. Nonqualified deferred compensation plans and
arrangements provide for the deferral of compensation that does not
satisfy the minimum coverage, nondiscrimination and other rules that
``qualify'' broad-based plans for favorable tax treatment under the
Internal Revenue Code.
    \144\ See, e.g., letter from WorldatWork. As described in
Section II.C.5.b. below, however, we have adopted the corresponding
footnote proposed for the Nonqualified Deferred Compensation Table.
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    As proposed, we have eliminated the delay that existed under the
former rules where salary or bonus for the most recent fiscal year is
determined following compliance with Item 402 disclosure. Under our new
rules, where salary or bonus cannot be calculated as of the most recent
practicable date, a current report under Item 5.02 of Form 8-K will be
triggered by a payment, decision or other occurrence as a result of
which either of such amounts become calculable in whole or part.\145\
The Form 8-K will include disclosure of the salary or bonus amount and
a new total compensation figure including that salary or bonus amount.
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    \145\ New Item 5.02(f) of Form 8-K and Instruction 1 to Item
402(c)(2)(iii) and (iv). Prior to these amendments, in the event
that such amounts were not determinable at the most recent
practicable date, they were generally reported in the annual report
on Form 10-K or proxy statement for the following fiscal year. We
believe providing the information more quickly is appropriate and
are therefore adopting the use of a current report on Form 8-K.
Instruction 1 to Item 402(c)(2) (iii) and (iv) requires that the
company disclose in a footnote that the salary or bonus is not
calculable through the latest practicable date and the date that the
salary or bonus is expected to be determined. We proposed to include
this requirement in an instruction to proposed paragraph (e) of Item
5.02 of Form 8-K. We are adopting it as a separate paragraph of Item
5.02 in order to make it clearer that it is a separate triggering
event.
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c. Plan-Based Awards
    As we proposed, the next three columns--Stock Awards, Option Awards
and Non-Equity Incentive Plan Compensation--cover plan-based awards.
i. Stock Awards and Option Awards Columns
    As proposed and adopted, the Stock Awards column (column (e))
discloses stock-related awards that derive their value from the
company's equity securities or permit settlement by issuance of the
company's equity securities and, as we have clarified, are thus within
the scope of FAS 123R for financial reporting, such as restricted
stock, restricted stock units, phantom stock, phantom stock units,
common stock equivalent units or other similar instruments that do not
have option-like features.\146\ Valuation is based on the

grant date fair value of the award determined pursuant to FAS 123R for
financial reporting purposes. Stock awards granted pursuant to an
equity incentive plan are also included in this column to ensure
consistent reporting of stock awards and to ensure their inclusion in
the revised Summary Compensation Table.\147\
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    \146\ Generally speaking, a restricted stock award is an award
of stock subject to vesting conditions, such as performance-based
conditions or conditions based on continued employment for a
specified period of time. This type of award is referred to as
``nonvested equity shares'' in FAS 123R. Phantom stock, phantom
stock units, common stock equivalent units and other similar awards
are typically awards where an executive obtains a right to receive
payment in the future of an amount based on the value of a
hypothetical, or notional, amount of shares of common equity (or in
some cases stock based on that value). To the extent that the terms
of phantom stock, phantom stock units, common stock equivalents or
other similar awards include option-like features, the awards will
be required to be included in the Option Awards column. Prior to
these amendments, restricted stock awards were valued in the Summary
Compensation Table by multiplying the closing market price of the
company's unrestricted stock on the date of grant by the number of
shares awarded.
    \147\ Prior to these amendments, these performance-based stock
awards could be reported at the company's election as incentive plan
awards under what was then specified in Instruction 1 to Item
402(b)(2)(iv). Our amendments today eliminate this alternative.
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    Awards of options, stock appreciation rights, and similar equity-
based compensation instruments that have option-like features that, as
we have clarified, are within the scope of FAS 123R, must be disclosed
in the Option Awards column (column (f)) in a manner similar to the
treatment of stock and other equity-based awards under the
amendments.\148\ Instead of the disclosure of the number of securities
underlying the awards as was the case prior to today's amendments, this
column requires disclosure of the grant date fair value of the award as
determined pursuant to FAS 123R. In order to calculate a total dollar
amount of compensation, the value rather than the number of securities
underlying an award must be used. The FAS 123R valuation must be used
whether the award itself is in the form of stock, options or similar
instruments or the award is settled in cash but the amount of payment
is tied to performance of the company's stock.\149\
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    \148\ A stock appreciation right usually gives the executive the
right to receive the value of the increase in the price of a
specified number of shares over a specified period of time. These
awards may be settled in cash or in shares.
    \149\ As proposed, we are eliminating the requirement that had
been specified in Options/SAR Grants in Last Fiscal Year Table under
Item 402(c)(2)(vi) to report the potential realizable value of each
option grant under 5% or 10% increases in value or the present value
of each grant (computed under any option pricing model). These
alternative disclosures are no longer necessary insofar as the grant
date fair value of equity-based awards is included in the Summary
Compensation Table.
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    Under FAS 123R, the compensation cost is initially measured based
on the grant date fair value of an award,\150\ and generally recognized
for financial reporting purposes over the period in which the employee
is required to provide service in exchange for the award (generally the
vesting period). Some commenters suggested that rather than requiring
disclosure of the grant date fair value of equity awards, we should
require a company to disclose just the portion of the award expensed in
the company's financial statements.\151\ These commenters expressed
concerns that disclosing the full grant date fair value would be
inconsistent with the company's financial statements, would overstate
compensation earned related to service rendered for the year, and would
be inconsistent with the presentation of non-equity incentive plan
compensation. Other commenters expressed support for requiring
companies to report the full grant date fair value in the year of the
award because it would provide a more complete representation of
compensation.\152\
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    \150\ Under FAS 123R, the classification of an award as an
equity or liability award is an important aspect of the accounting
because the classification will affect the measurement of
compensation cost. Awards with cash-based settlement, repurchase
features, or other features that do not result in an employee
bearing the risks and rewards normally associated with share
ownership for a specified period of time would be classified as
liability awards under FAS 123R. For an award classified as an
equity award under FAS 123R, the compensation cost recognized is
fixed for a particular award, and absent modification, is not
revised with subsequent changes in market prices or other
assumptions used for purposes of the valuation. In contrast,
liability awards are initially measured at fair value on the grant
date, but for purposes of recognition in financial statement
reporting are then re-measured at each reporting date through the
settlement date under FAS 123R. These re-measurements would not be
the basis for executive compensation disclosure under our amended
rules, unless the award has been modified, as described later in
this release.
    \151\ See, e.g., letters from the SEC Regulations Committee of
the American Institute of Certified Public Accountants (``AICPA'');
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.; Chamber of
Commerce; Computer Sciences Corporation (``Computer Sciences'');
Deloitte & Touche LLP; Ernst & Young LLP (``E&Y''); Fenwick; Foley;
HR Policy Association (``HRPA''); American Bar Association, Joint
Committee on Employee Benefits (``ABA-JCEB''); and KPMG LLP
(``KPMG'').
    \152\ See, e.g., letters from CalPERS; CFA Centre 1; CRPTF; L.
Burns; Governance for Owners; Laborers International Union of North
America; Nancy Lucke Ludgus (``N. Ludgus''); Institutional Investors
Group; State Board of Administration (SBA) of Florida (``SBAF'');
Teamsters Local 671; Teamsters PA/MD; United Church Foundation, Inc.
(``UCF''); Washington State Investment Board (``WSIB''); and Western
PA Teamsters Fund.
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    We are adopting these columns substantially as proposed.\153\ Under
our amendments, the compensation cost calculated as the grant date fair
value will be shown as compensation in the year in which the grant is
made.\154\ As we stated in the Proposing Release, we believe that this
approach is more consistent with the purpose of executive compensation
disclosure. We are adopting an approach that subscribes to the
measurement method of FAS 123R based on grant date fair value, but also
provides for immediate disclosure of compensation. This timing of
disclosure of option awards remains the same as it has been since 1992.
The only change is that the awards are now disclosed in dollars rather
than numbers of units or shares. Disclosing these awards as they are
expensed for financial statement reporting purposes would not mirror
the timing of disclosure of non-equity incentive plan compensation.
While we have imported a financial statement reporting principle to
enable disclosure of compensation costs, executive compensation
disclosure must continue to inform investors of current actions
regarding plan awards--a function that would not be fulfilled applying
financial reporting recognition timing. If a company does not believe
that the full grant date fair value reflects compensation earned,
awarded or paid during a fiscal year, it can provide appropriate
explanatory disclosure in the accompanying narrative section.
Furthermore, disclosing grant date fair value will give investors a
clearer picture of the value of any in-the-money awards. As we
proposed, the number of shares underlying an award and other details
regarding the award must be disclosed in a separate table covering
grants of plan-based awards supplementing the Summary Compensation
Table.\155\ This supplemental table, which combines the disclosure that
would have been required by the proposed Grants of Performance-Based