policies and procedures, and the standards to be applied pursuant to
such policies and procedures;
     The persons or groups of persons on the board of directors
or otherwise who are responsible for applying such policies and
procedures; and
     Whether such policies and procedures are in writing and,
if not, how such policies and procedures are evidenced.
    Item 404(b) requires identification of any transactions required to
be reported under paragraph (a) of Item 404 where the company's
policies and procedures do not require review, approval or ratification
or where such policies and procedures have not been followed.
    One commenter expressed concern that it is not reasonable or
customary for a company's related person transaction policy to extend
to transactions occurring before an individual becomes affiliated with
a company.\466\ In response, we have added an instruction indicating
that disclosure need not be provided pursuant to paragraph (b) of Item
404 regarding any transaction that occurred at a time before the
related person had the relationship that would trigger disclosure under
Item 404(a), if the transaction did not continue after the related
person had that relationship.\467\
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    \466\ See letter from NYCBA.
    \467\ See Instruction to Item 404(b). For example, disclosure
would not be required under Item 404(b) in a company's Form 10-K for
the fiscal year ended December 31, 2005 of a transaction that
occurred in March 2005 between the company and an immediate family
member of a person who later became a director of the company in
August 2005. However, disclosure would be required under Item 404(a)
in this circumstance. This Instruction to Item 404(b) does not apply
to transactions of significant shareholders of the company, because
Item 404(a) does not require disclosure of transactions with
significant shareholders that are completed before they become
significant shareholders.
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C. Promoters and Control Persons

    As proposed and adopted, the amendments require a company to
provide disclosure regarding the identity of promoters and its
transactions with those promoters if the company had a promoter at any
time during the last five fiscal years.\468\ The disclosure will be
required in Securities Act registration statements on Form S-1 or on
Form SB-2 and Exchange Act Form 10 or Form 10-SB. The disclosure
includes:
---------------------------------------------------------------------------

    \468\ Item 404(c).
---------------------------------------------------------------------------

     The names of the promoters;
     The nature and amount of anything of value received by
each promoter from the company and the nature and amount

of any consideration received by the company; and
     Additional information regarding any assets acquired by
the company from a promoter.
    The amendments are consistent with the previous disclosure
requirements regarding promoters. However, prior to these amendments
this disclosure was not required if the company had been organized more
than five years ago, even if the company otherwise had a promoter
within the last five years. Our staff's experience in reviewing
registration statements, especially of smaller companies, suggests that
the more appropriate five-year test for which the disclosure should be
provided relates to the period of time during which the company had a
promoter, as our revision provides, rather than the date of
organization of the company.\469\ We are also requiring the same
disclosure that is required for promoters for any person who acquired
control, or is part of a group that acquired control, of an issuer that
is a shell company.\470\ We are revising the title of this item to
include the term control persons in order to clarify the scope of the
disclosure requirement.
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    \469\ We also adopt as proposed similar revisions to the
disclosure requirement referencing promoters in Item 401(g)(1) of
Regulation S-K. In addition, as proposed our revisions add Form SB-2
to the list of registration statement forms in Item 404 for which
promoter disclosure is required. While this revision updates the
registration statement forms listed in Item 404, it does not change
the promoter disclosure requirement of Form SB-2.
    \470\ Item 404(c)(2). The term ``group'' has the same meaning as
in Exchange Act Rule 13d-5(b)(1) [17 CFR 240.13d-5(b)(1)], that is,
any two or more persons that agree to act together for the purpose
of acquiring, holding, voting or disposing of equity securities of
an issuer. The term ``shell company'' is defined in Securities Act
Rule 405 and Exchange Act Rule 12b-2.
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D. Corporate Governance Disclosure

    We are consolidating our disclosure requirements regarding director
independence and related corporate governance disclosure requirements
under a single disclosure item and updating such disclosure
requirements regarding director independence to reflect our current
requirements and current listing standards.\471\ Prior to these
amendments, Item 404(b) had required disclosure of specific business
relationships between a director or nominee for director and the
company that could bear on the ability of directors and nominees for
director to exercise independent judgment in the performance of their
duties. We proposed to eliminate the disclosure requirement that was
stated under paragraph (b) of Item 404 in favor of more direct
disclosure about the determination of the independence of directors and
nominees for director, including information supplementing the amended
related person transaction disclosure that would permit qualitative
assessment of those independence determinations. While one commenter
suggested that we retain a revised version of paragraph (b) to Item 404
as it was stated prior to these amendments,\472\ we continue to believe
that disclosure focused on the determinations made regarding director
independence is the appropriate approach. The comprehensive director
independence disclosure requirement that we are adopting today
recognizes the significant development of independence requirements
since the disclosure requirements in former paragraph (b) of Item 404
were originally adopted. As directed by the Sarbanes-Oxley Act of 2002,
we adopted a rule requiring national securities exchanges and national
securities associations to adopt listing standards requiring
independent audit committees meeting the standards of our rule.\473\
Further, in 2003 and 2004, we approved amendments to additional listing
standards, including those of the New York Stock Exchange and
Nasdaq,\474\ that imposed specific additional independence standards
for boards of directors, and the compensation and nominating committees
or persons performing similar functions. Each listed company (unless
exempt) determines whether its directors and committee members are
independent based on definitions that it adopts which, at a minimum,
are required to comply with the listing standards applicable to the
company.
---------------------------------------------------------------------------

    \471\ Item 407 of Regulations S-K and S-B. As adopted, Item 407
consolidates corporate governance disclosure requirements located in
several places under our rules and the principal markets' listing
standards, including in particular requirements that had been
specified in Items 306, 401(h), (i) and (j), 402(j) and 404(b) of
Regulation S-K and Item 7 of Schedule 14A under the Exchange Act
prior to these amendments. We are not making any changes to the
substance of the requirements under Item 306, Item 401(h), (i) or
(j), or Item 402(j) as part of this consolidation. However, as
proposed, Item 407 reorders some provisions that were specified in
Item 306 and reflects the relevant Public Company Accounting
Oversight Board rules. See PCAOB Rulemaking: Public Company
Accounting Oversight Board; Order Approving Proposed Technical
Amendments to Interim Standards Rules, Release No. 34-49624 (Apr.
28, 2004) [69 FR 24199]; and Order Regarding Section 101(d) of the
Sarbanes-Oxley Act of 2002, Release No. 33-8223 (Apr. 25, 2003) [68
FR 2336].
    \472\ Letter from Fenwick.
    \473\ See Section 10A(m) of the Exchange Act [15 U.S.C. 78j-
1(m)]; Exchange Act Rule 10A-3 [17 CFR 240.10A-3]; and Standards
Relating to Listed Company Audit Committees, Release No. 33-8220
(Apr. 9, 2003) (the ``Audit Committee Release'') [68 FR 18788].
    \474\ NASD and NYSE Listing Standards Release. The other
exchanges have also adopted corporate governance listing standards.
See Order Granting Approval of Proposed Rule Change by the American
Stock Exchange LLC and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 2 Relating to Enhanced
Corporate Governance Requirements Applicable to Listed Companies,
Release No. 34-48863 (Dec. 1, 2003) [68 FR 68432]; Notice of Filing
and Order Granting Accelerated Approval of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock Exchange,
Inc. Relating to Corporate Governance, Release No. 34-49881 (June
17, 2004) [69 FR 35408]; Order Approving Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago
Stock Exchange, Inc. Relating to Governance of Issuers on the
Exchange, Release No. 34-49911 (June 24, 2004) [69 FR 39989]; Notice
of Filing and Order Granting Accelerated Approval of Proposed Rule
Change by the Boston Stock Exchange, Inc. to Amend Chapter XXVII,
Section 10 of the Rules of the Board of Governors by Adding
Requirements Concerning Corporate Governance Standards of Exchange-
Listed Companies, Release No. 34-49955 (July 1, 2004) [69 FR 41555];
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendment Nos. 1 and 2 Thereto by the Chicago Board
Options Exchange, Incorporated, Relating to Enhanced Corporate
Governance Requirements for Listed Companies, Release No. 34-49995
(July 9, 2004) [69 FR 42476]; Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change and Amendment Nos. 1
and 2 Thereto by National Stock Exchange Relating to Corporate
Governance, Release No. 34-49998 (July 9, 2004) [69 FR 42788]; and
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
by the Pacific Exchange, Inc. to Amend the Corporate Governance
Requirements for PCX Listed Companies, Release No. 34-50677 (Nov.
16, 2004) [69 FR 68205].
    The Commission has previously received a rulemaking petition
submitted by the AFL/CIO, which requested the Commission to amend
Items 401 and 404 of Regulation S-K to require disclosure about
transactions with non-profit organizations (letter dated Dec. 12,
2001 from Richard Trumka, Secretary-Treasurer, AFL/CIO, File No. 4-
499, available at http://www.sec.gov/rules/petitions/petn4-499.pdf) and a

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

    The amendments we are adopting today, substantially as proposed,
include a disclosure requirement to identify the independent directors
of the company (and, in the case of disclosure in proxy or information
statements relating to the election of directors, nominees for
director) under the definition for determining board independence
applicable to it.\475\ The amendments also require disclosure of any
members of the compensation, nominating and audit committees that the
company has not identified as independent under the definition of

independence for that board committee applicable to it.\476\
---------------------------------------------------------------------------

    \475\ Item 407(a).
    \476\ Id. If the company does not have a separately designated
compensation, nominating or audit committee or committee performing
similar functions, it must provide this disclosure regarding
independence under committee independence standards with respect to
all members of the board of directors.
---------------------------------------------------------------------------

    More specifically, if the company is an issuer \477\ with
securities listed, or for which it has applied for listing, on a
national securities exchange \478\ or in an automated inter-dealer
quotation system of a national securities association \479\ which has
requirements that a majority of the board of directors be independent,
Item 407(a) requires disclosure of those directors and director
nominees that the company identifies as independent (and committee
members not identified as independent), using the definition for
independence for directors (and for committee members) that it uses for
determining compliance with the applicable listing standards. If the
company is not a listed issuer, we are requiring disclosure of those
directors and director nominees that the company identifies as
independent (and committee members not identified as independent) using
the definition for independence for directors (and for committee
members) of a national securities exchange or a national securities
association, specified by the company. The company will be required to
apply the same definition consistently to all directors and also to use
the independence standards of the same national securities exchange or
national securities association for purposes of determining the
independence of members of the compensation, nominating and audit
committees.\480\
---------------------------------------------------------------------------

    \477\ Under the amendments, ``listed issuer'' has the same
meaning as in Exchange Act Rule 10A-3.
    \478\ Under the amendments, ``national securities exchange''
means a national securities exchange registered pursuant to Section
6(a) of Exchange Act [15 U.S.C. 78f(a)].
    \479\ Under the amendments, ``inter-dealer quotation system''
means an automated inter-dealer quotation system of a national
securities association registered pursuant to Section 15A(a) of the
Exchange Act [15 U.S.C. 78o-3(a)], and a ``national securities
association'' means a national securities association registered
pursuant to Section 15A(a) of the Exchange Act [15 U.S.C. 78o-3(a)]
that has been approved by the Commission (as that definition may be
modified or supplemented). Inter-dealer quotation systems such as
the OTC Bulletin Board, the Pink Sheets and the Yellow Sheets, which
do not maintain or impose listing standards and do not have listing
agreements or arrangements with the issuers whose securities are
quoted through them, are not within this definition. See Section
II.F.1. in the Audit Committee Release.
    \480\ Similar disclosure had been required pursuant to Item
7(d)(2)(ii) and Item 7(d)(3)(iv) of Schedule 14A prior to these
amendments. As part of our consolidation of these provisions into
new Item 407, we adopt revised language for these provisions that
reflects the general approach discussed above with regard to
disclosure of director independence for board and committee
purposes.
---------------------------------------------------------------------------

    One commenter pointed out the rule proposals did not make clear
what disclosure would be required for listed issuers that relied upon
an exemption from independence requirements, most notably a
``controlled company'' exemption.\481\ To clarify the disclosure
required in this situation, we added a requirement to the amendments
that if the company is a listed issuer whose securities are listed on a
national securities exchange or in an inter-dealer quotation system
which has requirements that a majority of the board of directors be
independent, and also has exemptions to those requirements (for board
or committee member independence) upon which the company relied, the
company must disclose the exemption relied upon and explain the basis
for its conclusion that such exemption is applicable.\482\ Similar
disclosure is required for those companies that are not listed issuers
but would qualify for an exemption under the listing standards
selected. In addition, this instruction clarifies that small business
issuers listed on exchanges where at least half of the members of the
board of directors, rather than a majority, are required to be
independent must comply with the disclosure requirements specified in
Item 407(a).\483\
---------------------------------------------------------------------------

    \481\ Letter from NYCBA.
    \482\ Instruction 1 to Item 407(a).
    \483\ See Section 121.B.(2)(c) of the American Stock Exchange
Company Guide; paragraph (g) of Chapter XXVII, Listed Securities,
Section 10, Corporate Governance, of the Rules of the Board of
Governors of the Boston Stock Exchange; and Rule 19(a)(1) of Article
XXVIII, Listed Securities, of the Chicago Stock Exchange Rules.
---------------------------------------------------------------------------

    The amendments require as proposed that an issuer which has adopted
definitions of independence for directors and committee members must
disclose whether those definitions are posted on the company's Web
site, and if they are not include the definitions as an appendix to the
company's proxy or information statement at least once every three
years or if the policies have been materially amended since the
beginning of the company's last fiscal year.\484\ Further, if the
policies are not on the company's Web site, or included as an appendix
to the company's proxy or information statement, the company must
disclose in which of the prior fiscal years the policies were included
in the company's proxy or information statement.
---------------------------------------------------------------------------

    \484\ Item 407(a)(2).
---------------------------------------------------------------------------

    In addition, the amendments require, for each director or director
nominee identified as independent, a description, by specific category
or type, of any transactions, relationships or arrangements not
disclosed pursuant to paragraph (a) of Item 404 that were considered by
the board of directors of the company in determining that the
applicable independence standards were met. Under our proposals,
disclosure of the specific details of each such transaction,
relationship or arrangement would have been required. Several
commenters objected to providing this disclosure, given the potential
for extensive detail about these types of transactions, relationships
or arrangements, and some suggested instead providing disclosure by
category or type of transaction.\485\ In response to the commenters, we
have revised the disclosure requirement to permit transactions,
relationships or arrangements of each director or director nominee to
be described by the specific category or type. Consistent with the rule
proposals, the amended rule requires that the disclosure be made on a
director by director basis, with separate disclosure of categories or
types of transactions, relationships or arrangements for each director
and director nominee. We have also adopted an instruction indicating
that the description of the category or type must be sufficiently
detailed so that the nature of the transactions, relationships or
arrangements is readily apparent.\486\
---------------------------------------------------------------------------

    \485\ See, e.g., letters from Chamber of Commerce; FSR; and
Sidley Austin.
    \486\ Instruction 3 to Item 407(a).
---------------------------------------------------------------------------

    As proposed, this independence disclosure is required for any
person who served as a director of the company during any part of the
year for which disclosure must be provided,\487\ even if the person no
longer serves as director at the time of filing the registration
statement or report or, if the information is in a proxy statement, if
the director's term of office as a director will not continue after the
meeting. In this regard, we believe that the independence status of a
director is material while the person is serving as director, and not
just as a matter of reelection.\488\
---------------------------------------------------------------------------

    \487\ Instruction 2 to Item 407(a) has been revised to clarify
this requirement. As proposed, disclosure under these amendments
will not be required for persons no longer serving as a director in
registration statements under the Securities Act or the Exchange Act
filed at a time when the company is not subject to the reporting
requirements of Exchange Act Section 13(a) or 15(d). As proposed,
disclosure will not be required of anyone who was a director only
during the time period before the company made its initial public
offering if he or she was no longer a director at the time of the
offering.
    \488\ For this reason, we are not incorporating the concept
previously found in Instruction 4 to Item 404(b) into Item 407(a) as
adopted.

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

    We also amend the disclosure requirements regarding the audit
committee and nominating committee applicable prior to these amendments
in order to eliminate duplicative committee member independence
disclosure and to update the required audit committee charter
disclosure requirements for consistency with the more recently adopted
nominating committee charter disclosure requirements.\489\ As a result,
as proposed the audit committee charter will no longer be required to
be delivered to security holders if it is posted on the company's Web
site.\490\ We also are moving the disclosure required by Section 407 of
the Sarbanes-Oxley Act regarding audit committee financial experts to
Item 407, although as proposed we are not making any substantive
changes to that requirement.\491\
---------------------------------------------------------------------------

    \489\ However, we are not revising the provision that the Audit
Committee Report is furnished and not filed.
    \490\ Item 407(d)(1) and Instruction 2 to Item 407.
    \491\ Item 407(d)(5).
---------------------------------------------------------------------------

    The amendments require new disclosures regarding the compensation
committee that are similar to the disclosures required regarding audit
and nominating committees of the board of directors.\492\ The company
must state whether the compensation committee has a charter, and if it
does make the charter available through its Web site or proxy materials
in one of the ways that the audit and nominating committee charters may
be made available. As proposed, the company will be required to
describe its processes and procedures for the consideration and
determination of executive and director compensation including:
---------------------------------------------------------------------------

    \492\ These compensation committee disclosure requirements are
included in Item 407(e).
---------------------------------------------------------------------------

     The scope of authority of the compensation committee (or
persons performing the equivalent functions);
     The extent to which the compensation committee (or persons
performing the equivalent functions) may delegate any authority to
other persons, specifying what authority may be so delegated and to
whom;
     Any role of executive officers in determining or
recommending the amount or form of executive and director compensation;
and
     Any role of compensation consultants in determining or
recommending the amount or form of executive and director compensation,
identifying such consultants, stating whether such consultants are
engaged directly by the compensation committee (or persons performing
the equivalent functions) or any other person, describing the nature
and scope of their assignment, and the material elements of the
instructions or directions given to the consultants with respect to the
performance of their duties under the engagement.
    Several commenters viewed this item as redundant with the
Compensation Discussion and Analysis required under Item 402, and
suggested that they be combined.\493\ While this item and the
Compensation Discussion and Analysis both involve the determination of
executive officer compensation, they have different focuses. Item
407(e) focuses on the company's corporate governance structure that is
in place for considering and determining executive and director
compensation--such as the scope of authority of the compensation
committee and others in making these determinations, as well as the
resources utilized by the committee. In contrast, the Compensation
Discussion and Analysis focuses on material information about the
compensation policies and objectives of the company and seeks to put
the quantitative disclosure about named executive officer compensation
into perspective. We believe it is appropriate to discuss each of these
matters separately and, accordingly, we have not combined them.
---------------------------------------------------------------------------

    \493\ See, e.g., letters from J. Brill 1; Hewitt; Mercer; Pearl
Meyer & Partners; and SCSGP.
---------------------------------------------------------------------------

    As for the required disclosure regarding compensation consultants,
some commenters objected to the proposed requirements,\494\ while other
commenters suggested expanding the requirement to include, among other
things, a discussion of the work performed by the compensation
consultant for the company or others.\495\ In addition, some commenters
suggested deleting the requirement in proposed Item 407(e) that
companies identify any executive officer of the company that the
compensation consultants contacted in carrying out their
assignment.\496\ We continue to believe that the involvement of
compensation consultants and their interaction with the compensation
committee is material information that should be required. However, we
are persuaded that disclosure regarding any executive officers of the
company that the compensation consultants contacted in carrying out
their assignment is not necessary. Therefore, we are adopting the
compensation consultant disclosure requirement in Item 407(e) as
proposed, except for the required disclosure regarding contacts with
executive officers, which has not been adopted.\497\
---------------------------------------------------------------------------

    \494\ See, e.g., letters from Buck Consultants; Chamber of
Commerce; Hewitt; Pearl Meyer & Partners; Mercer; and Steven Hall &
Partners.
    \495\ See, e.g., letters from Brian Foley & Co.; 3C-Compensation
Consulting Consortium; BCIMC; CFA Centre 1; Governance for Owners;
Michelle Leder; James McFadden; Institutional Investor Group; SBAF;
and Theodore Schlissel.
    \496\ See, e.g., letters from Compensia; FedEx Corporation;
Hewitt; and Mercer.
    \497\ Under the rules as adopted, disclosure would also not be
required under this Item if an employee of a consulting firm met
with company management to work on matters not involving
compensation. See letter from Hewitt.
---------------------------------------------------------------------------

    Further, the amendments consolidate into this compensation
committee disclosure requirement the disclosure requirements regarding
compensation committee interlocks and insider participation in
compensation decisions, as proposed.\498\
---------------------------------------------------------------------------

    \498\ Prior to these amendments, disclosure regarding
compensation committee interlocks and insider participation in
compensation decisions was required by Item 402(j).
---------------------------------------------------------------------------

    Finally, for registrants other than registered investment
companies, the amendments eliminate an existing proxy disclosure
requirement regarding directors who have resigned or declined to stand
for re-election \499\ which is no longer necessary since it has been
superseded by a disclosure requirement in Form 8-K.\500\ For registered
investment companies, which do not file current reports on Form 8-K,
the requirement has been moved to Item 22(b) of Schedule 14A.\501\ Also
as proposed, the amendments combine various proxy disclosure
requirements regarding board meetings and committees into one
location.\502\ In addition, we are adopting as proposed two
instructions to Item 407 to combine repetitive provisions, one relating
to independence disclosure, and the other relating to board committee
charters.\503\
---------------------------------------------------------------------------

    \499\ Prior to these amendments, this disclosure was required by
Item 7(g) of Schedule 14A.
    \500\ Item 5.02(a) of Form 8-K.
    \501\ Item 22(b)(17) of Schedule 14A.
    \502\ Item 407(b) includes disclosure requirements previously
specified in paragraphs (d)(1), (f), and (h)(3) of Item 7 of
Schedule 14A.
    \503\ Instructions 1 and 2 to Item 407. Instruction 2 also
includes as proposed a requirement that the charter be provided if
it is materially amended.
---------------------------------------------------------------------------

E. Treatment of Specific Types of Issuers

1. Small Business Issuers
    We are adopting amendments to Item 404 of Regulation S-B
substantially as proposed. Amended Item 404 of Regulation S-B is
substantially similar to amended Item 404 of Regulation S-K, except for
the following two matters:
     Paragraph (b) of Item 404 of Regulation S-K relating to
policies and procedures for reviewing related person transactions is
not included in Regulation S-B, and
     Regulation S-B provides for a disclosure threshold of the
lesser of

$120,000 or one percent of the average of the small business issuer's
total assets at year-end for the last three completed fiscal
years,\504\ to require disclosure for small business issuers that may
have material related person transactions even though smaller than the
absolute dollar amount of $120,000.
---------------------------------------------------------------------------

    \504\ We are revising Item 404(a) of Regulation S-B from the
proposal to clarify that the determination of a small business
issuer's total assets for purposes of this Item shall be made as of
the issuer's fiscal year-end for its last three completed fiscal
years.
---------------------------------------------------------------------------

    Both amended items consist of disclosure requirements regarding
related person transactions and promoters. These provisions of Item 404
of Regulation S-B are substantially identical to those of Item 404 of
Regulation S-K, except for certain changes conforming amended Item 404
of Regulation S-B to former Item 404 of Regulation S-B. These changes
consist of the following:
     Retaining in amended Item 404 of Regulation S-B an
instruction in former Item 404 of Regulation S-B regarding underwriting
discounts and commissions;\505\ and
---------------------------------------------------------------------------

    \505\ Instruction 8 to Item 404(a) of Regulation S-B.
---------------------------------------------------------------------------

     Not including an instruction in amended Item 404 of
Regulation S-B regarding the treatment of foreign private issuers that
is included in amended Item 404 of Regulation S-K.\506\
---------------------------------------------------------------------------

    \506\ This is consistent with the requirements of Regulation S-B
prior to these amendments.
---------------------------------------------------------------------------

    The two year time period for disclosure embodied in Item 404 of
Regulation S-B prior to these amendments was retained in the principle
for disclosure in proposed Item 404(a) of Regulation S-B. Amended Item
404(a) of Regulation S-B continues to require two years of disclosure,
but does so by including an instruction to Item 404(a) of Regulation S-
B \507\ requiring a second year of disclosure, rather than by including
the two year time period in the principle for disclosure in Item 404(a)
of Regulation S-B as was proposed. This change from the proposal
clarifies that for purposes of applying the definition of ``related
person'' to determine whether disclosure is required of a transaction
that occurred prior to a person having the relationship that resulted
in the person becoming a related person, a one year time period should
be used rather than a two year time period.\508\ This change from the
proposal also results in the structure of Item 404(a) of Regulation S-B
more closely resembling the structure of Item 404(a) of Regulation S-K,
particularly in situations where Item 404(a) of Regulation S-K applies
to time periods longer than one year.
---------------------------------------------------------------------------

    \507\ Instruction 9 to Item 404(a) of Regulation S-B.
    \508\ For example, if an employee had a material interest in a
transaction with the small business issuer which occurred in
February 2005 and then became an executive officer in July 2005,
disclosure would be required in the small business issuer's Form 10-
KSB for the fiscal year ended December 31, 2005. However, if the
transaction had occurred in February 2004, disclosure would not be
required in the small business issuer's 2005 Form 10-KSB.
---------------------------------------------------------------------------

    In addition, amended Item 404 of Regulation S-B retains a paragraph
requiring disclosure of a list of all parents of the small business
issuer showing the basis of control and as to each parent, the
percentage of voting securities owned or other basis of control by the
small business issuer's immediate parent, if any.\509\
---------------------------------------------------------------------------

    \509\ Item 404(b) of Regulation S-B.
---------------------------------------------------------------------------

    One conforming change that we are not making to Regulation S-B,
however, concerns the calculation of a related person's interest in a
given transaction. Prior to today's amendments, Item 404(a) of
Regulation S-B differed from Item 404(a) of Regulation S-K with respect
to, among other things, the calculation of the dollar value of a
person's interest in a related person transaction. Prior to these
amendments, Instruction 4 to Item 404(a) of Regulation S-K had
specifically provided that the amount of such interest was to be
computed without regard to the amount of profit or loss involved in the
transaction. In contrast, Item 404(a) of Regulation S-B contained no
such instruction prior to these amendments. We are adopting amendments
as proposed so that the method of calculation of a related person's
interest in a transaction will be the same for both Regulation S-B and
Regulation S-K. We believe that differences, if any, between the types
of transactions that small business issuers may engage in with related
persons as compared to transactions of larger issuers would not warrant
a different approach for calculating a related person's interest in a
transaction.
    As proposed, new Item 407 of Regulation S-K is substantially
identical to new Item 407 of Regulation S-B,\510\ except that it would
not require disclosure regarding compensation committee interlocks and
insider participation in compensation decisions or the Compensation
Committee Report, since Regulation S-B did not require disclosure of
this information prior to adoption of these amendments.
---------------------------------------------------------------------------

    \510\ The requirements that were specified in paragraphs (e),
(f), and (g) of Item 401 of Regulation S-B prior to these amendments
are now specified in paragraphs (d)(5), (d)(4) and (c)(3),
respectively, of Item 407 of Regulation S-B.
---------------------------------------------------------------------------

2. Foreign Private Issuers
    Before today's amendments, a foreign private issuer would be deemed
to comply with Item 404 of Regulation S-K if it provided the
information required by Item 7.B. of Form 20-F. The amendments retain
this approach, but require that if more detailed information is
otherwise made publicly available or required to be disclosed by the
issuer's home jurisdiction or a market in which its securities are
listed or traded, that same information must also be disclosed pursuant
to Item 404.\511\
---------------------------------------------------------------------------

    \511\ Instruction 2 to Item 404 of Regulation S-K.
---------------------------------------------------------------------------

3. Registered Investment Companies
    We are revising Items 7 and 22(b) of Schedule 14A, substantially as
proposed, to reflect the reorganization that we have undertaken with
respect to operating companies. Under the amendments, information that
was required to be provided by registered investment companies under
Item 7 prior to the amendments is instead required by Item 22(b).\512\
The requirements of Item 7 that prior to the amendments applied to
registered investment companies regarding the nominating and audit
committees, board meetings, the nominating process, and shareholder
communications generally will be included in Item 22(b) by cross-
references to the appropriate paragraphs of new Item 407 of Regulation
S-K.\513\ The substance of these requirements has not been altered. In
addition, the revisions to Item 22(b) directly incorporate disclosures
relating to the independence of members of

[[Continued on page 53207]]

]

[[pp. 53207-53256]] Executive Compensation and Related Person Disclosure

[[Continued from page 53206]]

nominating and audit committees that are similar to those contained in
new Item 407(a) of Regulation S-K and contained in Item 7 prior to the
amendments.\514\ We are also adding instructions that are similar to
new Instruction 1 to Item 407(a).\515\
---------------------------------------------------------------------------

    \512\ Amendments to Item 7(e) of Schedule 14A. Business
development companies will furnish the information required by Item
7 of Schedule 14A, in addition to the information required by Items
8 and 22(b) of Schedule 14A. See amendments to Items 7, 8, and 22(b)
of Schedule 14A.
    \513\ Amendments to Items 22(b)(15)(i) and (ii)(A) and
22(b)(16)(i) of Schedule 14A. Amended Item 22(b)(15)(i) requires the
information required by new Items 407(b)(1) and (2) and (f),
corresponding to the information that registered investment
companies have been required to provide pursuant to Items 7(f) and
7(h) prior to today's amendments. Amended Item 22(b)(15)(ii)(A)
requires the information required by new Items 407(c)(1) and (2),
corresponding to the information that registered investment
companies have been required to provide pursuant to Items 7(d)(2)(i)
and 7(d)(2)(ii) (other than the nominating committee independence
disclosures required prior to today's amendments by Item
7(d)(2)(ii)(C)). Amended Item 22(b)(16)(i) requires closed-end
investment companies to provide the information required by new
Items 407(d)(1) through (3), corresponding to the information that
closed-end investment companies have been required to provide prior
to today's amendments pursuant to Item 7(d)(3) (other than the audit
committee independence disclosures required prior to today's
amendments by Items 7(d)(3)(iv)(A)(1) and (B)).
    \514\ Amendments to Items 22(b)(15)(ii)(B) and (16)(ii) of
Schedule 14A. Amended Item 22(b)(15)(ii)(B) requires disclosure
about the independence of nominating committee members that is
similar to those required by Item 7(d)(2)(ii)(C) prior to today's
amendments and amended Item 22(b)(16)(ii) requires disclosure about
the independence of audit committee members that is similar to those
required by Items 7(d)(3)(iv)(A)(1) and (B) prior to today's
amendments.
    \515\ Instruction to Item 22(b)(15)(ii)(B) of Schedule 14A;
Instruction to Item 22(b)(16)(ii) of Schedule 14A.
---------------------------------------------------------------------------

    As proposed, we are also raising from $60,000 to $120,000 the
threshold for disclosure of certain interests, transactions, and
relationships of each director or nominee for election as director who
is not or would not be an ``interested person'' of an investment
company within the meaning of Section 2(a)(19) of the Investment
Company Act.\516\ This disclosure is required in investment company
proxy and information statements and registration statements. The
increase in the disclosure threshold corresponds to the increase in the
disclosure threshold for amended Item 404 from $60,000 to $120,000.
---------------------------------------------------------------------------

    \516\ Amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of
Schedule 14A; amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8)
of Form N-1A; amendments to Items 18.9, 18.10, and 18.11 of Form N-
2; amendments to Items 20(h), 20(i), and 20(j) of Form N-3.
---------------------------------------------------------------------------

F. Conforming Amendments

    The changes to Item 404 necessitate conforming amendments to other
rules that refer specifically to Item 404.
1. Regulation Blackout Trading Restriction
    We are adopting, as proposed, conforming changes to Regulation
Blackout Trading Restriction,\517\ also known as Regulation BTR, which
we originally adopted to clarify the scope and operation of Section
306(a) \518\ of the Sarbanes-Oxley Act of 2002 and to prevent evasion
of the statutory trading restriction.\519\ Rule 100 of Regulation BTR
defines terms used in Section 306(a) and Regulation BTR, including the
term ``acquired in connection with service or employment as a director
or executive officer.'' \520\ Under this definition as originally
adopted, one of the specified methods by which a director or executive
officer directly or indirectly acquires equity securities in connection
with such service is an acquisition ``at a time when he or she was a
director or executive officer, as a result of any transaction or
business relationship described in paragraph (a) or (b) of Item 404 of
Regulation S-K.'' \521\ To conform this provision of Regulation BTR to
the Item 404 amendments, we are amending Rule 100(a)(2) so that it
references only transactions described in paragraph (a) of Item 404, as
we proposed.
---------------------------------------------------------------------------

    \517\ 17 CFR 245.100-104.
    \518\ 15 U.S.C. 7244(a), entitled ``Prohibition of Insider
Trading During Pension Fund Blackout Periods.''
    \519\ Insider Trades During Pension Fund Blackout Periods,
Release No. 34-47225 (Jan. 22, 2003) [68 FR 4337]. Section 306(a)
makes it unlawful for any director or executive officer of an issuer
of any equity security (other than an exempted security), directly
or indirectly, to purchase, sell, or otherwise acquire or transfer
any equity security of the issuer (other than an exempted security)
during any pension plan blackout period with respect to such equity
security, if the director or executive officer acquires the equity
security in connection with his or her service or employment as a
director or executive officer. This provision equalizes the
treatment of corporate executives and rank-and-file employees with
respect to their ability to engage in transactions involving issuer
equity securities during a pension plan blackout period if the
securities were acquired in connection with their service to, or
employment with, the issuer.
    \520\ This term is defined in Rule 100(a) of Regulation BTR.
    \521\ Rule 100(a)(2) of Regulation BTR.
---------------------------------------------------------------------------

2. Rule 16b-3 Non-Employee Director Definition
    We also are adopting conforming amendments to the definition of
Non-Employee Director in Exchange Act Rule 16b-3.\522\ Section 16(b)
provides an issuer (or shareholders suing on its behalf) the right to
recover from an officer, director, or ten percent shareholder profits
realized from a purchase and sale of issuer equity securities within a
period of less than six months. However, Rule 16b-3 exempts
transactions between issuers of securities and their officers and
directors if specified conditions are met. In particular, acquisitions
from and dispositions to the issuer are exempt if the transaction is
approved in advance by the issuer's board of directors, or board
committee composed solely of two or more Non-Employee Directors.\523\
---------------------------------------------------------------------------

    \522\ Exchange Act Rule 16b-3(b)(3)(ii), which defines a Non-
Employee Director of a closed-end investment company as ``a director
who is not an `interested person' of the issuer, as that term is
defined in Section 2(a)(19) of the Investment Company Act of 1940,''
is not amended.
    \523\ Exchange Act Rules 16b-3(d)(1) and 16b-3(e).
---------------------------------------------------------------------------

    Before adoption of these amendments, the definition of ``Non-
Employee Director,'' among other things, limited these directors to
those who:
     Do not directly or indirectly receive compensation from
the issuer, its parent or subsidiary for consulting or other non-
director services, except for an amount that does not exceed the Item
404(a) dollar disclosure threshold;
     Do not possess an interest in any other transaction for
which Item 404(a) disclosure would be required; and
     Are not engaged in a business relationship required to be
disclosed under Item 404(b).
    As described above, the Item 404 amendments substantially revise or
rescind the Item 404 provisions on which the Non-Employee Director
definition was based. To minimize potential disruptions and because no
problems were brought to our attention regarding any aspect of the
definition as it was stated before adoption of these amendments, we
proposed a conforming amendment that would delete the provision
referring to business relationships subject to disclosure under Item
404(b) as it was stated prior to today's amendments, without otherwise
revising the text of the rule.
    In the interest of providing certainty regarding Non-Employee
Director status and to recognize corporate governance changes since the
definition was adopted, one commenter suggested basing the definition
instead on whether a director meets the independence standards under
the rules of the principal national securities exchange where the
company's securities are traded.\524\ If the company has no securities
traded on an exchange, the commenter suggested relying on the
director's eligibility to serve on the issuer's audit committee under
Exchange Act Section 10A(m) and Exchange Act Rule 10A-3.\525\ We are
not following the suggested approach. As we stated in the Proposing
Release, the standards for an exemption from Section 16(b) liability
should be readily determinable by reference to the exemptive rule, and
not variable depending upon where the issuer's securities are
listed.\526\ Further, basing the Non-Employee Director definition on
eligibility to serve on the issuer's audit committee could burden the
audit committee with a compensation committee function.
---------------------------------------------------------------------------

    \524\ See letter from Sullivan.
    \525\ 15 U.S.C. 78j-1(m) and 17 CFR 240.10A-3.
    \526\ Proposing Release at n. 309.
---------------------------------------------------------------------------

    As proposed and adopted, the Non-Employee Director definition
continues to permit consulting and similar arrangements subject to
limits measured by reference to the revised Item 404(a) disclosure
requirements. Because the disclosure threshold of Item 404(a) is raised
from $60,000 to $120,000, however, the effect in some cases may be to
permit previously ineligible

directors to be Non-Employee Directors. In other cases, where revised
Item 404(a) may require disclosure of director indebtedness and
disclosure of business relationships not subject to disclosure under
former Item 404(b), some formerly eligible directors may become
ineligible.
    In response to concerns of commenters about the potential
difficulty of making a determination,\527\ we have revised the rule as
it was proposed to include an additional note to Rule 16b-3.\528\ The
Non-Employee Director definition contemplates that the director must
satisfy the definition's tests at the time he or she votes to approve a
transaction. For purposes of determining a director's status under
those tests that are based on Item 404(a), a company may rely on the
disclosure provided under Item 404 of Regulation S-K for the issuer's
most recent fiscal year contained in the most recent filing in which
Item 404 disclosure is presented.\529\ Where a transaction disclosed in
that filing was terminated before the director's proposed service as a
Non-Employee Director, that transaction will not bar such service. The
issuer must believe in good faith that any current or contemplated
transaction in which the director participates will not require Item
404(a) disclosure, based on information readily available to the issuer
and the director at the time such director proposes to act as a Non-
Employee Director. At such time as the issuer believes in good faith,
based on readily available information, that a current (or
contemplated) transaction with a director will require Item 404(a)
disclosure in a future filing, the director no longer is eligible to
serve as a Non-Employee Director. However, this determination does not
result in retroactive loss of a Rule 16b-3 exemption for a transaction
previously approved by the director while serving as a Non-Employee
director consistent with the note. In making determinations under the
note, an issuer may rely on information it obtains from the director,
for example pursuant to a response to an inquiry.
---------------------------------------------------------------------------

    \527\ See, e.g., letter from SCSGP.
    \528\ Note 4 to Rule 16b-3.
    \529\ As under Rule 16b-3 prior to these amendments, each test
referring to Item 404 is measured by reference to Regulation S-K,
even if the disclosure requirements applicable to the company are
governed by Regulation S-B.
---------------------------------------------------------------------------

3. Other Conforming Amendments
    The changes to Item 404, along with the consolidation of provisions
into Item 407, necessitate conforming amendments to various forms and
schedules under the Securities Act and the Exchange Act. The amendments
modify:
     Forms that prior to these amendments required disclosure
of the information required by Item 404 to instead require disclosure
of the information required by amended Item 404 and new Item 407(a);
\530\
---------------------------------------------------------------------------

    \530\ See amendments to Item 15 of Form SB-2, Item 11(n) of Form
S-1, Item 18(a)(7)(iii) and Item 19(a)(7)(iii) of Form S-4, Item 23
of Form S-11, Item 7 of Form 10, Item 13 of Form 10-K, Item 7 of
Form 10-SB and Item 12 of Form 10-KSB. The amendments to Forms SB-2,
10-SB and 10-KSB require disclosure of the information required by
amended Item 404 and new Item 407(a) of Regulation S-B.
---------------------------------------------------------------------------

     Some forms that prior to these amendments required
disclosure of the information required by Item 404(a) or by Items
404(a) and (c), to instead require disclosure of the information
required by Items 404(a) and (b) as amended, or amended Item 404(a), as
appropriate; \531\
---------------------------------------------------------------------------

    \531\ See amendment to Item 7(b) of Schedule 14A, which refers
to amended Items 404(a) and (b), and Item 22(b)(11) and the
Instruction to Item 22(b)(11) of Schedule 14A, and Item 5.02(c)(2)
of Form 8-K, which refer to amended Item 404(a). The amendments to
Form 8-K that reference Regulation S-B require disclosure of the
information required by amended Item 404(a) of Regulation S-B.
---------------------------------------------------------------------------

     A form that prior to these amendments cross-referenced an
instruction in Item 404 which we are eliminating to instead include the
text of this instruction; \532\
---------------------------------------------------------------------------

    \532\ See amendments to Item 23 of Form S-11.
---------------------------------------------------------------------------

     Item 7 of Schedule 14A, to require disclosure of the
information required by new Item 407(a) rather than the disclosure that
was required prior to these amendments by Item 404(b), to eliminate
paragraphs (d)-(h) of Item 7 that were duplicative of new Item 407 and
replace them with a requirement to disclose information specified by
corresponding paragraphs of new Item 407;
     Forms that prior to these amendments required disclosure
of the information required by Item 402 to instead require disclosure
of the information required by amended Item 402 and new Item 407(e)(4),
and, in the case of proxy statements and annual reports on Form 10-K,
new Item 407(e)(5); \533\
---------------------------------------------------------------------------

    \533\ See amendments to Item 8 of Schedule 14A, Item 11(l) of
Form S-1, General Instruction I.B.4.(c) of Form S-3, Items
18(a)(7)(ii) and 19(a)(7)(ii) of Form S-4, Item 22 of Form S-11,
Item 6 of Form 10 and Item 11 of Form 10-K.
---------------------------------------------------------------------------

     Some forms that prior to these amendments required
disclosure of the information required by Item 401 to instead require
disclosure of the information required by Item 401 as amended and
paragraphs (c)(3), (d)(4) and/or (d)(5) of new Item 407, as
appropriate; \534\
---------------------------------------------------------------------------

    \534\ See amendments to General Instruction I.B.4.(c) of Form S-
3, and Item 10 of Form 10-K, which refer to Item 401 and paragraphs
(c)(3), (d)(4) and (d)(5) of new Item 407, and Item 7(b) of Schedule
14A, which refers to Item 401 and paragraphs (d)(4) and (d)(5) of
new Item 407. The amendments to Form 10-KSB require disclosure of
the information required by amended Item 401 and new Item 407(c)(3),
(d)(4) and (d)(5) of Regulation S-B. We are not making any changes
to the reference to Item 401 in Note G to Form 10-K, however,
because the portion of Item 401 applicable in Note G (certain
disclosure regarding executive officers) does not include the part
of Item 401 that we are combining into new Item 407.
---------------------------------------------------------------------------

     Forms that prior to these amendments required disclosure
of the information required by Item 401(j), to instead require
disclosure of the information required by new Item 407(c)(3); \535\ and
---------------------------------------------------------------------------

    \535\ See amendments to Item 5 in Part II of Form 10-Q, and Item
5 in Part II of Form 10-QSB. The amendments to Item 5 in Part II of
Form 10-QSB require disclosure of the information required by new
Item 407(c)(3) of Regulation S-B.
---------------------------------------------------------------------------

     Item 10 of Form N-CSR to include a cross reference to new
Item 407(c)(2)(iv) of Regulation S-K and new Item 22(b)(15) of Schedule
14A, in lieu of the former reference to Item 7(d)(2)(ii)(G) of Schedule
14A.
    In addition, conforming amendments have been made to a provision in
Regulation AB, which prior to these amendments required disclosure of
the information required by Items 401, 402 and 404, so that instead it
will require disclosure of the information required by amended Items
401, 402, 404 and paragraphs (a), (c)(3), (d)(4), (d)(5) and (e)(4) of
new Item 407.\536\
---------------------------------------------------------------------------

    \536\ See amendments to Item 1107(e) of Regulation AB.
---------------------------------------------------------------------------

VI. Plain English Disclosure

    We are adopting as proposed a requirement that most of the
disclosure called for by amended Items 402, 403, 404 and 407 be
provided in plain English. This plain English requirement will apply
when information responding to these items is included (whether
directly or through incorporation by reference) in reports required to
be filed under Exchange Act Sections 13(a) or 15(d). Commenters were
generally supportive of the plain English requirement,\537\ and some
commenters suggested extending the plain English requirements to the
proxy statement as a whole and to other Commission filings.\538\
---------------------------------------------------------------------------

    \537\ See, e.g., letters from SCSGP; jointly, Angela Chappa,
Annie Gabel and Michelle Prater; SBAF; and Standard Life.
    \538\ See, e.g., letters from SCSGP; Foley; and Mercer.
---------------------------------------------------------------------------

    In 1998, we adopted rule changes requiring issuers preparing
prospectuses to write the cover page, summary and

risk factors section of prospectuses in plain English and apply plain
English principles to other portions of the prospectus.\539\ These
rules transformed the landscape of public offering disclosure and made
prospectuses more accessible to investors. We believe that plain
English principles should apply to the disclosure requirements that we
are adopting, so disclosure provided in response to those requirements
is easier to read and understand. Clearer, more concise presentation of
executive and director compensation, related person transactions,
beneficial ownership and corporate governance matters can facilitate
more informed investing and voting decisions in the face of complex
information about these important areas.
---------------------------------------------------------------------------

    \539\ Plain English Disclosure, Release No. 33-7497 (Jan. 28,
1998) [63 FR 6369] (adopting revisions to Securities Act Rule 421
[17 CFR 230.421]). We have also required that risk factor disclosure
included in annual reports and Summary Term Sheets in business
combination filings be in plain English. See Item 1A. to Form 10-K
and Item 1001 of Regulation M-A [17 CFR 229.1001], respectively.
---------------------------------------------------------------------------

    We are adding Exchange Act Rules 13a-20 and 15d-20 to require that
companies prepare their executive and director compensation, related
person transaction, beneficial ownership and corporate governance
disclosures included in Exchange Act reports using plain English,
including the following principles:
     Present information in clear, concise sections, paragraphs
and sentences;
     Use short sentences;
     Use definite, concrete, everyday words;
     Use the active voice;
     Avoid multiple negatives;
     Uuse descriptive headings and subheadings;
     Use a tabular presentation or bullet lists for complex
material, wherever possible;
     Avoid legal jargon and highly technical business and other
terminology;
     Avoid frequent reliance on glossaries or defined terms as
the primary means of explaining information;
     Define terms in the glossary or other section of the
document only if the meaning is unclear from the context;
     Use a glossary only if it facilitates understanding of the
disclosure; and
     In designing the presentation of the information, include
pictures, logos, charts, graphs, schedules, tables or other design
elements so long as the design is not misleading and the required
information is clear, understandable, consistent with applicable
disclosure requirements and any other included information, drawn to
scale and not misleading.
    The new rule also provides additional guidance on drafting the
disclosure that would comply with plain English principles, including
guidance as to the following practices that companies should avoid:
     Legalistic or overly complex presentations that make the
substance of the disclosure difficult to understand;
     vague ``boilerplate'' explanations that are overly
generic;
     complex information copied directly from legal documents
without any clear and concise explanation of the provision(s); and
     disclosure repeated in different sections of the document
that increases the size of the document but does not enhance the
quality of the information.
    Under the new rules, if disclosures about executive compensation,
beneficial ownership, related person transaction or corporate
governance matters are incorporated by reference into an Exchange Act
report from a company's proxy or information statement, the disclosure
is required to be in plain English in the proxy or information
statement.\540\ The plain English rules are part of the disclosure
rules applicable to filings required under Sections 13(a) and 15(d) of
the Exchange Act. We believe that these plain English requirements are
best administered by the Commission under these rules, and therefore we
are not at this time extending plain English requirements to the entire
proxy statement or to other Commission filings.
---------------------------------------------------------------------------

    \540\ See, e.g., General Instruction G(3) to Form 10-K and
General Instruction E.3. to Form 10-KSB (specifying information that
may be incorporated by reference from a proxy or information
statement in an annual report on Form 10-K or 10-KSB).
---------------------------------------------------------------------------

    We believe that several areas where commenters requested that
information be required in a specific format, such as tables, are best
addressed by application of our plain English principles. The plain
English rules adopted today specifically provide that, in designing the
presentation of the information, companies may include tables or other
design elements, so long as the design is not misleading and the
required information is clear, understandable, consistent with
applicable disclosure requirements, consistent with any other included
information, and not misleading.\541\ In response to our request for
comment, several commenters recommended using a separate supplemental
table, rather than footnotes, to identify the components of All Other
Compensation, including individual perquisites, reported in the Summary
Compensation Table.\542\ While we have not mandated such a separate
table, we encourage companies to use additional tables wherever tabular
presentation facilitates clearer, more concise disclosure. Several
commenters also requested that we specifically permit tabular
disclosure of the required potential post-employment payments
disclosure.\543\ Because of the difficulty of prescribing a single
format that would cover all circumstances, the rule as proposed and
adopted does not mandate tabular disclosure. However, consistent with
the plain English principles that we adopt today, we encourage
companies to develop their own tables to report post-termination
compensation if such tabular presentation facilitates clearer, more
concise disclosure. Similarly, while we do not require tabular
presentation of the narrative disclosure following the director
compensation table, such as a breakdown of director fees, consistent
with the plain English rules we adopt today, we encourage tabular
presentation where it facilitates an understanding of the disclosure.
Companies should also consider ways in which design elements such as
tables can facilitate the presentation of the related person
transaction disclosure and corporate governance disclosures.
---------------------------------------------------------------------------

    \541\ Of course, the tables required under the rules we adopt
today must be included and cannot be modified except as specifically
allowed for in the rules. See Item 402(a)(5) of Regulation S-K and
Item 402(a)(4) of Regulation S-B.
    \542\ See, e.g., letters from Amalgamated; CFA Centre 1; CII;
IUE-CWA; Mercer; and SBAF.
    \543\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; HRPA; ISS; Mercer; and The Value Alliance and Corporate
Governance Alliance.
---------------------------------------------------------------------------

VII. Transition

    A number of commenters recommended that we adopt the rules by
September or October 2006 in order for companies to have sufficient
time to implement them for the 2007 proxy season.\544\ One commenter
expressed concern on how the transition would apply to Securities Act
registration statements.\545\ In keeping with these comments, we
believe we have adopted the new rules and amendments in sufficient time
for compliance in the 2007 proxy season. Therefore, the compliance
dates are as follows:
---------------------------------------------------------------------------

    \544\ See, e.g., letters from ABA; ACC; Brian Foley & Co.; Jesse
Brill, Chair of CompensationStandards.com and Chair of the National
Association of Stock Plan Professionals, dated April 28, 2006; Buck
Consultants; Foley; Frederic W. Cook & Co.; Fried Frank; Mercer; and
Sullivan.
    \545\ See letter from BDO Seidman.

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

     For Forms 8-K, compliance is required for triggering
events that occur 60 days or more after publication in the Federal
Register;
     For Forms 10-K and 10-KSB, compliance is required for
fiscal years ending on or after December 15, 2006;
     For proxy and information statements covering registrants
other than registered investment companies, compliance is required for
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;
     For Securities Act registration statements covering
registrants other than registered investment companies and Exchange Act
registration statements (including pre-effective and post-effective
amendments, as applicable), compliance is required for registration
statements that are filed with the Commission 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;
     For initial registration statements and post-effective
amendments that are annual updates to effective registration statements
that are filed on Forms N-1A, N-2 and N-3 (except those filed by
business development companies), compliance is required for
registration statements and post-effective amendments that are filed
with the Commission on or after December 15, 2006; and
     For proxy and information statements covering registered
investment companies, compliance is required for any new proxy or
information statement filed on or after December 15, 2006.\546\
---------------------------------------------------------------------------

    \546\ The amendments to the cross-references in Item 10 of Form
N-CSR will appear in the Form concurrent with the effective date of
the amendments to our proxy rules, and will be effective for a
particular registrant's Forms N-CSR that are filed after the filing
of any proxy statement that includes a response to new Item
407(c)(2)(iv) of Regulation S-K (as required by new Item 22(b)(15)
of Schedule 14A). The substance of the information required by the
Item has not been changed.
---------------------------------------------------------------------------

    Commenters expressed some confusion concerning the periods for
which disclosure under the new rules and amendments will be required
during the transition from the former rules. As we noted in the
Proposing Release, companies will not be required to ``restate''
compensation or related person transaction disclosure for fiscal years
for which they previously were required to apply our rules prior to the
effective date of today's amendments. This means, for example, that
only the most recent fiscal year will be required to be reflected in
the revised Summary Compensation Table when the new rules and
amendments applicable to the Summary Compensation Table become
effective, and therefore the information for years prior to the most
recent fiscal year will not have to be presented at all. For the
subsequent year's Summary Compensation Table, companies will be
required to present only the most recent two fiscal years in the
Summary Compensation Table, and for the next and all subsequent years
will be required to present all three fiscal years in the Summary
Compensation Table.\547\ As another example, if a calendar year-end
company files its initial public offering on Form S-1 in November, the
initial filing will contain compensation disclosure regarding 2005
following the prior rules. If the registration statement does not
become effective until after the Item 402 disclosure must be updated,
then an amendment will have to be filed that includes the 2006
compensation information that complies with the rules we adopt today.
The Summary Compensation Table, however, will only contain the
information for 2006 and will not need to contain the information
restated from 2005.
---------------------------------------------------------------------------

    \547\ The other amended executive and director compensation
disclosure requirements which relate to the last completed fiscal
year will not be affected by this transition approach. The Summary
Compensation Table will be treated differently because, as amended,
it requires disclosure of compensation to the named executive
officers for the last three fiscal years.
---------------------------------------------------------------------------

    This transition approach will result in phased-in implementation of
the amended Summary Compensation Table and amended Item 404(a)
disclosure over a three-year period for Regulation S-K companies, and a
two-year period for Regulation S-B companies. During this phase-in
period, companies will not be required to present prior years'
compensation disclosure or Item 404(a) disclosure under the former
rules.

VIII. Paperwork Reduction Act

A. Background

    The new rules and amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of
1995.\548\ We published a notice requesting comment on the collection
of information requirements in the Proposing Release, and we submitted
these requirements to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act.\549\ The titles for the
collection of information are: \550\
---------------------------------------------------------------------------

    \548\ 44 U.S.C. 3501 et seq.
    \549\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \550\ The paperwork burden from Regulations S-K and S-B is
imposed through the forms that are subject to the requirements in
those Regulations and is reflected in the analysis of those forms.
To avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens, for administrative convenience we estimate the burdens
imposed by each of Regulations S-K and S-B to be a total of one
hour.
---------------------------------------------------------------------------

    (1) ``Regulation S-B'' (OMB Control No. 3235-0417);
    (2) ``Regulation S-K'' (OMB Control No. 3235-0071);
    (3) ``Form SB-2'' (OMB Control No. 3235-0418);
    (4) ``Form S-1'' (OMB Control No. 3235-0065);
    (5) ``Form S-4'' (OMB Control Number 3235-0324);
    (6) ``Form S-11'' (OMB Control Number 3235-0067);
    (7) ``Regulation 14A and Schedule 14A'' (OMB Control Number 3235-
0059);
    (8) ``Regulation 14C and Schedule 14C'' (OMB Control Number 3235-
0057);
    (9) ``Form 10'' (OMB Control No. 3235-0064);
    (10) ``Form 10-SB'' (OMB Control No. 3235-0419);
    (11) ``Form 10-K'' (OMB Control No. 3235-0063);
    (12) ``Form 10-KSB'' (OMB Control No. 3235-0420);
    (13) ``Form 8-K'' (OMB Control No. 3235-0060); and
    (14) ``Form N-2'' (OMB Control No. 3235-0026).
    We adopted all of the existing regulations and forms pursuant to
the Securities Act and the Exchange Act. In addition, we adopted Form
N-2 pursuant to the Investment Company Act. These regulations and forms
set forth the disclosure requirements for annual \551\ and current
reports, registration statements, proxy statements and information
statements that are prepared by issuers to provide investors with the
information they need to make informed investment decisions in
registered offerings and in secondary market transactions, as well as
informed voting decisions in the case of proxy statements.
---------------------------------------------------------------------------

    \551\ The pertinent annual reports are those on Form 10-K or 10-
KSB.
---------------------------------------------------------------------------

    Our amendments to the forms and regulations are intended to:
     Provide investors with a clearer and more complete picture
of compensation awarded to, earned by or paid to principal executive
officers, principal financial officers, the highest paid executive
officers other than the principal executive officer and principal
financial officer, and directors;

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

B. Summary of Information Collections

    The amendments will increase existing disclosure burdens for annual
reports on Form 10-K \552\ and registration statements on Forms 10, S-
1, S-4 and S-11 by requiring:
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    \552\ The amended disclosure requirements regarding executive
and director compensation, beneficial ownership, related person
transactions and parts of the amended corporate governance
disclosure requirements are in Form 10-K, Schedule 14A and Schedule
14C. Form 10-K permits the incorporation by reference of information
in Schedule 14A or 14C to satisfy the disclosure requirements of
Form 10-K. The analysis that follows assumes that companies would
either provide the required disclosure in a Form 10-K only, if the
company is not subject to the proxy rules, or would incorporate the
required disclosure into the Form 10-K by reference to the proxy or
information statement if the company is subject to the proxy rules.
This approach takes into account the burden from the amended
disclosure requirements that are included in both the Form 10-K and
in Schedule 14A or Schedule 14C.
---------------------------------------------------------------------------

     An expanded and reorganized Summary Compensation Table,
which will require expanded disclosure of a ``total compensation''
amount, and information necessary for computing the total amount of
compensation, such as the grant date fair value of equity-based awards
computed in accordance with FAS 123R, and the aggregate annual change
in the actuarial present value of the named executive officers'
accumulated benefit under defined benefit and actuarial pension plans;
     Disclosure at lower thresholds of information regarding
perquisites and other personal benefits;
     A more focused presentation of compensation plan awards in
a Grants of Plan-Based Awards Table, which builds upon former tabular
disclosures regarding long term incentive plans and awards of option
and stock appreciation rights to supplement the information required to
be included in the amended Summary Compensation Table;
     Expanded disclosure regarding holdings and exercises by
named executive officers of previously awarded stock, options and
similar instruments (with disclosure regarding outstanding option
awards required on an award-by-award basis), including disclosure of
option exercise prices and expiration dates, as well as the amounts
(both the number of shares and the value) realized upon the exercise of
options and the vesting of stock;
     Improved narrative disclosure accompanying data presented
in the executive compensation tables and a new Compensation Discussion
and Analysis section to explain material elements of compensation of
named executive officers;
     With regard to Form 10-K, a short Compensation Committee
Report regarding the compensation committee's review and discussion
with management of the Compensation Discussion and Analysis, and the
compensation committee's recommendation to the board of directors
concerning the disclosure of the Compensation Discussion and Analysis
in the Form 10-K or proxy or information statement;
     New tables and narrative disclosure regarding retirement
plans and nonqualified defined contribution and other deferred
compensation plans;
     Expanded disclosure regarding post-employment payments
other than pursuant to retirement and deferred compensation plans;
     A new table and improved narrative disclosure for director
compensation to replace the more general disclosure requirements in
place prior to these amendments;
     Disclosure regarding additional related persons by
expanding the definition of ``immediate family member'' under an
amended related person transaction disclosure requirement;
     New disclosure regarding a company's policies and
procedures for the review, approval or ratification of transactions
with related persons;
     New disclosure regarding corporate governance matters such
as the independence of directors; and
     Additional disclosure regarding pledges of securities by
officers and directors and directors' qualifying shares.
    At the same time, the amendments will decrease existing disclosure
burdens for annual reports on Form 10-K and registration statements on
Forms 10, S-1, S-4 and S-11 by:
     Eliminating tabular presentation regarding projected stock
option values under alternative stock appreciation scenarios;
     Eliminating a generalized tabular presentation regarding
defined benefit plans, which will offset in part the increased burdens
regarding pension plan disclosure; and
     Eliminating a disclosure requirement regarding specific
director relationships that could affect independence.
    In addition, the amendments may increase or decrease existing
disclosure burdens, or not affect them at all, for annual reports on
Form 10-K and registration statements on Forms 10, S-1, S-4 and S-11,
depending on a company's particular circumstances, by:
     Eliminating the requirement to include in proxy or
information statements a compensation committee report on the repricing
of options and stock appreciation rights and a table reporting on the
repricing of options and stock appreciation rights over the past ten
years, in favor of a narrative discussion of repricings, if any
occurred in the last fiscal year, which will be required to be included
or incorporated by reference (as applicable) in annual reports and
registration statements;
     Increasing the dollar value threshold for determining if
related person transaction disclosure is required from $60,000 to
$120,000;
     Narrowing the scope of an instruction that provides bright
line tests for determining whether transactions with related persons
are required to be disclosed in particular circumstances; and
     Requiring disclosure about reliance on an exemption from
requirements for director independence when such an exemption is
available.
    Specifically with respect to proxy and information statements, the
amendments will impose a new disclosure requirement regarding the

company's processes and procedures for the consideration and
determination of executive and director compensation with respect to
the compensation committee or persons performing the equivalent
functions, and disclosure regarding the availability of the
compensation committee's charter (if it has one), either as an appendix
to the proxy or information statement at least once every three fiscal
years or on the company's Web site. These amendments will not require a
compensation committee to establish or maintain a charter. The amended
disclosure that will be required regarding compensation committees is
similar to what is currently required for audit committees and
nominating committees. The amendments will decrease disclosure
requirements for proxy and information statements by eliminating a
disclosure requirement regarding the resignation of directors and a
compensation committee report on the repricing of options and stock
appreciation rights. The amendments require the Compensation Discussion
and Analysis disclosure in the annual report on Form 10-K and in proxy
or information statements to be accompanied by a short Compensation
Committee Report regarding the compensation committee's review and
discussion with management of the Compensation Discussion and Analysis,
and the compensation committee's recommendation to the board of
directors with regard to the disclosure of the Compensation Discussion
and Analysis. This new Compensation Committee Report, along with the
Compensation Discussion and Analysis, is required instead of the Board
Compensation Committee Report on Executive Compensation that was
previously required to be furnished with proxy and information
statements prior to these amendments. The extent to which eliminating
the former requirements to provide the Board Compensation Committee
Report on Executive Compensation and a compensation committee report on
the repricing of options and stock appreciation rights reduces burdens
for proxy and information statements will be offset to a substantial
extent, as discussed above, by the periodic reporting and proxy or
information statement requirements for Compensation Discussion and
Analysis, the new Compensation Committee Report and a narrative
disclosure requirement regarding repricings and other modifications of
outstanding awards. The Compensation Discussion and Analysis and
narrative disclosure requirement regarding repricings and other
modifications will be required to be included or incorporated by
reference in annual reports and registration statements, while the
Compensation Committee Report will only be required to be included or
incorporated by reference from the proxy or information statement in
the annual report on Form 10-K. We estimate that, on balance, the
changes that are specific to proxy or information statements will
result in some incremental burdens on proxy or information statement
collections of information, as described in more detail below.
    The amendments will increase existing disclosure burdens for annual
reports on Form 10-KSB \553\ and registration statements on Forms 10-SB
and SB-2 filed by small business issuers by requiring:
---------------------------------------------------------------------------

    \553\ The same analysis as discussed above with regard to the
relationship of Form 10-K to the disclosure required in proxy or
information statements is also applied to Form 10-KSB.
---------------------------------------------------------------------------

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

these items. The amendments will increase the existing disclosure
burdens for Form N-2 by requiring business development companies to
provide additional disclosure regarding compensation. However, the
amendments will decrease the existing disclosure burden by no longer
requiring compensation disclosure with respect to certain affiliated
persons and the advisory board of business development companies and by
no longer requiring business development companies to disclose certain
compensation from the fund complex.
    The amendments will decrease the Form 8-K disclosure burdens, by
focusing the Form 8-K disclosure requirement on more presumptively
material employment agreements, plans or arrangements of the narrower
group of named executive officers, which should reduce the number of
current reports on Form 8-K filed each year relating to executive and
director compensation matters.
    We do not believe that our amendments regarding exhibit filing
requirements for Form 20-F and our treatment of foreign private issuers
under the revised rules will impose any incremental increase or
decrease in the disclosure burden for these issuers.

C. Summary of Comment Letters and Revisions to Proposals

    We requested comment on the Paperwork Reduction Act analysis
contained in the Proposing Release. We did not receive comments on our
Paperwork Reduction Act estimates; \554\ however, a number of
commenters expressed concerns that costs associated with the proposals
were understated. Commenters also raised concerns with costs and
burdens associated with particular aspects of the proposals.
---------------------------------------------------------------------------

    \554\ One commenter noted our aggregate burden estimates in
commenting that the ``administrative costs'' noted in the Proposing
Release did not account for the need to overcome compliance risks
``where concern for satisfying new rules is multiplied by the
potential legal risks associated with sufficiency and completeness
under a regime of CEO and CFO certification.'' Letter from Hodak
Value Advisors.
---------------------------------------------------------------------------

    One commenter indicated that the Commission needs to take into
consideration that the disclosure is more detailed and lengthy, and
realistically will require more preparation time by more people;
historically, the individuals involved in the process outside a company
have been attorneys and accountants who are preparing or reviewing the
documents, but compensation consultants and their advisors and special
counsel to the directors would be introduced into the process; and the
cost analysis does not reflect additional director time that will be
required to read the lengthy new disclosure.\555\ The commenter also
expressed the view that smaller to mid-size issuers will be negatively
affected disproportionately more than larger public companies, as
disclosure requirements increase and greater reliance on external
support is thus necessitated.
---------------------------------------------------------------------------

    \555\ See letter from Chamber of Commerce.
---------------------------------------------------------------------------

    Other commenters stated their belief that the Commission
underestimated the cost of the proposed disclosure requirements.\556\
One of these commenters cited the limited availability of information
from existing information systems and requested that the Commission
afford an adequate transition period to accommodate the proposed
changes,\557\ while another commenter suggested that the proposal would
notably impose a reporting and administrative burden that would add to
the already substantial reporting obligations imposed by the Sarbanes-
Oxley Act of 2002 and related rules.\558\ Another commenter noted that
companies will likely incur considerable costs in preparing the first
proxy statement under the revised rules, even if, as was proposed, they
do not have to ``restate'' compensation for prior years.\559\
---------------------------------------------------------------------------

    \556\ See, e.g., letters from Computer Sciences; HRPA; N.
Ludgus; and Kathy B. Wheby.
    \557\ See letter from Computer Sciences.
    \558\ See letter from HRPA.
    \559\ See letter from Sullivan.
---------------------------------------------------------------------------

    Other commenters noted that specific aspects of the proposals would
result in significant costs or burdens, including:
     Compensation Discussion and Analysis generally, as well as
the status of this disclosure as filed rather than furnished; \560\
---------------------------------------------------------------------------

    \560\ See, e.g., letters from Hodak Value Advisors and Chamber
of Commerce.
---------------------------------------------------------------------------

     Disclosure of the increase in actuarial value of pension
plans in the Summary Compensation Table and its inclusion in the
determination of named executive officer status; \561\
---------------------------------------------------------------------------

    \561\ See, e.g., letters from E&Y and KPMG.
---------------------------------------------------------------------------

     Lowering the disclosure threshold for perquisites and
other personal benefits to $10,000, and changing the threshold for
separate identification and quantification; \562\
---------------------------------------------------------------------------

    \562\ See, e.g., letters from Hodak Value Advisors; ACC; Eli
Lilly; and NACCO Industries.
---------------------------------------------------------------------------

     Footnote disclosure to the Outstanding Equity Awards at
Year-End Table regarding expiration and vesting dates; \563\
---------------------------------------------------------------------------

    \563\ See, e.g., letters from ABA; Leggett & Platt; SCSGP; and
Sidley Austin.
---------------------------------------------------------------------------

     Plan-by-plan disclosure of pension benefits; \564\
---------------------------------------------------------------------------

    \564\ See, e.g., letters from ABA; Hewitt; HRPA; and Towers
Perrin.
---------------------------------------------------------------------------

     Numerical estimates of termination or change in control
payments; \565\
---------------------------------------------------------------------------

    \565\ See, e.g., letters from Sullivan; Kellogg; SCSGP; and
Chamber of Commerce.
---------------------------------------------------------------------------

     Amendments to the related person transaction disclosure
requirement; \566\
---------------------------------------------------------------------------

    \566\ See, e.g., letters from American Bankers; Whitney Holding;
SCSGP; and FSR.
---------------------------------------------------------------------------

     Disclosure of director relationships (other than those
disclosed under the related person transaction disclosure requirement)
considered by the board of directors when making independence
determinations; \567\ and
---------------------------------------------------------------------------

    \567\ See, e.g., letters from BRT; Chadbourne; Chamber of
Commerce; FSR; Intel; SCSGP; Sidley Austin; and Sullivan.
---------------------------------------------------------------------------

     Disclosure regarding the use of compensation consultants
by the compensation committee \568\ as well as the contacts between
compensation consultants and executive officers of the company.\569\
---------------------------------------------------------------------------

    \568\ See, e.g., letters from Chamber of Commerce and Compensia.
    \569\ See, e.g., letters from Mercer and Compensia.
---------------------------------------------------------------------------

    Some commenters also noted their belief that costs and burdens
arising from the proposals would disproportionately affect small
business issuers and smaller public companies.\570\
---------------------------------------------------------------------------

    \570\ See, e.g., letters from ABA; ACB; ICBA; and SCSGP.
---------------------------------------------------------------------------

    We have made substantive modifications to the proposals that
address, in part, the concerns expressed by commenters about costs.
Some of the changes in the final rules include:
     Treating Compensation Discussion and Analysis as filed
(and not furnished), but requiring a separate Compensation Committee
Report over the names of compensation committee members as a means of
emphasizing the committee's involvement in the disclosure and providing
additional information to which the principal executive officer and
principal financial officer may look to in completing their
certifications;
     Requiring disclosure of the actuarial present value of the
named executive officers' accumulated benefits under defined benefit
and actuarial pension plans in the Pension Benefits Table, which under
the final rules will include the actuarial present value of accumulated
benefits computed by utilizing assumptions used for financial reporting
purposes under generally accepted accounting principles (rather than
requiring disclosure of an estimate of the annual benefit payable upon
retirement as proposed), and requiring in the Summary Compensation
Table

the aggregate annual change in that value, so that the Summary
Compensation Table data will directly relate to the data presented in
the Pension Benefits Table;
     Specifying that companies compute estimates of
compensation under post-termination arrangements applying the
assumptions that the triggering event occurred on the last day of the
company's last completed fiscal year and the price per share of the
company's securities is the closing market price on that day;
     Specifying that companies must exclude the amounts for the
aggregate annual change in the actuarial present value of accumulated
benefits under defined benefit and actuarial pension plans and the
above-market or preferential earnings on nonqualified deferred
compensation when determining which executive officers are named
executive officers for the purposes of disclosure in the compensation
tables;
     Including some instructions to the related person
disclosure requirement that were proposed to be eliminated, so that
some bright line standards for non-disclosure, as modified, continue to
apply with respect to specific transactions;
     Requiring disclosure of director relationships (other than
any transactions, relationships or arrangements disclosed under the
related person transaction disclosure requirement) considered by the
board of directors when making independence determinations by specific
category or type, rather than by individual transactions, relationships
or arrangements as proposed; and
     Not requiring that companies identify the executive
officers that compensation consultants have contacted as proposed.
    Further, the final rules applicable to small business issuers are
adopted substantially as proposed, providing for significantly less
detailed disclosure regarding executive compensation for these
companies as compared to the disclosure required for larger issuers.
    We made other modifications to the proposals in response to issues
raised by commenters that could, depending on the particular
circumstances, increase costs relative to the costs estimated for the
proposals. In this regard, the final rules:
     Require expanded disclosure about option grants and
outstanding options, including disclosure of the date the compensation
committee or full board took action or was deemed to take action to
grant an award if that date is different from the grant date, a
description of the methodology for determining the exercise price of
options if the exercise price is not determined based on the closing
market price on the date of grant, and the amount of securities
underlying unexercised options, the exercise prices and the option
expiration dates for each outstanding option (rather than on an
aggregate basis as proposed);
     Require disclosure of the Performance Graph (which would
have been eliminated under the proposals) in annual reports to security
holders that precede or accompany a proxy or information statement
relating to an annual meeting at which directors are to be elected; and
     Require disclosure about reliance on an exemption from
requirements for director independence when such an exemption is
available.

D. Revisions to Paperwork Reduction Act Burden Estimates

    As discussed above, in consideration of commenters' concerns that
the costs associated with the disclosure requirements were understated
in the Proposing Release, we are revising our Paperwork Reduction Act
burden estimates that were originally submitted to the Office of
Management and Budget. In revising our estimates, we have considered
the comments identifying increased costs and burdens in the proposals,
as well as the revisions that we have made in the final rules as
compared to the proposals in response to some of the commenters'
concerns.
    The discussion that follows focuses on the incremental change in
burden estimates resulting from the amendments adopted today. The pre-
existing burden estimates to which these incremental changes will be
added reflect the current aggregate burden assigned to each information
collection, which already include the estimated burden of complying
with the executive compensation, related person transaction and
corporate governance disclosure requirements in place before adoption
of these amendments. The burden estimates (expressed as total burden
hours per form) prior to adding the additional burdens imposed by the
amended executive compensation, related person transaction and
corporate governance rules are as follows: 2,202 hours for Form 10-K;
1,646 hours for Form 10-KSB; 156 hours for Form 10; 133 hours for Form
10-SB; 593 hours for Form SB-2; 1,102 hours for Form S-1; 4,048 hours
for Form S-4; 1,892 hours for Form S-11; 271.4 hours for Form N-2;
\571\ 5 hours for Form 8-K; 84.5 hours for Schedule 14A; and 84 hours
for Schedule 14C. The estimated incremental burden arising from today's
amendments for each of these forms has been estimated with reference to
each of these pre-existing burden estimates.
---------------------------------------------------------------------------

    \571\ The pre-existing estimate for Form N-2 represents the
internal hour burden per response. In addition there is a pre-
existing external cost estimate for Form N-2 of $12,766 per
response.
---------------------------------------------------------------------------

    For purposes of the Paperwork Reduction Act, we now estimate that
the annual incremental increase in the paperwork burden for companies
to comply with our collection of information requirements to be
approximately 783,284 hours of in-house company personnel time and to
be approximately $133,883,300 for the services of outside
professionals.\572\ These estimates include the additional time and the
cost of collecting information, preparing and reviewing disclosure,
filing documents and retaining records over our existing burden
estimate for preparing executive compensation, related person
transaction and corporate governance disclosures. Our methodologies for
deriving these revised estimates are discussed below.
---------------------------------------------------------------------------

    \572\ For administrative convenience, the presentation of the
totals related to the paperwork burden hours have been rounded to
the nearest whole number and the cost totals have been rounded to
the nearest hundred.
---------------------------------------------------------------------------

    Our revised estimates represent the average burden for all issuers,
both large and small.\573\ As described below, we expect that the
burdens and costs could be greater for larger issuers and lower for
smaller issuers under the rules as adopted. For Exchange Act annual
reports on Forms 10-K or 10-KSB, current reports on Form 8-K, proxy
statements and information statements, we estimate that 75% of the
burden of preparation is carried by the company internally and that 25%
of the burden is carried by outside professionals retained by the
issuer at an average cost of $400 per hour.\574\ For Securities Act
registration statements on Forms SB-2, S-1, S-4, S-11, or N-2 and
Exchange Act registration statements on Forms 10

or 10-SB, we estimate that 25% of the burden of preparation is carried
by the company internally and that 75% of the burden is carried by
outside professionals retained by the issuer at an average cost of $400
per hour.\575\ The portion of the burden carried by outside
professionals is reflected as a cost, while the portion of the burden
carried by the company internally is reflected in hours.
---------------------------------------------------------------------------

    \573\ Our estimates are based on annual responses on Form 10-K
of 8,602 and annual responses on Form 10-KSB of 3,504. Our estimates
of the number of annual responses to the collections of information
are based on the number of filings made in the period from October
1, 2004 through September 30, 2005.
    \574\ At the proposing stage, we used an estimated hourly rate
of $300.00 to determine the estimated cost to public companies of
executive compensation and related disclosure prepared or reviewed
by outside counsel. We recently have increased this hourly rate
estimate to $400.00 per hour after consulting with several private
law firms. The cost estimates in this release are based on the
$400.00 hourly rate.
    \575\ As mentioned above, we do not believe that the amendments
increasing to $120,000 the current $60,000 threshold in Forms N-1A,
N-2, and N-3 for disclosure of certain interests, transactions, and
relationships of disinterested directors will significantly impact
the hours of company personnel time and cost of outside
professionals in responding to these items.
---------------------------------------------------------------------------

1. Securities Act Registration Statements, Exchange Act Registration
Statements, Exchange Act Annual Reports, Proxy Statements and
Information Statements
    For the purposes of the Paperwork Reduction Act, we estimate that,
over a three year period,\576\ the annual incremental disclosure burden
imposed by the amendments will average 95 hours per Form 10-K; 50 hours
per Form 10-KSB; 85 hours per Form 10; 45 hours per Forms 10-SB and SB-
2; 74 hours per Form S-1; 17 hours per Form S-4; 85 hours per Form S-
11; 3 hours per Schedules 14A and 14C; and 5 hours per Form N-2.\577\
While the amendments to Item 22(b) of Schedule 14A and increasing to
$120,000 the former $60,000 threshold in Forms N-1A, N-2, and N-3 for
disclosure of certain interests, transactions, and relationships of
disinterested directors may increase or decrease existing disclosure
burdens, or not affect them at all, depending on the particular
circumstances, we estimate that, as discussed below, the amendments
will not impose an annual incremental disclosure burden.
---------------------------------------------------------------------------

    \576\ We calculated an annual average over a three year period
because OMB approval of Paperwork Reduction Act submissions covers a
three year period. Embedded in the three year period is the
recognition that the costs in the initial year of compliance are
likely to be higher than in later years.
    \577\ In the Proposing Release, we estimated that the proposed
revisions would average 67 hours per Form 10-K; 35 hours per Form
10-KSB; 60 hours per Form 10; 30 hours per Forms 10-SB and SB-2; 60
hours per Forms S-1, S-4 and S-11; and 1.675 hours per Form N-2.
---------------------------------------------------------------------------

    These estimates were based on the following assumptions:
     The hours of company personnel time and outside
professional time required to prepare the disclosure regarding
executive and director compensation under amended Item 402 of
Regulation S-K will be greater in light of the expansion and
reorganization of the amended disclosure requirements relative to the
disclosure requirements on these topics in place prior to adoption of
these amendments, in particular the requirements regarding Compensation
Discussion and Analysis, expanded disclosures concerning options and
other equity-based awards and new disclosure requirements regarding
pension benefits, non-qualified deferred compensation, other potential
post-employment payments and director compensation.
     Companies filing annual reports on Form 10-K that will be
required to include disclosure under Item 402 of Regulation S-K, as we
are amending it, and Item 407(e)(4) of Regulation S-K (regarding
compensation committee interlocks and insider participation), will
experience greater costs in responding to these disclosure requirements
in the first year of compliance with them, and, to a lesser extent, in
the second and third years, as systems and processes are implemented to
obtain the relevant data and disclosure controls and procedures with
respect to new or expanded disclosure requirements are implemented,
with lower incremental costs expected in subsequent years.
     The hours of company personnel time and outside
professional time required to prepare the disclosure regarding related
person transactions under amended Item 404, director independence under
new Item 407(a) and compensation committee functions under paragraphs
(e)(1) through (e)(3) of Item 407 of both Regulation S-K and Regulation
S-B, will be greater as compared to the burden that was imposed in
complying with the related party transaction disclosure requirements
and disclosure about the board of directors required by Item 404 of
Regulations S-K and S-B and Item 7 of Schedule 14A prior to these
amendments. The new Compensation Committee Report that is required in
the Form 10-K (and is not required for small business issuers, because
they are not required to include Compensation Discussion and Analysis)
will increase the burdens. Other amendments to be made by moving
disclosure requirements relating to corporate governance to new Item
407 of Regulations S-K and S-B will not change the substance of the
disclosure requirements and will therefore not increase burdens,
particularly for proxy or information statements where much of the
disclosure about these topics is currently required.
     For Form 10-K, we estimate that it would take issuers 170
additional hours to prepare the amended disclosure in year one, 80
hours in year two and 35 hours in year three and thereafter, which
results in an average of 95 hours over the three year period to comply
with the amended disclosure requirements. This estimate takes into
account that the burden will be incurred by either including the
required disclosure in the report directly or incorporating by
reference from a proxy or information statement. This estimated
incremental burden is based on a consideration of the extent to which
the amendments will increase, decrease or not affect the burden imposed
by the requirements in place prior to these amendments, as described in
Section VIII.B., above. The incremental burden represents the estimate
of the average burden across the range of companies that file annual
reports on Form 10-K, recognizing that larger companies with more
complex executive and director compensation arrangements, more related
person transactions and more involved corporate governance structures
may require more time to comply with the amended disclosure
requirements, while smaller issuers with potentially less complex
circumstances are likely to require less time to comply with the
amended requirements.
     For proxy statements on Schedule 14A and information
statements on Schedule 14C, we estimate that it would take companies 6
additional hours to prepare the additional corporate governance and
other compensation committee disclosures required only in the proxy or
information statement in year one, and 2 hours in year two and 2 hours
in year three and thereafter, which results in an average of
approximately 3 hours over the three year period.\578\ As with the
estimates for Form 10-K, this estimated incremental burden is based on
a consideration of the extent to which the amendments will increase,
decrease or not affect the burden imposed by the requirements in place
prior to these amendments, as described in Section VIII.B., above. The
incremental burden represents the estimate of the average burden across
the range of companies that file proxy statements on Schedule 14A and

information statements on Schedule 14C, taking into account that larger
companies may require more time to comply with the amended disclosure
requirements, while smaller companies (including small business
issuers) with potentially less complex circumstances may require less
additional time to comply with the amended requirements.
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    \578\ Similarly, the hours of company personnel time and outside
professional time required to prepare the disclosure required by the
amended conforming revisions to Item 22(b) relating to the
independence of members of nominating and audit committees of
investment companies will be approximately the same as for
compliance with the requirements regarding disclosure of the
independence of nominating and audit committee members of investment
companies that were required by Item 7 of Schedule 14A prior to
today's amendments.
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     Companies filing registration statements on Forms 10, S-1,
S-4 and S-11 that are not already filing periodic reports pursuant to
Exchange Act Sections 13(a) or 15(d) will in many cases not have been
required to comply with the amended disclosure requirements prior to
filing such registration statements, and will therefore take an
estimated 85 additional hours on average to comply with the changes in
the disclosure requirements. For Forms S-1 and S-4, which permit
incorporation of information by reference to disclosure provided in
Exchange Act reports, we have estimated a lower average incremental
number of burden hours in order to recognize that the incremental
burden arising from the amendments is already factored into the
estimated average incremental burden for Forms 10-K and 10-KSB.\579\
These estimated incremental burdens are based on a consideration of the
extent to which the amendments will increase, decrease or not affect
the burden imposed by the requirements in place prior to these
amendments, as described in Section VIII.B., above. The additional time
required by these companies to obtain the relevant data and to compile
the required executive compensation information is offset to some
extent by the fact that only one year of executive compensation
information will generally be required for presentation in the Summary
Compensation Table, as compared to three years for issuers already
subject to Exchange Act reporting requirements. By contrast,
information regarding related person transactions, as was the case
prior to the amendments, is generally required for three years in
Securities Act and Exchange Act registration statements, so that any
additional burden associated with obtaining data and compiling the
related person transaction disclosure under the amended requirements
would be with respect to this three year period.
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    \579\ For Form S-1, we estimate an average incremental burden of
74 hours, based on an estimate that 459 out of the 528 registration
statements that we estimate will be filed on Form S-1 will not
include the disclosure contemplated by these rule changes through
incorporation by reference to a Form 10-K or Form 10-KSB (459
filings times 85 hours = 39,015 hours, which when divided by the 528
total annual filings results in approximately 74 hours per Form S-
1). For Form S-4, we estimate an average incremental burden of 17
hours, based on an estimate that 123 out of the 619 registration
statements that we estimate will be filed on Form S-4 will not
include the disclosure contemplated by these rule changes through
incorporation by reference to a Form 10-K or Form 10-KSB (123
filings times 85 hours = 10,455 hours, which when divided by the 619
total annual filings results in approximately 17 hours per Form S-
4).
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     Small business issuers filing annual reports on Form 10-
KSB will be subject to lower incremental costs than other issuers as a
result of the amendments, given the reduced disclosure required by Item
402 of Regulation S-B relative to Item 402 of Regulation S-K, as
described above. As with companies filing annual reports on Form 10-K,
we expect that small business issuers will experience greater costs in
responding to the amended disclosure requirements in the first year of
compliance with them, as systems are implemented to obtain the relevant
data and disclosure controls and procedures with respect to new or
expanded disclosure requirements are implemented, with lower
incremental costs in subsequent years.
     For Form 10-KSB, we estimate that it would take issuers an
estimated 100 additional hours on average to prepare their disclosure
under the amended requirements in year one, 35 additional hours in year
two and 15 additional hours in year three and thereafter, which results
in an average of 50 additional hours over the three year period. This
estimate assumes that the burden would be incurred by either including
the amended disclosure in the report directly or incorporating by
reference from a proxy or information statement. This estimated
incremental burden is based on a consideration of the extent to which
the amendments will increase, decrease or not affect the burden imposed
by the requirements in place prior to these amendments, as described in
Section VIII.B., above. The incremental burden represents the estimate
of the average burden across the range of companies that file annual
reports on Form 10-KSB, recognizing that small business issuers with
more complex executive and director compensation arrangements, more
related person transactions and more involved corporate governance
structures may require more time to comply with the amended disclosure
requirements, while other small business issuers with potentially less
complex circumstances, particularly the smallest companies in this
group, are likely to require less time to comply with the amended
requirements.
     Small business issuers filing registration statements on
Forms 10-SB and SB-2, including those small business issuers that are
not already filing periodic reports pursuant to Exchange Act Sections
13(a) or 15(d) and thus will not have been required to comply with the
amended disclosure requirements prior to filing such registration
statements, will take an estimated 45 additional hours on average to
comply with the changes in the disclosure requirements. The additional
time required by these registrants to obtain the relevant data and to
compile the required information is offset to some extent by the fact
that only one year of compensation information will generally be
required for presentation in the Summary Compensation Table, as
compared to two years for small business issuers already subject to
Exchange Act reporting requirements.
     Based on our experience with the requirement we adopted in
1998 for issuers to write certain sections of prospectuses in plain
English, drafting documents in plain English will result in an initial
increase in time and cost burdens in the first year of implementation,
and to a lesser extent, the second year, with those time or cost
burdens decreasing in the year following implementation of the new
rules. To the extent that companies incorporate required information by
reference to proxy or information statements, the amended plain English
requirements would apply to disclosure in those filings; however, the
incremental burden of preparing plain English disclosure is factored
into the burden estimates for Forms 10-K and 10-KSB. The plain English
rule amendments will not affect the substance of the required
disclosure, and companies that have filed registration statements under
the Securities Act are already familiar with the requirements.
     The amendments to increase to $120,000 the former $60,000
threshold for disclosure of certain interests, transactions, and
relationships of disinterested directors in Forms N-1A, N-2, and N-3
and in proxy and information statements may increase or decrease
existing disclosure burdens, or not affect them at all, depending on
the particular circumstances. Because these forms are already required
to disclose these interests, transactions, and relationships in amounts
exceeding $60,000, we do not believe the increase in the disclosure
threshold will significantly impact the hours of company personnel time
and cost of outside professionals in responding to these items, and we
estimate these amendments will neither increase nor decrease the annual
paperwork burden.

     Business development companies filing Form N-2 will be
required to include Item 402 of Regulation S-K, as we are amending it,
and will experience higher costs in responding to these disclosure
requirements in the first year of complying with them, and, to a lesser
extent, in the second year, as systems are implemented to obtain the
relevant data and compliance efforts with respect to new or expanded
disclosure requirements are implemented, with lower incremental costs
expected in subsequent years.\580\
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    \580\ For Form N-2, we estimate that it will take business
development companies 150 additional hours to prepare the amended
disclosure in year one, 75 hours in year two and 30 hours in year
three and thereafter, which results in an average of 85 hours for
each business development company to comply with the amended
compensation disclosures that would be required on Form N-2. We
estimate an average annual incremental disclosure burden of 5 hours
per Form N-2, based on 85 hours per Form N-2 filing by business
development companies times 27 filings on Form N-2 by business
development companies (representing all Form N-2 and N-2/A filings
by business development companies during the year ended December 31,
2005) (85 hours times 27 Form N-2 filings (including amendments) =
2,295 hours), divided by 462 total annual filings on Form N-2
(representing all Form N-2 and N-2/A filings during the year ended
December 31, 2005) (2,295 hours divided by 462 filings on Form N-2
(including amendments) = approximately 5 hours per Form N-2
(including amendments)).
    We note that in the Proposing Release, we estimated 935 total
annual filings on Form N-2 and N-2/A, but this higher number double
counted certain filings that were made under both the Securities Act
and the Investment Company Act. Our revised estimate is 462 annual
filings.
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    Tables 1 and 2 below illustrate the incremental annual compliance
burden in the collection of information in hours and cost for Exchange
Act periodic reports for companies other than registered investment
companies, proxy statements, information statements, Securities Act
registration statements and Exchange Act registration statements.

    Table 1.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic Reports, Proxy Statements and Information
                                                                       Statements
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                                                                                $400
                          Form                                Annual        Incremental     Incremental     75% Issuer          25%        Professional
                                                             responses      hours/form        burden                       Professional        cost
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