Release No. 33-8655
Release No. 34-53185

Release No. IC-27218
 

Securities and Exchange Commission

Executive Compensation and Related Party Disclosure
Section II.B.3 - II.B.9

    Release Table of Contents

II. Executive and Director Compensation Disclosure
    B. Compensation Tables
       .............

3. Narrative Disclosure to Summary Compensation Table and Supplemental Tables

We propose requiring narrative disclosure in order to give context to the tabular disclosure following the Summary Compensation Table, the Grants of Performance-Based Awards Table and the Grants of All Other Equity Awards Table. A company would be required to provide a narrative description of any additional material factors necessary to an understanding of the information disclosed in the tables.¹³⁰ Unlike the Compensation Discussion and Analysis, which would focus on broader topics regarding the objectives and implementation of executive compensation policies, this narrative disclosure would focus on and provide context to the quantitative disclosure in the tables. The material factors will vary depending on the facts, but may include, in given cases, among other things, descriptions of the material terms in the named executive officers' employment agreements, which may be a potential source of material information necessary to an understanding of the tabular disclosure. The proposed narrative disclosure would cover written or unwritten agreements or arrangements. Requiring this disclosure in proximity to the Summary Compensation Table is intended to make the tabular disclosure more meaningful.¹³¹ Mere filing of employment agreements (or summaries of oral agreements) may not be adequate to disclose material factors depending on the circumstances.

The factors that could be material include each reprising or other material modification of any outstanding option or other stock-based award during the last fiscal year. This disclosure would address not only option reprising, but also other significant changes to the terms of stock-based or other awards. We propose to eliminate the current ten-year option reprising table.¹³² In its place, the narrative disclosure following the Summary Compensation Table would describe, to the extent material and necessary to an understanding of the tabular disclosure, reprising, extension of exercise periods, change of vesting or forfeiture conditions, change or elimination of applicable performance criteria, change of the bases upon which returns are determined, or any other material modification. The tabular disclosure would reflect the awards total fair value after any such modification as a new award.¹³³

Narrative text accompanying the tables would also describe, to the extent material and necessary to an understanding of the tabular disclosure, award terms relating to data provided in the Grants of Performance-Based Awards Table, which could include, for example, a general description of the formula or criteria to be applied in determining the amounts payable, the vesting schedule, a description of the performance-based conditions and any other material conditions applicable to the award, whether dividends or other amounts would be paid, the applicable rate and whether that rate is preferential. Consistent with current disclosure requirements, however, companies would not be required to disclose any factor, criteria, or performance-related or other condition to payout or vesting of a particular award that involves confidential commercial or business information, disclosure of which would adversely affect the companys competitiveposition.¹³⁴

Another factor that may be necessary to an understanding of the information disclosed in the tables is any material waiver or modification of any specified performance target, goal or condition to payout under any reported incentive plan payout because each action can materially affect previously disclosed information about the plans. Companies would be required to disclose as part of this narrative discussion whether the waiver or modification applied to one or more specified named executive officers or applied to all compensation subject to the condition.¹³⁵

Material factors necessary to an understanding of the tabular disclosure could also include information regarding defined benefit and deferred compensation plans. For example, such information could include material assumptions underlying the determination of the amount of increase in actuarial value of defined benefit or actuarial plans or the provisions in a plan or otherwise for determining earnings on deferred compensation plans, including defined contribution plans, that are not tax-qualified.

We also propose an additional item that would require disclosure for up to three employees who were not executive officers during the last competed fiscal year and whose total compensation for the last completed fiscal year was greater than that of any of the named executive officers.¹³⁶ The item would require disclosure of the amount of each of such employees total compensation for the most recent fiscal year and a description of his or her job position. The individuals would not need to be named. We are proposing this requirement so that shareholders will have information about the use of corporate assets to compensate extremely highly paid employees in a company. More detailed information about these employees and their compensation does not appear appropriate in light of the fact that they do not have a policy making function at thecompany.¹³⁷

Request for Comment

Will the proposed narrative disclosure to the Summary Compensation Table enhance an understanding of the table?

Are there any additional material factors that should be listed as possibly requiring disclosure in the narrative to the Summary Compensation Table?

Is the difference between the proposed required narrative disclosure and the Compensation Discussion and Analysis requirement sufficiently clear? How can it be made more clear?

Should we require an additional column in the Summary Compensation Table where companies must indicate by checkmark whether a particular named executive officer has an employment agreement, so that investors will know to look for disclosure about the agreement in the narrative accompanying the table or to look for the agreement as an exhibit to a filing with us?

Is the proposed treatment of repricings the most appropriate approach for executive compensation disclosure purposes? Should the treatment be consistent with the reporting approach of FAS 123R? Would tabular presentation rather than discussion of material terms in the narrative be preferable? In addition to the disclosure proposed in the Summary Compensation Table and the related narrative, should we also require quantification of the fair value of the award both immediately before and immediately after the repricing or other modification?

Would the proposed disclosure of up to three employees who are not executive officers but earn more in total compensation than any of the named executive officers be appropriate in the narrative discussion? Should more disclosure be required regarding these employees and their compensation? Is this information material to investors? Will disclosure of this information, particularly in the case of smaller companies, cause competitive harm? Is disclosure of this information consistent with the overall goals of this proposal?

4. Exercises and Holdings of Previously Awarded Equity

The next section of proposed executive compensation disclosure would provide investors with an understanding of the compensation in the form of equity that has previously been awarded and remains outstanding, that is unexercised or unvested. This section also would disclose amounts realized on this type of compensation during the most recent fiscal year when, for example, a named executive officer exercises an option or his or her stock award vests. We propose two tables. One table shows the amounts of prior awards outstanding and the other shows the exercise or vesting of equity awards during the fiscal year.¹³⁸

a. Outstanding Equity Awards at Fiscal Year-End

Outstanding awards that have been granted but the ultimate outcomes of which have not yet been realized in effect represent potential amounts that the named executive officer might or might not realize, depending on the outcome for the measure or measures for example, stock price or performance benchmarks) to which the award relates. We are proposing a table that would disclose information regarding outstanding awards under, for example, stock option (or stock appreciation rights) plans, restricted stock plans, incentive plans and similar plans and disclose the market-based values of the options, rights, shares or units in question as of the companys most recent fiscal yearend.¹³⁹

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

With respect to options, stock appreciation rights and similar instruments, an instruction, which would be the same as the current standard, would indicate that these instruments are "in-the-money" if the market price of the underlying securities exceeds the exercise or base price. The in-the-money amount of options, stock appreciation rights and similar instruments would be calculated by determining the difference, at fiscal yearend, between the market price of the underlying securities and the exercise or baseprice.¹⁴⁰ The market value of stock (including restricted stock, restricted stock units or other similar instruments) and incentive plan award holdings would be calculated by multiplying the closing market price of the companys stock at the end of the last completed fiscal year by the respective numbers of stock or incentive plan award holdings that were not then vested.¹⁴¹

A new instruction would require footnote disclosure of the expiration dates of options, stock appreciation rights and similar instruments held at fiscal year-end, separately identifying those that are exercisable and unexercisable, and the vesting dates of shares of stock (including restricted stock, restricted stock units or other similar instruments) and incentive plan awards held at fiscal year-end. If the expiration date of an option had occurred after fiscal year-end but before the date on which the disclosure is made, the footnote would need to state whether the option had been exercised or hadexpired.¹⁴²

Request for Comment

Will the proposed Outstanding Equity Awards at Fiscal Year-End Table provide material information for investors regarding the named executive officers' outstanding awards?

Should the table include the value of out-of-the-money options and stock appreciation rights? Why or why not? If such instruments were included, how would the value be calculated and presented?

Should we require, as proposed, that options or similar awards that have been transferred by an executive must still be included in the table? Should continued disclosure depend on the nature of the transfer or the identity of the transferee?

b. Option Exercises and Stock Vesting

We are proposing a table that would show the amounts received upon exercise of options or similar instruments or the vesting of stock or similar instruments during the most recent fiscal year. This table would allow investors to have a picture of the amounts that a named executive officer realizes on equity compensation through its final stage.¹⁴³

OPTION EXERCISES AND STOCK VESTED

The grant date fair value of these instruments would have been disclosed in the Summary Compensation Table for the year in which they were awarded. Therefore, to eliminate the impact of double disclosure, this table would show that amount from applicable previous years from the Summary Compensation Table.

Request for Comment

In light of the proposed disclosure in the Summary Compensation Table of the grant date fair value of the awards, is separate reporting of the amounts realized upon exercise or vesting appropriate? Would it provide material information? Would separate reporting of the market value at exercise or vesting confuse users of financial statements and perhaps cause them to call into question the original grant date fair value estimate?

Would the proposed separate column for grant date fair value previously reported for the same award eliminate potential confusion about the amount of compensation provided by options, stock appreciation rights, stock and similar instruments? Are there other ways we could make this clear, such as an explanatory footnote to the table?

Will investors understand that the value of equity compensation had already been disclosed in the form of the grant-date fair value of equity-based awards? Are other sources of this information, such as reports filed by officers and directors pursuant to Section 16(a) of the Exchange Act,¹⁴⁴ adequate to inform investors of the information contained in this table?

Would it be preferable to combine proposed Outstanding Equity Awards at Fiscal Year-End Table and the proposed Option Exercises and Stock Vested Table into one table?

5. Post-Employment Compensation

We are proposing significant revisions to the disclosure regarding post employment compensation to provide a clearer picture of this potential future compensation. Executive retirement packages and other post-termination compensation may represent a significant commitment of corporate resources and a significant portion of overall compensation. First, we are proposing to replace the current pension plan table, alternative plan disclosure and some of the other narrative descriptions with a table regarding defined benefit pension plans and enhanced narrative disclosure. Second, we are proposing a table and narrative disclosure that will disclose information regarding on-qualified defined contribution plans and other deferred compensation. Finally, we are proposing revised requirements regarding disclosure of compensation arrangements triggered upon termination and on changes in control.

a. Retirement Plan Potential Annual Payments and Benefits Table

We are proposing significant revisions to the rules disclosing retirement benefits to require disclosure of the estimate of retirement benefits to be payable at normal retirement age and, if available, early retirement.¹⁴⁵ Current disclosure frequently does not provide investors useful information regarding specific potential pension benefits. Current disclosure may make it difficult for the reader to understand which amounts relate to any particular named executive officer, and may thus obscure the value of a significant component of compensation.

As a result, we propose a new table disclosing estimated annual retirement payments under defined benefit plans for each named executive officer, followed by narrative disclosure.¹⁴⁶ A separate line of tabular disclosure would be required for each plan in which a named executive officer participates that provides for the payment of specified retirement benefits, or benefits that will be paid primarily following retirement.¹⁴⁷

An instruction would provide that quantification of benefits should reflect the form of benefit currently elected by the named executive officer, such as joint and survivor annuity or single life annuity, specifying that form in a footnote. Where the named executive officer is not yet eligible to retire, the dollar amount of annual benefits to which he or she would be entitled upon becoming eligible would be computed assuming that the named executive officer continued to earn the same amount of compensation as reported for the companys last fiscal year. If a named executive officer left during the year, the dollar amounts of annual benefits to which he or she would be entitled would be required to be disclosed.

"Normal retirement age" would mean the normal retirement age defined in the plan, or if not so defined, the earliest time at which a participant may retire under the plan without any benefit reduction due to age. "Early retirement age" would be defined similarly as early retirement age as defined in the plan, or otherwise available to the executive.¹⁴⁸ If the credited years of service for the executive under any plan differ from the actual years of service with the company, a footnote quantifying the difference and any resulting benefit increase would be required.¹⁴⁹

The table would be followed by a narrative description of material factors necessary to an understanding of each plan disclosed in the table. Examples of such factors in the proposed rule may include, in given cases, among other things:

the material terms and conditions of benefits available under the plan, including the plans retirement benefit formula and eligibility standards, and early retirement arrangements;

if the executive or company may elect a lump sum distribution, the amount of such distribution that would be available on election as of the end of the company's last fiscal year, disclosing the valuation method and material assumptions applied in quantifying such amount;

the specific elements of compensation, such as salary and various forms of bonus, included in applying the benefit formula, identifying each such element;

regarding participation in multiple plans, the reasons for each plan; and

company policies with regard to such matters as granting extra years of credited service.

Request for Comment

Should any other information (including information that may be disclosed in the narrative) be included in the proposed table? Should any of the information we propose to require to be disclosed be excluded?

Should this item require quantification of the aggregate actuarial value of a plan benefit as of the end of the companys last fiscal year without regard to whether the plan permits a lump sum distribution? If so, why? Alternatively, would this information provide meaningful disclosure only if the named executive officer currently is eligible to retire under the plan with a lump sum distribution?

Is there any particular form of plan for which the proposed disclosure format is not suitable? If so, how could the proposed disclosure requirement be adapted for such plans?

b. Nonqualified Defined Contribution and Other Deferred Compensation Plans Table

In order to provide a more complete picture of potential post-employment compensation, we are proposing a new table to disclose contributions, earnings and balances under nonqualified defined contribution and other deferred compensation plans. These plans may be a significant element of retirement and post-terminationcompensation.¹⁵⁰ Our current rules elicit disclosure of the compensation when earned and only the above-market earnings on nonqualified deferred compensation.¹⁵¹ The full value of those earnings and the accounts on which they are payable are not currently subject to disclosure, nor are shareholders and investors informed regarding the rate at which these amounts and the corresponding cost to the company are growing.¹⁵²Therefore, as noted above, we are proposing to require disclosure in the Summary Compensation Table of all earnings on compensation that is deferred on a basis that is not tax-qualified and are also proposing new tabular and narrative disclosure of nonqualified deferred compensation.¹⁵³

An instruction would require footnote quantification of the extent to which amounts in the contributions and earnings columns are reported as compensation in the year in question and other amounts reported in the table in the aggregate balance column were reported previously in the Summary Compensation Table for prior years.¹⁵⁴ This would complement the proposed instruction to the Summary Compensation Table that would require footnote disclosure of amounts for which receipt has been deferred.¹⁵⁵Together, these footnotes would operate to provide information so that investors can avoid "double counting" of deferred amounts by clarifying the extent to which amounts payable as deferred compensation represent compensation previously reported, rather than additional currently earned compensation.

The table would be followed by a narrative description of material factors necessary to an understanding of the disclosure in the table.¹⁵⁶ Examples of such factors in the proposed rule may include, in given cases, among other things:

the type (s) of compensation permitted to be deferred, and any limitations (by percentage of compensation or otherwise) on the extent to which deferral is permitted;

the measures of calculating interest or other plan earnings (including whether such measure (s) are selected by the named executive officer or the company and the frequency and manner in which such selections may be changed), quantifying interest rates and other earnings measures applicable during the companys last fiscal year; and

material terms with respect to payouts, withdrawals and other distributions.

Request for Comment

Should tabular or narrative disclosure require presentation of any additional information necessary for investors to clearly understand nonqualified deferred compensation? For example:

o Should the dollar amount of aggregate interest or other earnings accrued from inception of the named executive officers participation in the plan through the end of the companys last fiscal year be disclosed in the proposed table?

o Is a narrative description of the tax implications for both the participant and the company necessary to a material understanding of these plans?

In addition to the footnote required by the proposed instruction, are any other provisions necessary or appropriate to avoid "double counting" of previously reported compensation that will have been deferred?

Should only above market or preferential earnings be included in the table? If so, why would such disclosure be more useful or informative to investors?

Is any of the proposed new disclosure unnecessary? If so, please explain.

c. Other Potential Post-Employment Payments

We are proposing significant revisions to our requirements to describe termination or change in control provisions. The Commission has long recognized that "terminationprovisions are distinct from other plans in both intent and scope and, moreover, are of particular interest to shareholders."¹⁵⁷ Currently, disclosure does not in many cases capture material information regarding these plans and potential payments under them.

We therefore propose disclosure of specific aspects of any written or unwritten arrangement that provides for payments at, following, or in connection with the resignation, severance, retirement or other termination (including constructive termination) of a named executive officer, a change in his or her responsibilities, or a change in control of the company. Our proposals would call for narrative disclosure of the following information regarding termination and change in control provisions:¹⁵⁸

the specific circumstances that would trigger payment (s) under the termination or change-in-control arrangements or the provision of other benefits (references to benefits include perquisites);

the estimated payments and benefits that would be provided in each termination circumstance, and whether they would or could be lump-sum or annual, disclosing the duration and by whom they would be provided;¹⁵⁹

the specific factors used to determine the appropriate payment and benefit levels under the various circumstances that would trigger payments or provision of benefits;

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

any other material features necessary for an understanding of the provisions.

The item contemplates disclosure of the duration of non-compete and similar agreements, and provisions regarding waiver of breach of these agreements, and disclosure of tax gross-up payments.

As proposed, a company would be required to provide quantitative disclosure under these requirements even where uncertainties exist as to amounts payable under these plans and arrangements. In the event that uncertainties exist as to the provision of payments or benefits or the amounts involved, the company would be required to make reasonable estimates and disclose material assumptions underlying such estimates in its disclosure. In such event, the disclosure would be considered forward-looking information as appropriate that falls within the safe harbor for disclosure of suchinformation.¹⁶⁰

Request for Comment

Should we, as proposed, eliminate the current $100,000 threshold for disclosure for compensatory plans or arrangements providing payments upon termination or change-in-control?

Should the proposed item specifically require narrative disclosure of any additional information? If so, what information and why?

Would a tabular format result in more effective disclosure of any of this information? If so, how should such a table be constructed so that it is easily understood, given the wide variability of the factors determining payments? For example, should such a table have separate columns for cash payments, stock payments, and perquisites; separate lines for each potential termination event; and narrative disclosure of other material terms, such as duration, renewal and applicable covenants?

Should we require companies to provide quantitative disclosure as proposed? If not, how can there be assurance that investors can understand the significant amounts of compensation that may be involved?

6. Officers Covered

a. Named Executive Officers

We propose to have the principal executive officer, the principal financialofficer¹⁶¹ and the three most highly compensated executive officers other than the principal executive officer and principal financial officer comprise the named executiveofficers.¹⁶² In addition, as is currently the case, up to two additional individuals for whom disclosure would have been required but for the fact that they were no longer serving as executive officers at the end of the last completed fiscal year would be included.

We believe that compensation of the principal financial officer is important to shareholders because, along with the principal executive officer, the principal financial officer provides the certifications required with the companys periodic reports and has important responsibility for the fair presentation of the companys financial statements and other financial information.¹⁶³ Like the principal executive officer, disclosure about the principal financial officer would be required even if he or she was no longer serving in that capacity at the end of the last completed fiscal year.¹⁶⁴ As is currently the case for the chief executive officer, all persons who served as the companys principal executive officer or principal financial officer during the last completed fiscal year would be named executive officers.

We do not propose to require compensation disclosure for all of the officers listed in Item 5.02 of Form 8-K.¹⁶⁵ Item 5.02 of Form 8-K was adopted to provide current disclosure in the event of an appointment, resignation, retirement or termination of the specified officers, based on the principle that changes in employment status of these particular officers are unquestionably or presumptively material. At the time when a decision is made regarding the employment status of a particular officer, it will not always be clear who will be the named executive officers for the current year. Given these factors, it is reasonable for the two groups not to be identical.

Request for Comment

Should the principal financial officer be specifically included as a named executive officer?

Would the proposed named executive officers be those executive officers whose compensation is material to investors? Is only the compensation of the principal executive officer material? The principal executive officer and the principal financial officer?

Should Item 402 specifically require disclosure of the compensation of any other officers listed in Form 8-K Item 5.02? If so, which officers and why? If we were to require Item 402 disclosure regarding compensation of additional Item 5.02 officers, should we also require Item 402 disclosure for two or three additional officers who receive the highest compensation?

Are there any other specific executive officers, such as the general counsel or principal accounting officer, who should be specifically identified as named executive officers? If so, which officers and why?

Should we retain, as proposed, the current requirement that up to two additional individuals for whom disclosure would have been required but for the fact that they were no longer serving as executive officers at the end of the year be included in the disclosure?

Is the continuation of the current requirement for five named executive officers appropriate? Should that number be higher or lower?

b. Identification of Most Highly Compensated Officers; Dollar Threshold for Disclosure

We propose to identify the most highly compensated executive officers on the basis of total compensation for the most recent fiscal year.¹⁶⁶ We also propose to revise the dollar threshold for disclosure of named executive officers other than the principal executive officer and the principal financial officer to $100,000 of total compensation for the last fiscal year.¹⁶⁷ Both the determination of the most highly compensated officers and the $100,000 disclosure threshold are currently based only on total annual salary and bonus for the last fiscal year.¹⁶⁸ Given the proliferation of various forms of compensation other than salary and bonus, we believe that total compensation more accurately identifies those officers who are, in fact, the most highly compensated. Moreover, basing identification of named executive officers solely on the compensation reportable in the salary and bonus categories may provide an incentive to re-characterize compensation.

Under the current rules, companies are permitted to exclude an executive officer other than the chief executive officer) due to either an unusually large amount of cash compensation that is not part of a recurring arrangement and is unlikely to continue, or cash compensation relating to overseas assignments attributed predominantly to suchassignments.¹⁶⁹ Because payments attributed to overseas assignments have the potential to skew the application of Item 402 disclosure away from executives whose compensation otherwise properly would be disclosed, we propose to retain this basis for exclusion. However, we believe that other compensation that is "not recurring and unlikely to continue" should be considered compensation for disclosure purposes. There has been inconsistent interpretation of the "not recurring and unlikely to continue" standard, and it is susceptible to manipulation. We therefore propose to eliminate this basis for exclusion.¹⁷⁰

Request for Comment

Are there any particular circumstances or categories of companies for which admeasure other than total compensation should be applied to identify the most highly compensated executive officers? If so, what measure should be applied and why? Is $100,000 the correct disclosure threshold?

Should payments attributable to overseas assignments be included in determining the most highly compensated officers, given that the purpose of such payments typically is to compensate for disadvantageous currency exchange rates or high costs of living?

Are there any particular circumstances, such as commissions for executives responsible for sales, for which the "not recurring and unlikely to continue "standard should be retained?

7. Interplay of Items 402 and 404

We propose that Item 402 require disclosure of all transactions between the company and a third party where the primary purpose of the transaction is to furnish compensation to a named executive officer. Currently, while Item 402 states that such compensation is reportable under Item 402, even if also called for by another requirement, Item 402 also provides that information may be excluded if a transaction has been reported in response to Item 404.¹⁷¹ This provision may cause Item 402 disclosure to omit compensation that a transaction disclosed under Item 404 provides to executives.

We propose to eliminate that exclusion from Item 402.¹⁷² We also propose instructions to Item 404 that would clarify what compensation does not need to be reported under Item 404.¹⁷³ In some cases the result may nevertheless be that compensation information is disclosed under Item 402 while a related person transaction giving rise to that compensation is disclosed under Item 404. We believe the possibility of additional disclosure in the context of each of the respective items is preferable to the possibility that compensation is not properly and fully disclosed under Item 402.

Request for Comment

In light of the amendments to Item 404 that we also propose, are there any circumstances for which the current exclusion from Item 402 disclosure for transactions reported under Item 404 should be retained? If so, why?

8. Other Proposed Changes

A company is currently permitted to omit from Item 402 disclosure "informationregarding group life, health, hospitalization, medical reimbursement or relocation plans that do not discriminate in scope, terms or operation, in favor of executive officers or directors of the company and that are available generally to all salaried employees."¹⁷⁴Because relocation plans, even when available generally to all salaried employees, are susceptible to operation in a discriminatory manner that favors executive officers, this exclusion may deprive investors of disclosure of significant compensatory benefits.¹⁷⁵For this reason, we propose to delete relocation plans from this exclusion. For the same reason, we are also deleting relocation plans from the exclusion from portfolio manager compensation in forms used by management investment companies to register under the Investment Company Act and offer securities under the Securities Act.¹⁷⁶ We also propose to revise the definition of "plan" so that it is more principles-based.¹⁷⁷

Request for Comment

Should relocation plans be required to be disclosed as compensation? Should group life, health, hospitalization and medical reimbursement also be included in reportable compensation? Can these plans be operated in a manner that may obscure compensation disclosure? Are there other plans or benefits that should be excluded from the disclosure requirements of Item 402? If so, why?

Should management investment companies be required to disclose all relocation plans as portfolio manager compensation? Should all group life, health, hospitalization, medical reimbursement, and pension and retirement plans and arrangements also be included in compensation that is disclosed for portfolio managers of management investment companies?

9. Compensation of Directors

Director compensation has continued to evolve from simple compensation packages mostly involving cash compensation and attendance fees to more complex packages, which can also include share-based compensation, incentive plans and other forms of compensation.¹⁷⁸ In light of this complexity, we have determined to propose formatted tabular disclosure for director compensation, accompanied by narrative disclosure of additional material information. In doing so, we are revisiting an approach that the Commission proposed in 1995 but did not adopt at that time.¹⁷⁹ The commenter supporting the proposal generally believed that it was appropriate to treat director compensation similarly to executive compensation.¹⁸⁰ The commenters opposing the proposal believed that non-executive directors were generally compensated uniformly, and therefore breaking out compensation for each director in a table often could yield repetitious data.¹⁸¹

Director compensation has continued to evolve since 1995 so that we are again proposing a Director Compensation Table, which would resemble the proposed Summary Compensation Table, but would present information only with respect to the company's last completed fiscal year.

DIRECTOR COMPENSATION

The All Other Compensation column of the proposed Director Compensation Table would include, but not be limited to:

all perquisites and other personal benefits if the total is $10,000 or greater;

all earnings on compensation that is deferred on a basis that is not tax-qualified;

all tax reimbursements;

annual company contributions or other allocations to vested and unvested defined contribution plans;

for any security of the company or its subsidiaries purchased from the company or its subsidiaries (through deferral of fees or otherwise) at a discount from the market price of such security at the date of purchase, unless the discount is generally available to all security holders or to all salaried employees of the company, the compensation cost computed in accordance with FAS 123R;

aggregate annual increase in actuarial value of all defined benefit and actuarial pension plans;

annual company contributions to vested and unvested defined contribution and other deferred compensation plans;

all consulting fees;

awards under director legacy or charitable awards programs;¹⁸² and

the dollar value of any insurance premiums paid by, or on behalf of, the company for life insurance for the directors benefit.

In addition to the disclosure specified in the columns of the table, companies would be required to disclose, for each director, by footnote to the appropriate column, the outstanding equity awards at fiscal year end as would be required if the Outstanding Equity Awards at Fiscal Year-End table for named executive officers were required fordirectors.¹⁸³ The same instructions as provided in the Summary Compensation Table would govern analogous matters in the Director Compensation Table. As with the Summary Compensation Table, the proposed rules make clear that all compensation must be included in the table.¹⁸⁴ As is the case with the current director disclosure requirement, companies would not be required to include in the director disclosure any amounts of compensation paid to a named executive officer and disclosed in the Summary Compensation Table with footnote disclosure indicating what amounts reflected in that table are compensation for services as a director. A proposed instruction to the Director Compensation Table would permit the grouping of directors in a single row of the table if all of their elements and amounts of compensation are identical.¹⁸⁵

Following the table, narrative disclosure would describe any material factors necessary to an understanding of the table. Such factors may include, for example, a breakdown of types of fees.¹⁸⁶ We are not proposing the supplemental tables for directors.

Request for Comment

Does the proposed table organize director compensation disclosure in a format that is easy to understand?

Do the proposed table and narrative disclose information that is material to an investor's analysis of director compensation? Should other tables be required, such as the Grants of Performance-Based Awards Table and the Grants of All Other Equity Awards Table?

Should named executive officers who are also directors be omitted from the table, with any compensation for services as a director reported only in the Summary Compensation Table, as is currently the case? If so, should there be some indication of their status as directors and compensation related to their director service in the Summary Compensation Table, the Director Compensation Table, or both? Should the nature or extent of compensation to the chairman of the board of directors be presented differently from that of other directors?

With respect to disclosure of perquisites, should the director compensation apply the same $10,000 disclosure threshold as proposed for the Summary Compensation Table? Should separate identification and quantification apply to director perquisites?

Does the proposed table cover any forms of compensation that typically are not awarded to directors and therefore should be omitted? Should the requirements be modified to make it easier to capture forms of compensation, if any, that develop in the future?

Does the proposed table omit any forms of compensation awarded to directors that should be specifically included or identified?

Should narrative disclosure regarding the companys policies and objectives with respect to director compensation and share ownership or retention policies accompany this table? Should it be included in the Compensation Discussion and Analysis?

Would more specific footnote disclosure, as opposed to the proposed accompanying narrative, provide additional material information regarding director compensation? Should there be supplemental tables for directors, or should we require disclosure of the number of shares, units, options and other securities awarded to directors in addition to the grant date fair value of such awards?

¹³⁰ Proposed Item 402(f)(1). Disclosure of employment agreement information is currently required by Item 402(h)(1). The standard of materiality that would apply in proposed Item 402(f)(1) is that of Basic v. Levinson, 485 U.S. 224 (1988) and TSC Industries v. Northway, 426 U.S. 438 (1976).

¹³¹ Provisions regarding post-termination compensation would need to be addressed in the narrative section only to the extent disclosure of such compensation is required in the Summary Compensation Table; otherwise these provisions would be disclosable as post-termination compensation in the manner described in Section II.B.5., below.

¹³² Current Item 402(i). We believe that the disclosure requirement would provide investors with material information regarding repricings and modifications and eliminate the arguably dated information contained in the ten-year option repricing table.

¹³³ While this approach is different from that required for accounting and financial statement reporting purposes under FAS 123R, it does proceed from the grant date fair value concept embodied in that standard, and we believe it provides more meaningful information for executive compensation disclosure than the financial statement reporting approach and is consistent with our current requirement to treat repricings as a new award. This treatment would continue the current approach of essentially treating a repricing as a new award in Instruction 3 to Item 402(b)(2)(iv). However, this approach would not apply to any repricing that occurs through a pre-existing formula or mechanism in the plan or award that results in the periodic adjustment of the option or stock appreciation right exercise or base price, an antidilution provision, or a recapitalization or similar transaction equally affecting all holders of the class of securities underlying the options or stock appreciation rights. See Proposed Instruction 2 to Item 402(f)(1).¹³⁴ Proposed Item 402(f)(1)(iii), which combines some information required by current Instruction 2to Item 402(b)(2)(iv) with information required by current Instruction 1 to Item 402(e). For a discussion of the standard companies should use when determining whether disclosure would have an adverse impact on the companys competitive position, see Section II.A.2., above.

¹³⁵ Proposed Item 402(f)(1)(iv).

¹³⁶ Proposed Item 402(f)(2).

¹³⁷ See note 162 below for a discussion of the term "executive officer."

¹³⁸ Some of this information is currently required in one table, the Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Table required by current Item 402(d).

¹³⁹ Proposed Item 402(g). Under current rules such disclosure is provided only for holdings of outstanding stock options and stock appreciation rights. Consistent with current interpretations, this table, like the Summary Compensation Table, would reflect that the transfer of an option or similar award by an executive does not negate the awards status as compensation that should be reported. Registration of Securities on Form S-8, Release No. 33-7646 (Feb. 25, 1999) [64 FR11103], at Section III.D.

¹⁴⁰ Proposed Instruction 1 to Item 402(g)(2), which is based on current Instruction 1 to Item 402(d)(2).

¹⁴¹ Proposed Instruction 3 to Item 402(g)(2). This standard is based on the current Summary Compensation Table footnote disclosure regarding restricted stock, expanded to cover restricted stock units and incentive plans. Current Instruction 2 to Item 402(b)(2)(iv).

¹⁴² Proposed Instruction 2 to Item 402(g)(2).

¹⁴³ This table is similar to a portion of the current Aggregate Options/SAR Exercises in Last Fiscal Year and FY-End Options/SAR Values Table, except unlike that table it would also include the vesting of restricted stock and similar instruments. Commentators have noted a need for comparable disclosure of restricted stock vesting. See, e.g., Phyllis Plitch, Restricted Stock Grants Cloud Executive Pay Tally, Wall St. J. Online Edition , Jan. 26, 2005. The number and value of unexercised options and stock appreciation rights, included in the current option exercises table, would be shown in the proposed Outstanding Equity Awards at Fiscal Year-End Table described immediately above. See current Item 402(d).

¹⁴⁴ 15 U.S.C. 78p(a).

¹⁴⁵ Currently, for defined benefit or actuarial plans, disclosure consists of a general table showing estimated annual benefits under the plan payable upon retirement (including amounts attributable to supplementary or excess pension award plans) for specified compensation levels and years of service. The table does not provide disclosure for any specific named executive officer. See current Item 402(f)(1). This requirement is for plans under which benefits are determined primarily by final compensation (or average final compensation) and years of service, and includes narrative disclosure. If named executive officers are subject to other plans under which benefits are not determined primarily by final compensation (or average final compensation), narrative disclosure is required of the benefit formula and estimated annual benefits payable to the officers upon retirement at normal retirement age. See current Item 402(f)(2).

¹⁴⁶ Proposed Item 402(i).

¹⁴⁷ These would include, but not be limited to, tax-qualified defined benefit plans, supplemental employee retirement plans and cash balance plans, but would exclude defined contribution plans, for which we propose disclosure as described below.

¹⁴⁸ Proposed Instruction 3 to Item 402(i).

¹⁴⁹ Proposed Instruction 2 to Item 402(i).

¹⁵⁰ Nonqualified defined contribution and other deferred compensation plans are plans providing for deferral of compensation that do not satisfy the minimum coverage, nondiscrimination and other rules that "qualify" broad-based plans for favorable tax treatment under the Internal Revenue Code. A typical 401(k) plan, by contrast, is a qualified deferred compensation plan. Nonqualified defined contribution and other deferred compensation plans are generally unfunded, and their taxation is governed by Section 409A of the Internal Revenue Code [26 U.S.C. 409A].

¹⁵¹ See Section II.B.1.d.i. above.

¹⁵² See Lucian A. Bacchus and Jesse M. Fried, Stealth Compensation via Retirement Benefits, 1 Berkeley Bus. L.J. 291, 314-316 (2004); See also The Corporate Counsel (Sept.Oct. 2005) at 6-7 and Gretchen Morgenson, Executive Pay, Hiding Behind Small Print, N.Y. Times, Feb. 8, 2004,§3, at 1.

¹⁵³ Proposed Item 402(j).

¹⁵⁴ Proposed Instruction to Item 402(j)(2).

¹⁵⁵ Proposed Instruction 4 to Item 402(c), described in Section II.B.1.b., above, regarding the Summary Compensation Table.

¹⁵⁶ Proposed Item 402(j)(3).

¹⁵⁷ 1983 Release, at Section III.E.

¹⁵⁸ Proposed Item 402(k), which would replace current Item 402(h)(2).

¹⁵⁹ We propose to eliminate the current $100,000 disclosure threshold. With respect to post termination perquisites, however, the same disclosure and itemization thresholds proposed for the Summary Compensation Table would apply. See Section II.B.1.d.iii, above.

¹⁶⁰ See Securities Act Section 27A and Exchange Act Section 21E.

¹⁶¹ We propose to adopt the nomenclature used most recently in Item 5.02 of Form 8-K, which refers to "principal executive officer" and "principal financial officer."

¹⁶² Proposed Item 402(a)(3). Currently, the named executive officers for whom disclosure is required include the companys chief executive officer and the four most highly compensated executive officers excluding the chief executive officer. As defined in Securities Act Rule 405 [17 CFR230.405] and Exchange Act Rule 3b-7 [17 CFR 240.3b-7], "the term executive officer, when used with reference to a registrant, means its president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant. Executive officers of subsidiaries may be deemed executive officers of the registrant if they perform such policy making functions for the registrant." Therefore, as is currently the case today, a named executive officer may be an executive officer of a subsidiary.

¹⁶³ Exchange Act Rules 13a-14 and 15d-14.

¹⁶⁴ Proposed paragraphs (a)(3)(i) and (a)(3)(ii) of Item 402 would provide that all individuals who served as a principal executive officer and principal financial officer or in similar capacities during the last completed fiscal year must be considered named executive officers. Proposed Instruction4 to Item 402(a)(3) would specify that if the principal executive officer or principal financial officer served in that capacity for only part of a fiscal year, information must be provided as to all of the individuals compensation for the full fiscal year. Proposed Instruction 4 to Item 402(a)(3)would also specify that if a named executive officer (other than the principal executive officer or principal financial officer) served as an executive officer of the company (whether or not in the same position) during any part of the fiscal year, then information is required as to all compensation of that individual for the full fiscal year.

¹⁶⁵ These are the registrants principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or any person performing similar functions.

¹⁶⁶ Proposed Instruction 1 to Item 402(a)(3).

¹⁶⁷ Id.

¹⁶⁸ Current Instruction 1 to Item 402(a)(3).

¹⁶⁹ Current Instruction 3 to Item 402(a)(3).

¹⁷⁰ Proposed Instruction 3 to Item 402(a)(3).

¹⁷¹ Current Items 402(a)(2) and 402(a)(5).

¹⁷² Because current Item 402(a)(5) otherwise is redundant with current Item 402(a)(2), we propose to rescind Item 402(a)(5) in its entirety. We propose a conforming amendment to Item 402(a)(2).

¹⁷³ Proposed Instructions 5 and 6 to Item 404(a).

¹⁷⁴ Current Item 402(a)(7)(ii), which generally defines the term "plan."

¹⁷⁵ See, e.g., Ellen Simon, At Corporate Helm, Extra Benefits Still Alive and Well, Assoc. Press, Apr.26, 2004; and Carrie Johnson, Former Tyco Executive Takes Stand in Trial, Wash. Post, Feb. 11,2004, at E2.

¹⁷⁶ Proposed amendment to Instruction 2 to Item 15(b) of Form N-1A; proposed amendment to Instruction 2 to Item 21.2 of Form N-2; proposed amendment to Instruction 2 to Item 22(b) of Form N-3.

¹⁷⁷ Proposed Item 402(a)(6)(ii).

¹⁷⁸ See, e.g., National Association of Corporate Directors and Pearl Meyer & Partners, 2003-2004Director Compensation Survey (2004); National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission On Director Compensation (2001); and Dennis C. Carey, et al, How Should Corporate Directors Be Compensated?, Investment Dealers Digest Inc.Special Issue: Boards and Directors (Jan. 1996).

¹⁷⁹ 1995 Release. The 1995 proposal was coupled with a proposal to permit companies to reduce the detailed executive compensation information provided in the proxy statement by instead furnishing that information in the Form 10-K. We did not act upon the proposals.

¹⁸⁰ The Commission received approximately 153 letters supporting the proposal. Of those, 133, all individuals, expressed their views via a brief statement submitted using a form letter. Additional supporting commenters included corporations, associations, unions, and security holder resource providers. See, e.g., comment letters on the 1995 Release in File No. S7-14-95 from Bell Atlantic Network Services, Inc.; Chevron Corporation; and Scott Paper Company (generally offering support for proposal). See also, e.g., comment letters from the American Bar Association; American Institute of Certified Public Accountants; Association of Investment Management and Research; American Society of Corporate Secretaries; Institutional Shareholder Services; and Ernst & Young LLP (favoring tabular disclosure of director compensation, but with suggested improvements to proposed rules).

¹⁸¹ Approximately 20 commenters, primarily corporations and associations, opposed the rules. See, e.g., comment letters in File No. S7-14-95 from the American Corporate Counsel Association; AT&T Corp.; The Business Roundtable; Consolidated Edison Company of New York; Deere &Company; Lehman Brothers; Safeco Corporation; Sullivan & Cromwell; and SBC Communications, Inc.

¹⁸² Under director legacy programs, also known as charitable award programs, registrants typically agree to make a future donation to one or more charitable institutions in the directors name, payable by the registrant upon a designated event such as death or retirement. The amount to be disclosed in the table would be the annual cost of such promises and payments, with footnote disclosure of the total dollar amount and other material terms of each such program.

¹⁸³ Proposed Instruction to Item 402(l)(2)(iv) and (v).

¹⁸⁴ The only exception would be if all perquisites received by the director total less than $10,000, they would not need to be disclosed.

¹⁸⁵ Proposed Instruction to Item 402(l)(2).

¹⁸⁶ Proposed Item 402(l)(3).