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

Release No. IC-27218
 

Securities and Exchange Commission

Executive Compensation and Related Party Disclosure
Section III - III.D

    Release Table of Contents

III. Proposed Revisions to Form 8-K and the Periodic Report Exhibit Requirements

In March 2004, the Commission adopted amendments to Form 8-K that significantly expanded the number of events that are reportable on Form 8-K and reduced the reporting deadline for most Form 8-K disclosure items to four business days after the triggering event. ²⁰⁶ These amendments became effective on August 23, 2004. As part of our broader effort to revise our executive and director compensation disclosure requirements, we are proposing revisions to Item 1.01 of Form 8-K, which currently requires this real-time disclosure about an Exchange Act reporting companys entry into a material definitive agreement outside of the ordinary course of the companys business, as well as any material amendment to such an agreement. Our staffs experience over the last year suggests that this item has elicited executive compensation disclosure regarding types of matters that do not appear always to be unquestionably or presumptively material, which is the standard we set for the expanded Form 8-K disclosure events.²⁰⁷ We therefore propose to revise Items 1.01 and 5.02 to require real-time disclosure of employee compensation events that more clearly satisfy this standard.

In addition to the proposed amendments to Items 1.01 and 5.02 of Form 8-K, we propose to revise General Instruction D of Form 8-K to permit companies in most cases to omit the Item 1.01 heading if multiple items including Item 1.01 are applicable, so long as all of the substantive disclosure required by Item 1.01 is included.

A. Proposed Revisions to Items 1.01 and 5.02 of Form 8-K

Item 1.01 of Form 8-K requires an Exchange Act reporting company to disclose, within four business days, the companys entry into a material definitive agreement outside of its ordinary course of business, or any amendment of such agreement that is material to the company. When we initially proposed this item, several commenters stated that it would be difficult to determine, within the shortened Form 8-K filing period, whether a particular definitive agreement met the materiality threshold of Item 1.01, and whether the agreement was outside of the ordinary course of business.²⁰⁸ Some of these commenters suggested that we apply to Item 1.01 the standards used in pre-existing Item 601(b)(10) of Regulation S-K governing the filing as exhibits to Commission reports of material contracts entered into outside the ordinary course because these standards had been in place for many years and were familiar to reporting companies.²⁰⁹  

In response to the concerns raised by these comments, we adopted Item 1.01 of Form 8-K so that it used the standards of Item 601(b)(10) to determine the types of agreements that are material to a company and not in the ordinary course of business. Item 601(b)(10) of Regulation S-K requires a company to file, as an exhibit to Securities Act and Exchange Act filings, material contracts that are not made in the ordinary course of business and are to be performed in whole or part at or after the filing of the registration statement or report, or were entered into not more than two years before the filing. The item refers specifically to employment compensation arrangements and establishes a companys obligation to file the following as exhibits:

any management contract or any compensatory plan, contract or arrangement, including but not limited to plans relating to options, warrants or rights, pension, retirement or deferred compensation or bonus, incentive or profit sharing (or if not set forth in any formal document, a written description thereof) in which any director or any named executive officer (as defined by Item 402(a)(3) of Regulation S-K) participates;

any other management contract or any other compensatory plan, contract, or arrangement in which any other executive officer of the registrant participates, unless immaterial in amount or significance; and

any compensation plan, contract or arrangement adopted without the approval of security holders pursuant to which equity may be awarded, including, but not limited to, options, warrants or rights in which any employee (whether or not an executive officer of the company) participates unless immaterial in amount or significance. ²¹⁰

Therefore, entry into these types of contracts triggers the filing of a Form 8-K within four business days. Importantly, the requirement for directors and named executive officers does not include an exception for those that are "immaterial in amount or significance."

The incorporation of the Item 601(b)(10) standards into Item 1.01 of Form 8-K has therefore significantly affected executive compensation disclosure practices. Prior to the Form 8-K amendments, it was customary for a companys annual proxy statement to be the primary vehicle for disclosure of executive and director compensation information. However, Item 1.01 of amended Form 8-K has resulted in executive compensation disclosures that are much more frequent and accelerated than those included in a companys proxy statement. In addition, particularly because of the terms of Item 601(b)(10), Item 1.01 of Form 8-K has triggered compensation disclosure of the types of matters that, in some cases, appear to fall short of the "unquestionably or presumptively material" standard associated with the expanded Form 8-K disclosure items. Companies and their counsel have raised concerns that the new Form 8-K requirements have resulted in real-time disclosure of compensation events that should be disclosed, if at all, in a companys proxy statement for its annual meeting or as an exhibit to the companys next periodic report, such as the Form 10-Q or Form 10-K.²¹¹

We believe that much of the disclosure regarding employment compensation matters required in real-time under the new Form 8-K requirements is viewed by investors as material.²¹² However, we also believe that it would be appropriate to restore a more balanced approach to this aspect of Form 8-K that is designed to elicit unquestionably or presumptively material information on a real-time basis, but seeks to limit Form 8-K disclosure of information below that threshold. Accordingly, we propose to amend Item 1.01 of Form 8-K to eliminate employment compensation arrangements and to cover such arrangements under a modified broader Item 5.02.²¹³

Item 5.02 of Form 8-K currently generally requires disclosure within four business days of the appointment or departure of directors and specified officers. In particular, Item 5.02 requires disclosure if a companys principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, or any person performing similar functions, retires, resigns or is terminated from that position²¹⁴ or if a company appoints a new principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, or any person performing similar functions.²¹⁵ Item 5.02 also requires disclosure if a director retires, resigns, is removed, or declines to stand for re-election.²¹⁶ The required disclosure currently includes a brief description of the material terms of any employment agreement between the registrant and the officer and a description of disagreements, if any.

We propose to modify Item 5.02 to capture generally the currently required information under that item, as well as additional information regarding material employment compensation arrangements involving named executive officers that currently fall under Item 1.01. Our proposal will both modify the overall requirements for disclosure of employment compensation arrangements on Form 8-K and locate all such disclosure under a single item. We propose to accomplish this by taking the following steps:

expanding the information regarding retirement, resignation or termination to include all persons falling within the definition of named executive officers for the companys previous fiscal year, whether or not included in the list currently specified in Item 5.02;²¹⁷

expanding the disclosure items covered under Item 5.02 beyond employment agreements to require a brief description of any material plan, contract or arrangement to which a covered officer or director is a party or in which he or she participates that is entered into or materially amended in connection with any of the triggering events specified in Item 5.02, or any grant or award to any such covered person, or modification thereto, under any such plan, contract or arrangement in connection with any such event;²¹⁸

in respect of the principal executive officer, the principal financial officer, or persons falling within the definition of named executive officer for the companys previous fiscal year, expanding the disclosure items to include a brief description of any material new compensatory plan, contract or arrangement, or new grant or award thereunder (whether or not written), and any material amendment to any compensatory plan, contract or arrangement (or any modification to a grant or award thereunder), whether or not such occurrence is in connection with a triggering event specified in Item 5.02. Grants or awards or modifications thereto will not be required to be disclosed if they are consistent with the terms of previously disclosed plans or arrangements and they are disclosed the next time the company is required to provide new disclosure under Item 402 of Regulation S-K; and

Adding a requirement for disclosure of salary and bonus for the most recent fiscal year that was not available at the latest practicable date in connection with disclosure under Item 402 of Regulation S-K.²¹⁹

In the case of each of these disclosure items proposed for Item 5.02, we emphasize that we are proposing that a brief description of the specified matter be included. We have observed that in response to the current requirement under Item 1.01, some companies have included disclosure that resembles an updating of the disclosure required under current Item 402 of Regulation S-K. In the context of current disclosure under Form 8-K, we are seeking a disclosure that informs investors of specified material events and developments. However, the information we are seeking does not perforce extend to the information necessary to comply with Item 402.

Request for Comment

Is there a particular benefit to receiving information regarding employment compensation on a current basis rather than annually or quarterly? What information is material in that regard?

Is disclosure of material information about executive and director compensation and related person transactions avoided if comprehensive disclosure of compensation and related party transactions only occurs annually? Should we also require quarterly disclosure of material changes to information required by Items 402 and 404 in each companys Form 10-Q?

Would a quarterly update of material changes to Item 402 and Item 404 disclosure provide meaningful disclosure to investors that they cannot get through other sources? If not, why?

Would quarterly updates eliminate the need for most of the current disclosure about executive and director compensation transactions provided under Item 1.01 of Form 8-K? Should the information we propose to require under Item 5.02(e) of Form 8-K only be required quarterly?

Are the proposed revisions to Items 1.01 and 5.02 of Form 8-K the most effective means to achieve an appropriate balance regarding real-time director and executive compensation disclosure? Please describe any suggested alternatives in detail.

Should we require disclosure of all amendments to the plans, contracts and arrangements encompassed by our proposed disclosure requirements under Item 5.02(e) of Form 8-K? Only material amendments?

B. Proposed Extension of Limited Safe Harbor under Section 10(b) and Rule 10b-5 to Item 5.02(e) of Form 8-K and Exclusion of that Item from Form S-3 Eligibility Requirements

We propose to extend the safe harbors regarding Section 10(b) and Rule 10b-5 and Form S-3 eligibility in the event that a company fails to timely file reports required by Item 5.02(e) of Form 8-K. In the final rules for the new Form 8-K requirements, we adopted a limited safe harbor from liability under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder for failure to timely file reports required by Form 8-K Items 1.01, 1.02, 2.03, 2.04, 2.05, 2.06 and 4.02(a). The safe harbor applies until the filing due date of the companys quarterly or annual report for the period in question. As we stated at the time, we believe that these items may require management to make rapid materiality and similar judgments within the timeframe required for filing of a Form 8-K. Under those circumstances we concluded that the risk of liability under these provisions was sufficiently disproportionate to justify the limited safe harbor of fixed duration. For the same reasons, we believe that the safe harbor should also extend to proposed Item 5.02(e) of Form 8-K. We therefore propose to amend Exchange Act Rules 13a-11(c) and 15d-11(c) accordingly.

In addition, under our current rules, a company forfeits its eligibility to use Form S-3 if it fails to timely file all reports required under Exchange Act Sections 13(a) or 15(d) during the 12 months prior to filing of the registration statement.²²⁰ For the same reasons, when adopting the new Form 8-K rules, we revised the Form S-3 eligibility requirements so that a company would not lose its eligibility to use Form S-3 registration statements if it failed to timely file reports required by the Form 8-K items to which the Section 10(b) and Rule 10b-5 safe harbor applies.²²¹ In particular, the burden resulting from a companys sudden loss of eligibility to use Form S-3 could be a disproportionately large negative consequence of an untimely Form 8-K filing under one of the specified items.²²² We believe that this safe harbor should be extended to proposed Item 5.02(e) of Form 8-K. Therefore, we propose to amend General Instruction I.4 of Form S-3, which pertains to the eligibility requirements for use of Form S-3 to reflect this position.²²³  

Request for Comment

Should we extend the Section 10(b) and Rule 10b-5 safe harbor and the Form S-3 safe harbor to all of Item 5.02 or just the provision proposed?

C. General Instruction D to Form 8-K

Frequently an event may trigger a Form 8-K filing under multiple items, particularly under both Item 1.01 and another item. General Instruction D to Form 8-K currently permits a company to file a single Form 8-K to satisfy one or more disclosure items, provided that the company identifies by item number and caption all applicable items being satisfied and provides all of the substantive disclosure required by each of the items. In order to promote prompt filings on Form 8-K and avoid potential noncompliance with Form 8-K due to inadvertent exclusions of captions, we propose a revision to General Instruction D to permit companies to omit the Item 1.01 heading in a Form 8-K also disclosing any other Item, so long as the substantive disclosure required by Item 1.01 is included in the Form 8-K. This would not extend to allowing a company to omit any other caption if the Item 1.01 caption is included.  

Request for Comment

Is it appropriate to allow a company to omit the Item 1.01 heading in a Form 8-K disclosing any other item?

D. Foreign Private Issuers

We propose revising the exhibit instructions to Form 20-F under which foreign private issuers would be required to file any employment or compensatory plan with management or directors (or portion of such plan) only when the foreign private issuer either is required to publicly file the plan (or portion of it) in its home country or if the foreign private issuer had otherwise publicly disclosed the plan.²²⁴

Under Item 6.B.1 of Form 20-F, a foreign private issuer must disclose the compensation of directors and management on an aggregate basis and, additionally, on an individual basis, unless individual disclosure is not required in the issuers home country and is not otherwise publicly disclosed by the foreign private issuer. Under the exhibit instructions to Form 20-F, management contracts or compensatory plans in which directors or members of management participate generally must be filed as exhibits, unless the foreign private issuer provides compensation information on an aggregate basis and not on an individual basis. Under these rules, an issuer that provides any individualized compensation disclosure is required to file as an exhibit to Form 20-F management employment agreements that potentially relate to matters that have not otherwise been disclosed.

The proposed revision to the exhibit instructions to Form 20-F²²⁵ is intended to be consistent with the existing disclosure requirements under Form 20-F relating to executive compensation matters for foreign private issuers. In the same way that executive compensation disclosure under Form 20-F largely mirrors the disclosure that a foreign private issuer makes under home country requirements or voluntarily, so too the public filing of management employment agreements as an exhibit to Form 20-F would under our proposal mirror the public availability of such agreements under home country requirements or otherwise. In addition, we believe that the proposed amendments may encourage foreign private issuers to provide more compensation disclosure in their SEC filings by eliminating privacy concerns associated with filing an individuals employment agreement when such agreement is not required to be made public by a home country exchange or securities regulator. As foreign disclosure related to executive remuneration varies in different countries but continues to improve,²²⁶ the proposed revisions would recognize that trend and provide for greater harmonization of international disclosure standards with respect to executive compensation in a manner consistent with other requirements of Form 20-F.

Request for Comment

Should we require the filing of employment agreements by foreign private issuers when individualized compensation information is disclosed? Should we instead require the filing of those portions of management employment agreements and plans that relate to the information that is disclosed on an individualized basis regardless of whether those portions are required to be made public in the issuers home country or otherwise?

²⁰⁶ Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33- 8400 (Mar. 16, 2004) [69 FR 15593] (the "Form 8-K Adopting Release").

²⁰⁷ We stated in Section I of the Form 8-K Adopting Release: "The revisions that we adopt today will benefit markets by increasing the number of unquestionably or presumptively material events that must be disclosed currently."

²⁰⁸ See, e.g., comment letters on Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33-8106 (June 17, 2002) [67 FR 42913] in File No. S7-22-02 from the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association; Cleary, Gottlieb, Steen & Hamilton; Intel Corporation; Professor Joseph A. Grundfest, et al; Perkins Coie LLP; Sherman & Sterling; and Sullivan & Cromwell.  

²⁰⁹ See e.g., comment letter in File No. S7-22-02 from the Section of Business Law of the American Bar Association.

²¹⁰ Item 601(b)(10)(iii) of Regulation S-K. We note the provision in Item 601(b)(10)(iii)(A) that carves out any plan, contract or arrangement in which named executive officers and directors do not participate that is "immaterial in amount or significance." In 1980, the Commission adopted amendments to Regulation S-K that consolidated all of the exhibit requirements of various disclosure forms into a single item in Regulation S-K. Amendments Regarding Exhibit Requirements, Release No. 33-6230 (Aug. 27, 1980) [45 FR 58822], at Section II.B. This item was a forerunner of the current Item 601. As part of that 1980 adopting release, the definition of material contract contained in the new item was also revised in an effort to reduce the number of remunerative plans or arrangements that must be filed. Not long after, though, the staff discovered that rather than reduce the number of exhibits filed, the provision actually had the opposite effect. The staff found that the revised definition of material contract "has resulted in registrants filing a large volume of varied remunerative contracts involving directors and executive officers, contracts which are not material and which would not have been filed under the previously existing material in amount or significance standard." Technical Amendment Regarding Exhibit Requirement, Release No. 33-6287 (Feb. 6, 1981) [46 FR 11952], at Section I. Therefore, in February 1981, the Commission added "unless immaterial in amount or significance" to the definition of "material contracts" as applied to remunerative plans, contracts or arrangements participated in by executives that are not named executive officers. Id. We reiterate that this phrase was intended to indicate that whether plans, contracts or arrangements which executive officers other than named executive officers participate are to included in the requirements of 601(b)(10) must be determined on the basis of materiality.  

²¹¹ See, e.g., Melissa Klein Aguilar, This Side of Caution: New Regs. Prompt 8-K Increases, Compliance Week, Aug. 23, 2005; Scott S. Cohen, Editorial: Debating the Materiality of "Material Definitive Agreements," Compliance Week, Feb. 8, 2005; and Patrick McGeehan, Now, an Advance Look at Those Big Paychecks, N.Y. Times, Sept. 26, 2004, at 36.  

²¹² See, e.g., Jerry Knight, Tiny SEC Filing Gave a Big Hint to Vasteras Plans, Wash. Post, Jan. 24, 2005, at E1; and Alex Berenson, Merck Offering Top Executives Rich Way Out, N.Y. Times, Nov. 30, 2004, at A1.  

²¹³ We propose deleting the last sentence of current Instruction 1 to Item 1.01 of Form 8-K, which references the portions of Item 601(b)(10) that specifically relate to management compensation and compensatory plans. In place of the deleted sentence, we propose to add a sentence specifying that agreements involving the subject matter identified in Item 601(b)(10)(iii)(A) or (B) of Regulation S-K need not be disclosed under Item 1.01 of Form 8-K. This change also will apply to disclosure of terminations of material definitive agreements under Item 1.02 of Form 8-K, which references the definition of "material definitive agreement" in Item 1.01 of Form 8-K. Instead of being required to be disclosed based on the general requirements with regard to material definitive agreements in Item 1.01 and Item 1.02, employment compensation arrangements would be covered under Item 5.02 of Form 8-K.

²¹⁴ Item 5.02(b) of Form 8-K.

²¹⁵ Item 5.02(c) of Form 8-K.

²¹⁶ Item 5.02(a) of Form 8-K.

²¹⁷ The Item would continue to cover the officers specified therein, whether or not named executive officers for the previous or current years, and all directors.

²¹⁸ Plans, contracts or arrangements (but not material amendments or grants or awards or modifications thereto) may be denoted by reference to the description in the companys most recent annual report on Form 10-K or proxy statement.  

²¹⁹ See Section II.B.1.b. above for a discussion of the reporting delay that exists under the current disclosure rules when bonus and salary are not determinable at the most recent practicable date.  

²²⁰ General Instruction I.A.3 to Form S-3.

²²¹ Form 8-K Adopting Release, at Section II.E.

²²² Id.  

²²³ Because Form S-2 was eliminated effective December 1, 2005, a similar proposed change to the eligibility rules of Form S-2 is unnecessary. Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44721], at Section V.B.3.c.  

²²⁴ We are also proposing a similar revision to Item 601(b)(10)(iii)(C)(5) of Regulation S-K.

²²⁵ Proposed Instruction 4(c) to Exhibits to Form 20-F.

²²⁶ Many jurisdictions now require or encourage disclosure of executive compensation information. For example, enhanced disclosure of executive remuneration is included as part of the European Commissions 2003 Company Law Action Plan. See Guido Ferrarini and Niamh Moloney, Executive Remuneration in the EU: The Context for Reform, European Corporate Governance Institute, Law Working Paper N. 32/2005 (April 2005).