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

Release No. IC-27218
 

Securities and Exchange Commission

Executive Compensation and Related Party Disclosure
Section XIII   Items 1-8

Release Table of Contents

XIII. Statutory Authority and Text of the Proposed Amendments

We are proposing new rules and amendments pursuant to Sections 3(b), 6, 7, 10, and 19(a) of the Securities Act, as amended, Sections 10(b), 12, 13, 14, 15(d) and 23(a) of the Exchange Act, as amended, and Sections 8, 20(a), 24(a), 30 and 38 of the Investment Company Act of 1940, as amended.

List of Subjects

17 CFR Part 228

Reporting and recordkeeping requirements, Securities, Small businesses. 17 CFR Parts 229, 239, 240, 245 and 249

Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

Investment companies, Reporting and recordkeeping requirements, Securities.

For the reasons set forth above, we propose to amend Title 17, Chapter II of the Code of Federal Regulations as follows:

PART 228 INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

1. The authority citation for part 228 continues to read in part as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350.

* * * * *

2. Amend §228.201 by revising Instruction 2 to paragraph (d) to read as follows:

§228.201 (Item 201) Market for Common Equity and Related Stockholder Matters.

Instructions to paragraph (d).

1. * * *

2. For purposes of this paragraph, an "individual compensation arrangement" includes, but is not limited to, the following: a written compensation contract within the meaning of "employee benefit plan" under §230.405 of this chapter and a plan (whether or not set forth in any formal document) applicable to one person as provided under Item 402(a)(5)(ii) of Regulation S-B (§228.402(a)(5)(ii)).

* * * * *

3. Remove and reserve §228.306.

4. Amend §228.401 by removing paragraphs (e), (f) and (g).

5. Revise §228.402 to read as follows:

§228.402 (Item 402) Executive compensation.

(a) General.

(2) Persons covered. Disclosure shall be provided pursuant to this Item for each of the following (the "named executive officers"):

(i) All individuals serving as the small business issuers principal executive officer or acting in a similar capacity during the last completed fiscal year ("PEO"), regardless of compensation level;

(ii) The small business issuers two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year; and

(iii) Up to two additional individuals for whom disclosure would have been provided pursuant to paragraph (a)(2)(ii) of this Item but for the fact that the individual was not serving as an executive officer of the small business issuer at the end of the last completed fiscal year.

Instructions to Item 402(a)(2).

1. Determination of most highly compensated executive officers. The determination as to which executive officers are most highly compensated shall be made by reference to total compensation for the last completed fiscal year (as required to be disclosed pursuant to paragraph (b)(2)(iii) of this Item), provided, however, that no disclosure need be provided for any executive officer, other than the PEO, whose total compensation does not exceed $100,000.

2. Inclusion of executive officer of subsidiary. It may be appropriate for a small business issuer to include as named executive officers one or more executive officers of subsidiaries in the disclosure required by this Item. See Rule 3b-7 under the Exchange Act (17 CFR 240.3b-7).

3. Exclusion of executive officer due to overseas compensation. It may be appropriate in limited circumstances for a small business issuer not to include in the disclosure required by this Item an individual, other than its PEO, who is one of the small business issuers most highly compensated executive officers due to the payment of amounts of cash compensation relating to overseas assignments attributed predominantly to such assignments.

(4) Omission of table or column. A table or column may be omitted, if there has been no compensation awarded to, earned by, or paid to any of the named executive officers required to be reported in that table or column in any fiscal year covered by that table.

(5) Definitions. For purposes of this Item:

(ii) The term plan includes, but is not limited to, the following: Any plan, contract, authorization or arrangement, whether or not set forth in any formal document, pursuant to which cash, securities, similar instruments or any other property may be received. A plan may be applicable to one person. Small business issuers may omit information regarding group life, health, hospitalization, or medical reimbursement plans that do not discriminate in scope, terms or operation, in favor of executive officers or directors of the small business issuer and that are available generally to all salaried employees.

(iii) The term incentive plan means any plan providing compensation intended to serve as incentive for performance to occur over a specified period, whether such performance is measured by reference to financial performance of the small business issuer or an affiliate, the small business issuers stock price, or any other measure. A non-stock incentive plan is an incentive plan or portion of an incentive plan where the relevant performance measure is not based on the price of the small business issuers equity securities or the award does not permit settlement by issuance of the small business issuers equity securities. The term incentive plan award means an award provided under an incentive plan.

(b) Summary compensation table.

(1) General. Provide the information specified in paragraph (b)(2) of this Item, concerning the compensation of the named executive officers for each of the small business issuers last two completed fiscal years, in a Summary Compensation Table in the tabular format specified below.

SUMMARY COMPENSATION TABLE

(i) The name and principal position of the named executive officer (column (a)) ;

(ii) The fiscal year covered (column (b));

(iii) The dollar value of total compensation for the covered fiscal year (column (c)). With respect to each named executive officer, disclose the sum of all amounts reported in columns (d) through (i);

(v) The dollar value of bonus (cash and non-cash) earned by the named executive officer during the fiscal year covered (column (e));

Instructions to Item 402(b)(2)(iv) and (v).

1. If the amount of salary or bonus earned in a given fiscal year is not calculable through the latest practicable date, a footnote shall be included disclosing that the amount of salary or bonus is not calculable through the latest practicable date and providing the date that the amount of salary or bonus is expected to be determined, and such amount must be disclosed in a filing under Item 5.02(e) of Form 8-K (17 CFR 249.308).

2. Small business issuers need not include in the salary column (column (d)) or bonus column (column (e)) any amount of salary or bonus forgone at the election of a named executive officer pursuant to a small business issuers program under which stock, stock-based or other forms of non-cash compensation may be received by a named executive officer instead of a portion of annual compensation earned in a covered fiscal year. However, the receipt of any such form of non-cash compensation instead of salary or bonus earned for a covered fiscal year must be disclosed in the appropriate column of the Table corresponding to that fiscal year (e.g., stock awards (column (f)); option awards (column (g)); all other compensation (column (i))); or if made pursuant to a non-stock incentive plan and therefore not reportable at grant in the Summary Compensation Table, a footnote must be added to the salary or bonus column so disclosing and referring to the Narrative Disclosure to the Summary Compensation Table (required by paragraph (c) of this Item) where the material terms of the award are reported.

(vi) For awards of stock, including restricted stock, restricted stock units, phantom stock, phantom stock units, common stock equivalent units and other similar instruments that do not have option-like features, the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("FAS 123R"), as modified or supplemented, applying the same valuation model and assumptions as the small business issuer applies for financial statement reporting purposes, and all earnings on any outstanding awards (column (f));

(vii) For awards of stock options, with or without tandem SARs, freestanding SARs and other similar instruments with option-like features (including awards that subsequently have been transferred), the aggregate grant date fair value computed in accordance with FAS 123R applying the same valuation model and assumptions as the small business issuer applies for financial statement reporting purposes, and all earnings on any outstanding awards (column (g));

Instructions to Item 402(b)(2)(vi) and (vii).

1. For awards reported in columns (f) and (g), include a footnote disclosing all assumptions made in the valuation, by reference to a discussion of those assumptions in the small business issuers financial statements, footnotes to the financial statements, or discussion in the Managements Discussion and Analysis. The sections so referenced are deemed part of the disclosure provided pursuant to this Item 402.

2.  If at any time during the last completed fiscal year, the small business issuer has adjusted or amended the exercise price of stock options or SARs previously awarded to a named executive officer, whether through amendment, cancellation or replacement grants, or any other means ("repriced"), or otherwise has materially modified such awards, the small business issuer shall include, as awards required to be reported in column (g), the total fair value of options or SARs as so repriced or modified, measured as of the repricing or modification date.

3.  All earnings on outstanding awards must be identified and quantified in a footnote to column (f) or (g), as applicable, whether the earnings were paid during the fiscal year, payable during the period but deferred, or payable by their terms at a later date.

(viii) The dollar value of all earnings for services performed during the fiscal year pursuant to non-stock based incentive plans as defined in paragraph (a)(5)(iii) of this Item, and all earnings on any outstanding non-stock incentive plan awards (column (h));

Instructions to Item 402(b)(2)(viii).

1. If the relevant performance measure is satisfied during the fiscal year (including for a single year in a plan with a multi-year performance measure), the earnings are reportable for that fiscal year, even if not payable until a later date, and are not reportable again in the fiscal year when amounts are paid to the named executive officer.

2. All earnings on non-stock incentive plan compensation must be identified and quantified in a footnote to column (h), whether the earnings were paid during the fiscal year, payable during the period but deferred at the election of the named executive officer, or payable by their terms at a later date.

(A) Perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000;

(B) All earnings on compensation that is deferred on a basis that is not tax-qualified, including such earnings on non-qualified defined contribution plans;

(C) All "gross-ups" or other amounts reimbursed during the fiscal year for the payment of taxes;

(D) For any security of the small business issuer or its subsidiaries purchased from the small business issuer or its subsidiaries (through deferral of salary or bonus, or otherwise) at a discount from the market price of such security at the date of purchase, unless that discount is available generally, either to all security holders or to all salaried employees of the small business issuer, the compensation cost computed in accordance with FAS 123R applying the same valuation model and assumptions as the small business issuer applies for financial statement reporting purposes;

(E) The amount paid or accrued to any named executive officer pursuant to a plan or arrangement in connection with:

(1) Any termination, including without limitation through retirement, resignation, severance or constructive termination (including a change in responsibilities) of such executive officers employment with the small business issuer and its subsidiaries; or

(2) A change in control of the small business issuer;

(G) The aggregate increase in actuarial value to the named executive officer of all defined benefit and actuarial pension plans (including supplemental plans) accrued during the small business issuers covered fiscal year; and

(H) The dollar value of any insurance premiums paid by, or on behalf of, the small business issuer during the covered fiscal year with respect to life insurance for the benefit of a named executive officer.

Instructions to Item 402(b)(2)(ix).

1. Incentive plan awards and earnings and earnings on restricted stock, options, SARs and similar awards are required to be reported elsewhere as provided herein. These amounts and amounts received on exercise of options and SARs are not reportable as All Other Compensation in column (i).

2.  Benefits paid pursuant to defined benefit and actuarial plans are reportable as All Other Compensation in column (i) if paid to the named executive officer during the period covered by the Table. Otherwise information concerning these plans is reportable pursuant to paragraph (e)(1) of this Item.

3.  Reimbursements of taxes owed with respect to perquisites or other personal benefits must be included in the columns as tax reimbursements (paragraph (b)(2)(ix)(C) of this Item) even if the associated perquisites or other personal benefits are not required to be included because the aggregate amount of such compensation is less than $10,000.

4. Perquisites and other personal benefits shall be valued on the basis of the aggregate incremental cost to the small business issuer and its subsidiaries.

5. Regarding paragraph (b)(2)(ix)(B) of this Item, if the applicable interest rates vary depending upon conditions such as a minimum period of continued service, the reported amount should be calculated assuming satisfaction of all conditions to receiving interest at the highest rate. Footnote disclosure may be provided disclosing the portion of any earnings that the registrant considers to be paid at an above-market rate, provided that the footnote explains the small business issuers criteria for determining the portion considered to be above-market.

6. The disclosure required pursuant to paragraph (b)(2)(ix)(G) of this Item applies to each plan that provides for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans and supplemental employee retirement plans, but excluding tax-qualified defined contribution plans and nonqualified defined contribution plans.

Instructions to Item 402(b).

1. Information with respect to the fiscal year prior to the last completed fiscal year will not be required if the small business issuer was not a reporting company pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a), 78o(d)) at any time during that year, except that the small business issuer will be required to provide information for such year if that information previously was required to be provided in response to a Commission filing requirement.

2. All compensation values reported in the Summary Compensation Table must be reported in dollars. Where compensation was paid to or received by a named executive officer in a different currency, a footnote must be provided to identify that currency and describe the rate and methodology used to convert the payment amounts to dollars.

3. If a named executive officer is also a director who receives compensation for his or her services as a director, reflect that compensation in the Summary Compensation Table and provide a footnote identifying and itemizing such compensation and amounts. Use the categories in the Director Compensation Table required pursuant to paragraph (f) of this Item.

4. Amounts deferred at the election of a named executive officer or at the direction of the small business issuer, whether pursuant to a plan established under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), or otherwise, shall be included in the appropriate column for the fiscal year in which earned. The amount so deferred must be disclosed in a footnote to the applicable column.

(1) Provide a narrative description of any material factors necessary to an understanding of the information disclosed in the Table required by paragraph (b) of this Item. Examples of such factors may include, in given cases, among other things:

(i) The material terms of each named executive officers employment agreement or arrangement, whether written or unwritten.

(ii) If at any time during the last fiscal year, any outstanding option, SAR or other equity-based award was repriced or otherwise materially modified (such as by extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined), a description of each such repricing or other material modification.

(iii) The waiver or modification of any specified performance target, goal or condition to payout with respect to any amount included in non-stock incentive plan compensation or payouts reported in column (h) to the Summary Compensation Table required by paragraph (b) of this Item, stating whether the waiver or modification applied to one or more specified named executive officers or to all compensation subject to the target, goal or condition.

(iv) The material terms of each grant, including but not limited to date of exercisability, any conditions to exercisability, any tandem feature, any reload feature, any tax-reimbursement feature, and any provision that could cause the exercise price to be lowered.

(vii) An identification to the extent material of any item included under All Other Compensation (column (i)) in the Summary Compensation Table. Identification of an item shall not be considered material if it does not exceed the greater of $25,000 or 10% of all items included in the specified category in question set forth in paragraphs (b)(2)(ix) of this Item. All items of compensation are required to be included in the Summary Compensation Table without regard to whether such items are required to be identified.

(d) Outstanding equity awards at fiscal year-end table.

(1) Provide the information specified in paragraph (d)(2) of this Item, concerning the number and value of unexercised options, SARs and similar instruments and nonvested stock (including restricted stock, restricted stock units or other similar instruments) and incentive plan awards for each named executive officer outstanding as of the end of the small business issuers last completed fiscal year on an aggregated basis in the following tabular format:

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

(i) The name of the executive officer (column (a));

(ii) The total number of securities underlying unexercised options, SARs and similar instruments with option-like features held at the end of the last completed fiscal year, including awards that have been transferred, separately identifying the exercisable and unexercisable options, SARs and similar instruments (column (b));

(iii) The aggregate in-the-money amount of unexercised options, SARs and similar instruments with option-like features held at the end of the fiscal year, including awards that have been transferred, separately identifying the exercisable and unexercisable options, SARs and similar instruments (column (c));

(v) The aggregate market value of nonvested shares of stock (including restricted stock, restricted stock units or similar instruments that do not have option-like features) held at the end of the fiscal year (column (e));

(vi)The total number of nonvested shares, units or other rights awarded under any incentive plan, and, if applicable the number of shares underlying any such unit or right, held at the end of the fiscal year (column (f)); and

(vii) The aggregate market or payout value of nonvested shares, units or other rights awarded under any incentive plan held at the end of the fiscal year (column (g)).

Instructions to Item 402(d)(2). 1. In the title of the table, specify the applicable fiscal year of the small business issuer.

2. Options, SARs or similar instruments are in-the-money if the market price of the underlying securities exceeds the exercise or base price of the option, SAR or similar instrument. Compute the amounts in column (c) by determining the difference between the market price at fiscal year-end of the securities underlying the options, SARs or similar instruments and the exercise or base price of the options, SARs or similar instruments.

3. The expiration dates of options, SARs and similar instruments held at fiscal year-end, separately identifying the exercisable and unexercisable options, SARs and similar instruments must be disclosed by footnote to column (b). If the expiration date of an option, SAR or similar instrument held at fiscal year-end subsequently has occurred, state whether it was exercised or expired unexercised. The vesting dates of restricted stock shares and similar instruments and incentive plan awards held at fiscal-year end must be disclosed by footnotes to columns (d) and (f), respectively.

4. Compute the market values of stock (including restricted stock, restricted stock units or similar instruments) holdings reported in column (e) and equity-based incentive plan awards reported in column (g) by multiplying the closing market price of the small business issuers stock at the end of the last completed fiscal year by the number of restricted stock or incentive plan award holdings, respectively.

(1) The material terms of each plan that provides for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans, supplemental employee retirement plans, tax-qualified defined contribution plans and nonqualified defined contribution plans.

(2) The material terms of each contract, agreement, plan or arrangement, whether written or unwritten, that provides for payment(s) to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer, or a change in control of the small business issuer or a change in the named executive officers responsibilities following a change in control, with respect to each named executive officer.

(f) Compensation of directors.

DIRECTOR COMPENSATION

(2) The Table shall include:

(ii) The dollar value of total compensation for the covered fiscal year (column (b)). With respect to each director, disclose the sum of all amounts reported in columns (c)through (g);

(iii) The aggregate dollar amount of all fees earned or paid in cash for services as a director, including annual retainer fees, committee and/or chairmanship fees, and meeting fees (column (c));

(v) For awards of stock options, with or without tandem SARs, freestanding SARs and other similar instruments with option-like features (including awards that subsequently have been transferred), the aggregate grant date fair value computed in accordance with FAS 123R applying the same valuation model and assumptions as the small business issuer applies for financial statement reporting purposes, and all earnings on any outstanding awards (column (e));

Instruction to Item 402(f)(2)(iv) and (v).

Disclose, for each director, by footnote to the appropriate column, the outstanding equity awards at fiscal year end as would be required if the tabular presentation for named executive officers specified in paragraph (d) of this Item were required for directors.

(vi) The dollar value of all earnings for services performed during the fiscal year pursuant to non-stock-based incentive plans as defined in paragraph (a)(5)(iii) of this Item, and all earnings on any outstanding awards (column (f)); and

(vii) All other compensation for the covered fiscal year that the small business issuer could not properly report in any other column of the Director Compensation Table (column (g)). Each compensation item for the last completed fiscal year that is not properly reportable in columns (c) (f) must be reported in this column and must be identified and quantified in a footnote if it is deemed material in accordance with paragraph (c)(6) of this Item. Such compensation must include, but is not limited to:

(B) All earnings on compensation that is deferred on a basis that is not tax-qualified;

(C) All amounts reimbursed during the fiscal year for the payment of taxes;

(E) The amount paid or accrued to any director pursuant to a plan or arrangement in connection with:

(2) A change in control of the small business issuer;

(F) The aggregate increase in actuarial value to the director of all defined benefit and actuarial pension plans (including supplemental plans) accrued during the small business issuers covered fiscal year;

(G) Small business issuer contributions or other allocations to vested and unvested defined contribution plans;

(H) Consulting fees earned from, or paid or payable by the small business issuer and/or its subsidiaries (including joint ventures);

(I) The annual costs of payments and promises of payments pursuant to director legacy programs and similar charitable award programs; and

(J) The dollar value of any insurance premiums paid by, or on behalf of, the small business issuer during the covered fiscal year with respect to life insurance for the benefit of a director.

Instruction to Item 402(f)(2)(vii).

Programs in which small business issuers agree to make donations to one or more charitable institutions in a directors name, payable by the small business issuer currently or upon a designated event, such as the retirement or death of the director, are charitable awards programs or director legacy programs for purposes of the disclosure required by paragraph (f)(2)(vii)(I) of this Item. Provide footnote disclosure of the total dollar amount and other material terms of each such program for which tabular disclosure is provided.

Instruction to Item 402(f)(2).

Two or more directors may be grouped in a single row in the table if all of their elements of compensation are identical. The names of the directors for whom disclosure is presented on a group basis should be clear from the table.

(3) Narrative to director compensation table.

Provide a narrative description of any factors necessary to an understanding of the director compensation disclosed in this Table. While material factors will vary depending upon the facts, examples of such factors may include, in given cases, among other things:

(ii) Whether any director has a different compensation arrangement, identifying that director and describing the terms of that arrangement.

Instruction to Item 402(f).

In addition to the Instruction to paragraph (f)(2)(vii) of this Item, the following apply equally to paragraph (f) of this Item: Instructions 2 and 3 to paragraph (b) of this Item; the Instructions to paragraphs (b)(2)(iv) and (v) of this Item; the Instructions to paragraphs (b)(2)(vi) and (vii) of this Item; the Instructions to paragraph (b)(2)(viii) of this Item; the Instructions to paragraph (b)(2)(ix) of this Item; and paragraph (c)(6) of this Item. These Instructions apply to the columns in the Director Compensation Table that are analogous to the columns in the Summary Compensation Table to which they refer and to disclosures under paragraph (f) of this Item that correspond to analogous disclosures provided for in paragraph (b) of this Item to which they refer.

§228.403 (Item 403) Security Ownership of Certain Beneficial Owners and Management.

(a) * * *

(b) Security ownership of management. Furnish the following information, as of the most recent practicable date, in substantially the tabular form indicated, as to each class of equity securities of the small business issuer or any of its parents or subsidiaries, including directors qualifying shares, beneficially owned by all directors and nominees, naming them, each of the named executive officers as defined in Item 402(a)(2) (§228.402(a)(2)), and directors and executive officers of the small business issuer as a group, without naming them. Show in column (3) the total number of shares beneficially owned and in column (4) the percent of the class so owned. Of the number of shares shown in column (3), indicate, by footnote the amount of shares that are pledged as security and the amount of shares with respect to which such persons have the right to acquire beneficial ownership as specified in §240.13d-3(d)(1) of this chapter.

* * * * *

7. Revise §228.404 to read as follows:

§228.404 (Item 404) Transactions with related persons and promoters.

(1) The name of the related person and the basis on which the person is a related person.

(2) The related persons interest in the transaction with the small business issuer, including the related persons position(s) or relationship(s) with, or ownership in, a firm, corporation, or other entity that is a party to, or has an interest in, the transaction.

(3) The approximate dollar value of the amount involved in each transaction and of the amount of the related persons interest in each transaction each of which shall be computed without regard to the amount of profit or loss.

(4) In the case of indebtedness, disclosure of the amount involved in the transaction shall include the largest aggregate amount of principal outstanding during the last two years, the amount thereof outstanding as of the latest practicable date, the amount of principal paid during the periods for which disclosure is provided, the amount of interest paid during the period for which disclosure is provided, and the rate or amount of interest payable on the indebtedness.

(5) Any other information regarding the transaction or the related person in the context of the transaction that is material to investors in light of the circumstances of the particular transaction.

Instructions to Item 404(a).

1. For the purposes of paragraph (a) of this Item, the term related person means:

a. Any person who was in any of the following categories at any time during the specified period for which disclosure under paragraph (a) of this Item is required:

i. Any director or executive officer of the small business issuer;

ii. Any nominee for director, when the information called for by paragraph (a) of this Item is being presented in a proxy or information statement relating to the election of that nominee for director; or

iii. Any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and any person (other than a tenant or employee) sharing the household of a related person identified in paragraph 1.a.i.or 1.a.ii. of this instruction; and

b. Any person who was in any of the following categories when a transaction in which such person had a direct or indirect material interest occurred or existed:

i. A security holder covered by Item 403(a) (§228.403(a)); or

ii. Any immediate family member of any such security holder, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, of such security holder and any person (other than a tenant or employee) sharing the household of such security holder.

2. For purposes of paragraph (a) of this Item, a transaction includes, but is not limited to, any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships.

3. The amount involved in the transaction shall be computed by determining the dollar value of the amount involved in the transaction in question, which shall include:

a. In the case of any lease or other transaction providing for periodic payments or installments, the aggregate amount of all periodic payments or installments due on or after the beginning of the small business issuers last fiscal year, including any required or optional payments due during or at the conclusion of the lease.

b. In the case of indebtedness, the largest aggregate amount of all indebtedness outstanding at any time since the beginning of the small business issuers last fiscal year and all amounts of interest payable on it during the last fiscal year.

4. In the case of transactions involving indebtedness, the following items of indebtedness may be excluded from the calculation of the amount of indebtedness and need not be disclosed: amounts due from the related person for purchases of goods and services subject to usual trade terms, for ordinary business travel and expense payments and for other transactions in the ordinary course of business.

5. Disclosure of an employment relationship or transaction involving an executive officer and any related compensation solely resulting from that employment relationship or transaction need not be provided pursuant to paragraph (a) of this Item if:

b. The executive officer is not an immediate family member of a related person (as specified in Instruction 1. to paragraph (a) of this Item) and such compensation would have been reported under Item 402 (§228.402) as compensation earned for services to the small business issuer if the executive officer was a named executive officer as that term is defined in Item 402(a)(2) (§228.402(a)(2)), and such compensation had been approved as such by the compensation committee of the board of directors (or group of independent directors performing a similar function) of the small business issuer.

6. Disclosure of compensation to a director need not be provided pursuant to paragraph (a) of this Item if the compensation is reportable pursuant to Item 402(f) (§228.402(f)).

7. In the case of a transaction involving indebtedness, if the lender is a bank, savings and loan association, or broker-dealer extending credit under Federal Reserve Regulation T (12 CFR part 220) and the loans are not disclosed as nonaccrual, past due, restructured or potential problems (see Item III.C.1. and 2. of Industry Guide 3, Statistical Disclosure by Bank Holding Companies (17 CFR 229.802(c))), disclosure under paragraph (a) of this Item may consist of a statement, if such is the case, that the loans to such persons:

a. Were made in the ordinary course of business;

c. Did not involve more than the normal risk of collectibility or present other unfavorable features.

8. A person who has a position or relationship with a firm, corporation, or other entity that engages in a transaction with the small business issuer shall not be deemed to have an indirect "material" interest within the meaning of paragraph (a) of this Item where:

a. The interest arises only:

i. From such persons position as a director of another corporation or organization which is a party to the transaction; or

ii. From the direct or indirect ownership by such person and all other persons specified in Instruction 1 to paragraph (a) of this Item, in the aggregate, of less than a ten percent equity interest in another person (other than a partnership) which is a party to the transaction; or

iii. From both such position and ownership; or

9. Include information for any material underwriting discounts and commissions upon the sale of securities by the small business issuer where any of the specified persons was or is to be a principal underwriter or is a controlling person or member of a firm that was or is to be a principal underwriter.

(c) Promoters.

(1) Small business issuers that had a promoter at any time during the past five fiscal years shall:

(i) State the names of the promoter(s), the nature and amount of anything of value (including money, property, contracts, options or rights of any kind) received or to be received by each promoter, directly or indirectly, from the small business issuer and the nature and amount of any assets, services or other consideration therefor received or to be received by the small business issuer; and

(ii) As to any assets acquired or to be acquired by the small business issuer from a promoter, state the amount at which the assets were acquired or are to be acquired and the principle followed or to be followed in determining such amount, and identify the persons making the determination and their relationship, if any, with the small business issuer or any promoter. If the assets were acquired by the promoter within two years prior to their transfer to the small business issuer, also state the cost thereof to the promoter.

(2)Small business issuers shall provide the disclosure required by paragraphs (c)(1)(i) and (c)(1)(ii) of this Item as to any person who acquired control of a small business issuer that is a shell company, or any person that is part of a group, consisting of two or more persons that agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of a small business issuer, that acquired control of a small business issuer that is a shell company.

8. Add §228.407 to read as follows:

§228.407 (Item 407) Corporate governance.

(a) Director independence. Identify each director and, when the disclosure called for by this paragraph is being presented in a proxy or information statement relating to the election of directors, each nominee for director, that is independent under the independence standards applicable to the small business issuer under paragraph (a)(1) of this Item. In addition, if such independence standards contain independence requirements for committees of the board of directors, identify each director that is a member of the compensation, nominating or audit committee that is not independent under such committee independence standards. If the small business issuer does not have a separately designated audit, nominating or compensation committee or committee performing similar functions, the small business issuer must provide the disclosure of directors that are not independent with respect to all members of the board of directors applying such committee independence standards.

(i) If the small business issuer 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, the small business issuers definition of independence that it uses for determining if a majority of the board of directors is independent in compliance with the listing standards applicable to the small business issuer. When determining whether the members of a committee of the board of directors are independent, the small business issuers definition of independence that it uses for determining if the members of that specific committee are independent in compliance with the independence standards applicable for the members of the specific committee in the listing standards of the national securities exchange or inter-dealer quotation system that the small business issuer uses for determining if a majority of the board of directors are independent. If the small business issuer does not have independence standards for a committee, the independence standards for that specific committee in the listing standards of the national securities exchange or inter-dealer quotation system that the small business issuer uses for determining if a majority of the board of directors are independent.

(ii) If the small business issuer is not a listed issuer, a definition of independence of a national securities exchange or of a national securities association which has requirements that a majority of the board of directors be independent, and state which definition is used. Whatever such definition the small business issuer chooses, it must use the same definition with respect to all directors and nominees for director. When determining whether the members of a specific committee of the board of directors are independent, if the national securities exchange or national securities association whose standards are used has independence standards for the member of a specific committee, use those committee specific standards.

(iii) If the information called for by paragraph (a) of this Item is being presented in a registration statement on Form S-1 (§239.11 of this chapter) or Form SB-2 (§239.10 of this chapter) under the Securities Act or on a Form 10 or Form 10-SB (§249.210 or §249.210b of this chapter) under the Exchange Act where the small business issuer has applied for listing with a national securities exchange or in an inter-dealer quotation system which has requirements that a majority of the board of directors be independent, the definition of independence that the small business issuer uses for determining if a majority of the board of directors is independent, and the definition of independence that the small business issuer uses for determining if members of the specific committee of the board of directors are independent, that is in compliance with the independence listing standards of the national securities exchange or inter-dealer quotation system on which it has applied for listing, or if the small business issuer has not adopted such definitions, the independence standards for determining if the majority of the board of directors is independent and if members of the committee of the board of directors are independent of that national securities exchange or inter-dealer quotation system.

(3) For each director and nominee for director that is identified as independent, describe any transactions, relationships or arrangements not disclosed pursuant to Item 404(a) (§228.404(a)) that were considered by the board of directors under the applicable independence definitions in determining that the director is independent.

Instruction to Item 407(a). No information called for by paragraph (a) of this Item need be given in a registration statement filed at a time when the small business issuer is not subject to the reporting requirements of sections 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a), or 78o(d)) respecting any director who is no longer a director at the time of effectiveness of the registration statement.

(b) Board meetings and committees.

(i) The total number of meetings of the board of directors (held during the period for which he has been a director); and

(ii) The total number of meetings held by all committees of the board on which he served (during the periods that he served).

(2) Describe the small business issuers policy, if any, with regard to board members attendance at annual meetings of security holders and state the number of board members who attended the prior years annual meeting.

Instruction to Item 407(b)(2). In lieu of providing the information required by paragraph (b)(2) of this Item in the proxy statement, the small business issuer may instead provide the small business issuers Web site address where such information appears.

(c) Nominating committee.

(1) If the small business issuer does not have a standing nominating committee or committee performing similar functions, state the basis for the view of the board of directors that it is appropriate for the small business issuer not to have such a committee and identify each director who participates in the consideration of director nominees.

(2) Provide the following information regarding the small business issuers director nomination process:

(i) State whether or not the nominating committee has a charter. If the nominating committee has a charter, provide the disclosure required by Instruction 2 to this Item regarding the nominating committee charter;

(ii) If the nominating committee has a policy with regard to the consideration of any director candidates recommended by security holders, provide a description of the material elements of that policy, which shall include, but need not be limited to, a statement as to whether the committee will consider director candidates recommended by security holders;

(iii) If the nominating committee does not have a policy with regard to the consideration of any director candidates recommended by security holders, state that fact and state the basis for the view of the board of directors that it is appropriate for the small business issuer not to have such a policy;

(v) Describe any specific minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee for a position on the small business issuers board of directors, and describe any specific qualities or skills that the nominating committee believes are necessary for one or more of the small business issuers directors to possess;

(vi) Describe the nominating committees process for identifying and evaluating nominees for director, including nominees recommended by security holders, and any differences in the manner in which the nominating committee evaluates nominees for director based on whether the nominee is recommended by a security holder;

(vii) With regard to each nominee approved by the nominating committee for inclusion on the small business issuers proxy card (other than nominees who are executive officers or who are directors standing for re-election), state which one or more of the following categories of persons or entities recommended that nominee: security holder, non-management director, chief executive officer, other executive officer, third-party search firm, or other specified source;

(viii) If the small business issuer pays a fee to any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees, disclose the function performed by each such third party; and

(ix) If the small business issuers nominating committee received, by a date not later than the 120th calendar day before the date of the small business issuers proxy statement released to security holders in connection with the previous years annual meeting, a recommended nominee from a security holder that beneficially owned more than 5% of the small business issuers voting common stock for at least one year as of the date the recommendation was made, or from a group of security holders that beneficially owned, in the aggregate, more than 5% of the small business issuers voting common stock, with each of the securities used to calculate that ownership held for at least one year as of the date the recommendation was made, identify the candidate and the security holder or security holder group that recommended the candidate and disclose whether the nominating committee chose to nominate the candidate, provided, however, that no such identification or disclosure is required without the written consent of both the security holder or security holder group and the candidate to be so identified.

Instructions to Item 407(c)(2)(ix).

1. For purposes of paragraph (c)(2)(ix) of this Item, the percentage of securities held by a nominating security holder may be determined using information set forth in the small business issuers most recent quarterly or annual report, and any current report subsequent thereto, filed with the Commission pursuant to the Exchange Act, unless the party relying on such report knows or has reason to believe that the information contained therein is inaccurate.
2. For purposes of the small business issuers obligation to provide the disclosure specified in paragraph (c)(2)(ix) of this Item, where the date of the annual meeting has been changed by more than 30 days from the date of the previous years meeting, the obligation under that Item will arise where the small business issuer receives the security holder recommendation a reasonable time before the small business issuer begins to print and mail its proxy materials.
3. For purposes of paragraph (c)(2)(ix) of this Item, the percentage of securities held by a recommending security holder, as well as the holding period of those securities, may be determined by the small business issuer if the security holder is the registered holder of the securities. If the security holder is not the registered owner of the securities, he or she can submit one of the following to the small business issuer to evidence the required ownership percentage and holding period:

b. If the security holder has filed a Schedule 13D (§240.13d-101 of this chapter), Schedule 13G (§240.13d-102 of this chapter), Form 3 (§249.103 of this chapter), Form 4 (§249.104 of this chapter), and/or Form 5 (§249.105 of this chapter), or amendments to those documents or updated forms, reflecting ownership of the securities as of or before the date of the recommendation, a copy of the schedule and/or form, and any subsequent amendments reporting a change in ownership level, as well as a written statement that the security holder continuously held the securities for the one-year period as of the date of the recommendation.

4. For purposes of the small business issuers obligation to provide the disclosure specified in paragraph (c)(2)(ix) of this Item, the security holder or group must have provided to the small business issuer, at the time of the recommendation, the written consent of all parties to be identified and, where the security holder or group members are not registered holders, proof that the security holder or group satisfied the required ownership percentage and holding period as of the date of the recommendation.

Instruction to Item 407(c)(2). For purposes of paragraph (c)(2) of this Item, the term "nominating committee" refers not only to nominating committees and committees performing similar functions, but also to groups of directors fulfilling the role of a nominating committee, including the entire board of directors.

(3) Describe any material changes to the procedures by which security holders may recommend nominees to the small business issuers board of directors, where those changes were implemented after the small business issuer last provided disclosure in response to the requirements of paragraph (c)(2)(iv) of this Item, or paragraph (c)(3) of this Item.

Instructions to Item 407(c)(3).

1. The disclosure required in paragraph (c)(3) of this Item need only be provided in a small business issuers quarterly or annual reports.
2. For purposes of paragraph (c)(3) of this Item, adoption of procedures by which security holders may recommend nominees to the small business issuers board of directors, where the small business issuers most recent disclosure in response to the requirements of paragraph (c)(2)(iv) of this Item, or paragraph (c)(3) of this Item, indicated that the small business issuer did not have in place such procedures, will constitute a material change.

(d) Audit committee.

(2) If a listed issuers board of directors determines, in accordance with the listing standards applicable to the issuer, to appoint a director to the audit committee who is not independent (apart from the requirements in §240.10A-3 of this chapter), including

as a result of exceptional or limited or similar circumstances, disclose the nature of the relationship that makes that individual not independent and the reasons for the board of directors determination.

(3)(i) The audit committee must state whether:

(B) The audit committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T;

(C) The audit committee has received the written disclosures and the letter from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600T, and has discussed with the independent accountant the independent accountants independence; and

(D) Based on the review and discussions referred to in paragraphs (d)(3)(i)(A) through (d)(3)(i)(C) of this Item, the audit committee recommended to the board of directors that the audited financial statements be included in the small business issuers Annual Report on Form 10-K (17 CFR 249.310) for the last fiscal year for filing with the Commission.

(ii) The name of each member of the companys audit committee (or, in the absence of an audit committee, the board committee performing equivalent functions or the entire board of directors) must appear below the disclosure required by paragraph (d)(3)(i) of this Item.

(4)(i) If you meet the following requirements, provide the disclosure in paragraph (d)(4)(ii) of this Item:

(B) You are filing either an annual report on Form 10-K or10-KSB (17 CFR

249.310 or 17 CFR 249.310b), or a proxy statement or information statement pursuant to the Exchange Act (15 U.S.C. 78a et seq.) if action is to be taken with respect to the election of directors; and

(C) You are neither:

(ii)(A) State whether or not the small business issuer has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)), or a committee performing similar functions. If the small business issuer has such a committee, however designated, identify each committee member. If the entire board of directors is acting as the small business issuers audit committee as specified in section 3(a)(58)(B) of the Exchange Act (15 U.S.C. 78c(a)(58)(B)), so state.

(B) If applicable, provide the disclosure required by §240.10A-3(d) of this chapter regarding an exemption from the listing standards for audit committees.

(5) Audit committee financial expert.

(i)(A) Disclose that the small business issuers board of directors has determined that the small business issuer either:

(2) Does not have an audit committee financial expert serving on its audit committee.

(B) If the small business issuer provides the disclosure required by paragraph (d)(5)(i)(A)(1) of this Item, it must disclose the name of the audit committee financial expert and whether that person is independent, as independence for audit committee members is defined in the listing standards applicable to the listed issuer.

(C) If the small business issuer provides the disclosure required by paragraph (d)(5)(i)(A)(2) of this Item, it must explain why it does not have an audit committee financial expert.

Instruction to Item 407(d)(5)(i). If the small business issuers board of directors has determined that the small business issuer has more than one audit committee financial expert serving on its audit committee, the small business issuer may, but is not required to, disclose the names of those additional persons. A small business issuer choosing to identify such persons must indicate whether they are independent pursuant to paragraph (d)(5)(i)(B) of this Item.

(A) An understanding of generally accepted accounting principles and financial statements;

(B) The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;

(C) Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the small business issuers financial statements, or experience actively supervising one or more persons engaged in such activities;

(E) An understanding of audit committee functions.

(iii) A person shall have acquired such attributes through:

(B) Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;

(C) Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or

(iv) Safe harbor.

(A) A person who is determined to be an audit committee financial expert will not be deemed an expert for any purpose, including without limitation for purposes of section 11 of the Securities Act (15 U.S.C. 77k), as a result of being designated or identified as an audit committee financial expert pursuant to this Item 407.

(B) The designation or identification of a person as an audit committee financial expert pursuant to this Item does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification.

(C) The designation or identification of a person as an audit committee financial expert pursuant to this Item does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.

Instructions to Item 407(d)(5).

1. The disclosure under paragraph (d)(5) of this Item is required only in a small business issuers annual report. The small business issuer need not provide the disclosure required by paragraph (d)(5) of this Item in a proxy or information statement unless that small business issuer is electing to incorporate this information by reference from the proxy or information statement into its annual report pursuant to General Instruction E(3) to Form 10-KSB (17 CFR 249.310b).
2. If a person qualifies as an audit committee financial expert by means of having held a position described in paragraph (d)(5)(iii)(D) of this Item, the small business issuer shall provide a brief listing of that persons relevant experience. Such disclosure may be made by reference to disclosures required under Item 401(a)(4) (§228.401(a)(4)).
3. In the case of a foreign private issuer with a two-tier board of directors, for purposes of paragraph (d)(5) of this Item, the term board of directors means the supervisory or non-management board. Also, in the case of a foreign private issuer, the term generally accepted accounting principles in paragraph (d)(5)(ii)(A) of this Item means the body of generally accepted accounting principles used by that issuer in its primary financial statements filed with the Commission.
4. Following the effective date of the first registration statement filed under the Securities Act (15 U.S.C. 77a et seq.) or Exchange Act (15 U.S.C.78a et seq.) by a small business issuer, the small business issuer or successor issuer need not make the disclosures required by this Item in its first annual report filed pursuant to section 13(a) or 15(d) (15 U.S.C. 78m(a) or 78o(d)) of the Exchange Act after effectiveness.

Instructions to Item 407(d).

1. The information required by paragraphs (d)(1) - (3) of this Item shall not be deemed to be "soliciting material," or to be "filed" with the Commission or subject to Regulation 14A or 14C (17 CFR 240.14a-1 through 240.14b-2 or 240.14c-1through 240.14c-101), other than as provided in this Item, or to the liabilities of section 18 of the Exchange Act (15 U.S.C. 78r), except to the extent that the small business issuer specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act. Such information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the small business issuer specifically incorporates it by reference.
2. The disclosure required by paragraphs (d)(1) - (3) of this Item need only be provided one time during any fiscal year.
3. The disclosure required by paragraph (d)(3) of this Item need not be provided in any filings other than a small business issuers proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting).

(e) Compensation committee.

(2) State whether or not the compensation committee has a charter. If the compensation committee has a charter, provide the disclosure required by Instruction 2 to this Item regarding the compensation committee charter.

(3) Provide a narrative description of the small business issuers processes and procedures for the consideration and determination of executive and director compensation, including:

(i)(A) The scope of authority of each of the compensation committee (or persons performing the equivalent functions); and

(B) The extent to which the compensation committee (or persons performing the equivalent functions) may delegate any authority described in paragraph (e)(3)(i)(A) of this Item to other persons, specifying what authority may be so delegated and to whom;

(ii) Any role of executive officers in determining or recommending the amount or form of executive and director compensation; and

(iii) 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, the material elements of the instructions or directions given to the consultants with respect to the performance of their duties under the engagement and identifying the executive officer within the small business issuer the consultants contacted in carrying out their assignment.

(f) Shareholder communications and annual meeting attendance.

(2) If the small business issuer has a process for security holders to send communications to the board of directors:

(i) Describe the manner in which security holders can send communications to the board and, if applicable, to specified individual directors; and

(ii) If all security holder communications are not sent directly to board members, describe the small business issuers process for determining which communications will be relayed to board members.

Instructions to Item 407(f).

1. In lieu of providing the information required by paragraph (f)(2) of this Item in the proxy statement, the small business issuer may instead provide the small business issuers Web site address where such information appears.

2. For purposes of the disclosure required by paragraph (f)(2)(ii) of this Item, a small business issuers process for collecting and organizing security holder communications, as well as similar or related activities, need not be disclosed provided that the small business issuers process is approved by a majority of the independent directors.

3. For purposes of this paragraph, communications from an officer or director of the small business issuer will not be viewed as "security holder communications." Communications from an employee or agent of the small business issuer will be viewed as "security holder communications" for purposes of this paragraph only if those communications are made solely in such employees or agents capacity as a security holder.

4. For purposes of this paragraph, security holder proposals submitted pursuant to §240.14a-8 of this chapter, and communications made in connection with such proposals, will not be viewed as "security holder communications."

Instructions to Item 407.

1. For purposes of this Item:

a. Listed issuer means a listed issuer as defined in §240.10A-3 of this chapter;

c. 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

d. 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).

2. With respect to paragraphs (c)(2)(i), (d)(1) and (e)(2) of this Item, disclose whether a current copy of the applicable committee charter is available to security holders on the small business issuers Web site, and if so, provide the small business issuers Web site address. If a current copy of the charter is not available to security holders on the small business issuers Web site, include a copy of the charter in an appendix to the small business issuers proxy statement that is provided to security holders at least once every three fiscal years, or if the charter has been materially amended since the beginning of the small business issuers last fiscal year. If a current copy of the charter is not available to security holders on the small business issuers Web site, and is not included as an appendix to the small business issuers proxy statement, identify in which of the prior fiscal years the charter was so included in satisfaction of this requirement.