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

Release No. IC-27218
 

Securities and Exchange Commission

Executive Compensation and Related Party Disclosure
Section V

    Release Table of Contents

V. Certain Relationships and Related Transactions Disclosure

We believe that, in addition to disclosure regarding executive compensation, a materially complete picture of financial relationships with a company involves disclosure regarding related party transactions. Therefore, we are also proposing significant revisions to Item 404 of Regulation S-K "Certain Relationships and Related Transactions." In 1982, various provisions that had been adopted in a piecemeal fashion and had been subject to frequent amendment were consolidated into Item 404 of Regulation S-K.²³¹ Today we propose to amend Item 404 of Regulation S-K and S-B to streamline and modernize this disclosure requirement, while making it more principlesbased. Although the proposals would significantly modify this disclosure requirement, its purpose - to elicit disclosure regarding transactions and relationships, including indebtedness, involving the company and related persons and the independence of directors and nominees for director and the interests of management - would remain unchanged.

As discussed in greater detail below, the proposal has four parts:²³²

Item 404(a) would contain a general disclosure requirement for related person transactions, including those involving indebtedness.²³³

Item 404(b) would require disclosure regarding the companys policies and procedures for the review, approval or ratification of related person transactions.  

Item 404(c) would require disclosure regarding promoters of a company.²³⁴

New Item 407 would consolidate current corporate governance disclosure requirements.²³⁵ Proposed Item 407(a) would require disclosure regarding the independence of directors, including whether each director and nominee for director of the registrant is independent, as well as a description of any relationships not disclosed under paragraph (a) of Item 404 that were considered when determining whether each director and nominee for director is independent.  

A. Transactions with Related Persons

We are proposing revisions to Item 404 to make the certain relationships and related transactions disclosure requirements clearer and easier to follow. The proposals would retain the principles for disclosure of related person transactions that are specified in current Item 404(a), but would no longer include all of the instructions that serve to delineate what transactions are reportable or excludable from disclosure based on bright lines that can depart from a more appropriate materiality analysis. Instead, proposed Item 404(a) would consist of a general statement of the principle for disclosure, followed by specific disclosure requirements and instructions. The instructions would explain the related persons covered by the Item, the scope of transactions covered by the Item, the method for computation of the amounts involved in the relationship or transaction, the interaction with Item 402, special requirements for indebtedness with banks, and the materiality of certain ownership interests.

The proposed Item would extend to disclosure of indebtedness. Currently, Item 404(a) requires disclosure regarding transactions involving the company and certain related persons,²³⁶ and Item 404(c) requires disclosure regarding indebtedness.²³⁷ We propose to consolidate these two provisions in order to eliminate confusion regarding the circumstances in which each item applies and streamline duplicative portions of current paragraphs (a) and (c) of Item 404.

1. Broad Principle for Disclosure

Proposed Item 404(a) would articulate a broad principle for disclosure; it would state that a company must provide disclosure regarding:

any transaction since the beginning of the companys last fiscal year, or any currently proposed transaction;

in which the company was or is to be a participant;

in which the amount involved exceeds $120,000; and

in which any related person had, or will have, a direct or indirect material interest.

We propose to eliminate current Instruction 1 to Item 404(a), which is repetitive of the general materiality standard applicable to the item. By proposing to delete this instruction we do not intend to change the materiality standard applicable to Item 404(a). The "materiality" standard for disclosure currently embodied in Item 404(a) would be retained; a company would disclose based on whether the related person had, or will have, a direct or indirect material interest in the transaction. The materiality of any interest would continue to be determined on the basis of the significance of the information to investors in light of all the circumstances and the significance of the interest to the person having the interest. ²³⁸ The relationship of the related persons to the transaction, and with each other, and the amount involved in the transaction would be among the factors to be considered in determining the materiality of the information to investors.

We propose to eliminate current Instruction 7 to Item 404(a), which establishes certain presumptions regarding materiality and may operate to exclude some transactions from disclosure that might otherwise require disclosure under the principles enunciated by the Item. We also propose to eliminate current Instruction 9 to Item 404(a), which indicates that the $60,000 threshold is not a bright line materiality standard. We propose to eliminate current Instruction 9 to Item 404(a) because it is repetitive of the general materiality standard applicable to the Item.²³⁹ We believe that application of the materiality principles under the Item would be more consistent with a principles-based approach and would lead to more appropriate disclosure outcomes than application of the instructions that we propose to eliminate.

In addition, the proposals would:

call for disclosure if a company is a "participant" in a transaction, rather than if it is "a party" to the transaction, as "participant" more accurately connotes the companys involvement;

modify the $60,000 threshold for disclosure to $120,000 to adjust for inflation;

include a defined term for "transaction" to provide that it includes a series of similar transactions and to make clear its broad scope; and

include a single defined term for "related persons."²⁴⁰

As is currently the case, disclosure would be required for three years in registration statements filed pursuant to the Securities Act or the Exchange Act.²⁴¹

Finally, the rule proposals would include a technical modification. Currently, Item 404(a) states that disclosure must be provided regarding situations involving "the registrant or any of its subsidiaries." Because companies must include subsidiaries in making materiality determinations in all circumstances, the reference to "subsidiaries" is superfluous, and we propose to eliminate it. This proposal would not change the scope of disclosure required under the Item.²⁴²

Request for Comment

Should we recast Item 404(a) as a more principles-based disclosure requirement as proposed? Why or why not?

In recasting Item 404(a) as a more principles-based disclosure requirement, should we eliminate all of the current instructions, not only the ones we propose eliminating? Are there any concepts in the instructions to Item 404(a) that we propose to eliminate that should be retained? As a result of eliminating the instructions to Item 404(a), would there be any categories of transactions which would have an unclear disclosure status? Although the analysis required for any particular transaction would be fact-specific, should we provide further guidance or examples regarding the disclosure status of particular types of direct or indirect interests?

Is it appropriate to adjust the threshold for disclosure to $120,000? Should there be no threshold? Should the threshold also operate on a sliding scale (for example, the lower of $120,000 or 1% of the average of total assets for the last three completed fiscal years²⁴³ or the lower of $120,000 or a percentage of annual corporate expenses) to capture smaller transactions for smaller companies?

Explain whether a higher or lower threshold, or no threshold, would result in more effective disclosure.

In Item 404(a), should we require a company to be "involved" rather than to be "a participant" in transactions subject to disclosure?

a. Indebtedness

Section 402 of the Sarbanes-Oxley Act prohibits most personal loans by an issuer to its officers and directors.²⁴⁴ This development raises the issue of whether disclosure of indebtedness of the sort required under our current rules should be maintained. We believe that the approach to disclosure of indebtedness involving related persons that we propose today would be appropriate because of the scope of the direct and indirect interests covered by our disclosure requirements, because related persons include persons not covered by the prohibitions, and because there are certain exceptions to the prohibitions. We propose, however, to eliminate the current distinction between indebtedness and other types of related person transactions.

As a result of integrating paragraph (c) of Item 404 into paragraph (a) of Item 404, the proposals would change some situations in which indebtedness disclosure is required. First, disclosure of indebtedness transactions would be required with regard to all related persons covered by the related person transaction disclosure requirement, including significant shareholders.²⁴⁵ Second, the rule proposals would require disclosure of all material indirect interests in indebtedness transactions of related persons, including significant shareholders and immediate family members.²⁴⁶ Disclosure of material indirect interests of these related persons in transactions involving the company currently is, and would continue to be, required by Item 404(a). Currently, Item 404(c) requires disclosure of specific indirect interests of directors, nominees for director, and executive officers of the registrant in indebtedness through corporations, organizations, trusts, and estates.²⁴⁷ We believe that disclosure requirements for indebtedness and for other related person transactions should be congruent. In particular, we believe that loans by companies other than financial institutions should be treated like any other related person transactions, and, as discussed below, we propose to address certain ordinary course loans by financial institutions in an instruction to Item 404(a).

Request for Comment

Is our proposal appropriate in light of the prohibition on personal loans to officers and directors in the Sarbanes-Oxley Act?

Should we combine the related person and indebtedness disclosure requirements in paragraphs (a) and (c) of Item 404? As a result of combining these disclosure requirements, would there be categories of indebtedness transactions for which disclosure would be required that should not be required or for which disclosure would not be required that should be disclosed?

Should the disclosure requirements for indebtedness be extended to significant shareholders?

b. Definitions

We propose to define the terms "transaction," "related person" and "amount involved" to streamline Item 404(a) and clarify the broad scope of financial transactions and relationships covered by the rule.

The term "transaction" would have a broad scope in proposed Item 404(a).²⁴⁸ As proposed, this term is not to be interpreted narrowly, but rather would broadly include, but not be limited to, any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships. The proposals also would specifically note that the term "transactions" is defined to include indebtedness and guarantees of indebtedness.

The proposed definition of "related person" would identify the persons covered, and clarify the time periods during which they would be covered. As proposed, the term "related person"²⁴⁹ would mean any person who was in any of the following categories at any time during the specified period for which disclosure under paragraph (a) of Item 404 would be required:

any director or executive officer of the registrant and his immediate family members; and

if disclosure were provided in a proxy or information statement involving the election of directors, any nominee for director and the immediate family members of any nominee for director.

In addition, a security holder known to the registrant to own of record or beneficially more than five percent of any class of the companys voting securities or any immediate family member of any such person, when a transaction in which such security holder or family member had a direct or indirect material interest occurred or existed would also be a related person.

This is the same list of persons covered by current Item 404(a). This proposed definition of "related person" would result in requiring disclosure for all transactions involving the company and a person (other than a significant shareholder or family member of such shareholder) that occurred during the last fiscal year, if the person was a "related person" during any part of that year.²⁵⁰ A person who had such a position or relationship giving rise to the person being a "related person" during only part of the last fiscal year may have had a material interest in a transaction with the registrant during that year. Although current Item 404(a) does not specifically indicate whether disclosure is required for the transaction in this situation, the history of Item 404 suggests that disclosure would be required if the requisite relationship existed at the time of the transaction, even if the person was no longer a related person at the end of the year.²⁵¹

We believe that, because of the potential for abuse and the close proximity in time between the transaction and the persons status as a "related person," it is appropriate to require disclosure for transactions in which the person had a material interest occurring at any time during the fiscal year. For example, it is possible that a material interest of a person in a transaction during this proximity in time could influence the persons performance of his or her duties.

We believe that transactions with persons who have been or who will become significant shareholders (or their family members), but are not at the time of the transaction, raise different considerations and are harder to track, and thus we propose to exclude them. Disclosure would be required, however, regarding a transaction that begins before a significant shareholder becomes a significant shareholder, and continues (for example, through the on-going receipt of payments) on or after the person becomes a significant shareholder.

Under the rule proposals, the term "immediate family member" of a related person would mean any child, stepchild, parent, stepparent, spouse, sibling, mother-inlaw, 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 any director, nominee for director, executive officer, or significant shareholder of the registrant.²⁵² The proposed definition would differ from the current definition in that it includes stepchildren, stepparents, and any person (other than a tenant or employee) sharing the household of a related person.

The proposed definition of "amount involved" would incorporate two concepts included in current Item 404 regarding how to determine the "amount involved" in transactions, and to clarify that the amounts reported must be in dollars even if the amount was set or expensed in a different currency.²⁵³ Under the proposals, the term "amount involved" would mean the dollar value of the transaction, or series of similar transactions, and would include:

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 companys last fiscal year, including any required or optional payments due during or at the conclusion of the lease;²⁵⁴ and

in the case of indebtedness, the largest aggregate principal amount of all indebtedness outstanding at any time since the beginning of the companys last fiscal year and all amounts of interest payable on it during the last fiscal year.²⁵⁵

Request for Comment

Does the definition of "transaction" make clear its broad scope? Are there any additional categories that it should specifically identify? Alternatively, is it overly inclusive? If so, explain how.

Should the same categories of people be covered by the disclosure requirements currently in paragraphs (a) and (c) of Item 404? Specifically, are there any persons who would be defined as "related persons" for whom indebtedness disclosure should not be required or are there any additional persons who should be covered?

The proposed changes to Item 404 would require disclosure of indirect interests in indebtedness of related persons. Should they?

Should disclosure be required regarding portions of a period during which a person did not have the relationship giving rise to the disclosure requirement? Is it appropriate, as we propose, to exclude significant shareholders and their immediate family members from this approach?

Should we expand the definition of "immediate family member" as proposed? Specifically, are there any categories of people that should be added to, or removed from, the proposed definition?

In 2002 we issued a release regarding MD&A disclosure. At that time, we noted the possible need for related party disclosure in circumstances additional to those specified in Item 404.²⁵⁶ Are there any circumstances that fall within the MD&A requirements that should also be covered by Item 404 where disclosure currently is not required, or would not be required under the rule proposals?

Is there any reason to change the current meaning of amount involved in transactions involving leases, which we propose to retain?

2. Disclosure Requirements

Proposed subparagraphs of Item 404(a) would provide the disclosure requirements for related person transactions. The company would be required to describe the transaction, including:

the persons relationship to the company;

the persons interest in the transaction with the company, including the related persons position or relationship with, or ownership in, a firm, corporation, or other entity that is a party to or has an interest in the transaction; and

the dollar value of the amount involved in the transaction and of the related persons interest in the transaction.²⁵⁷

Registrants would also be required to disclose 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.  

Consistent with the principles-based approach that we propose to apply to related person transaction disclosure, we have, as noted above, eliminated many of the instructions that provide bright line tests that may be inconsistent with general materiality standards. Similarly, we propose to eliminate a current instruction that, in the case of a related person transaction involving a purchase of assets by the company or sale of assets to the company, calls for specific disclosure of the cost of the assets if acquired within two years of the transaction. We would note, however, that if such information was material under the proposed standards of Item 404(a), because, for example, the recent purchase price to the related person was materially less than the sale price to the company, or the sale price to the related person was materially more than the recent purchase price to the company, disclosure of such prior purchase price could be required.²⁵⁸

Currently, disclosure must be provided regarding amounts possibly owed to the company under Section 16(b) of the Exchange Act.²⁵⁹ The purpose of related person transaction disclosure differs from the purpose of Section 16(b). Accordingly, the rule proposals eliminate this Section 16(b)-related disclosure requirement.

Request for Comment

Should Item 404 require specific disclosure of the person determining the registrants purchase or sale price for registrant purchases or sales of assets not in the ordinary course of business?

Should Item 404 require disclosure of Section 16(b)-related indebtedness? Why or why not?

Consistent with our principles-based approach, should we specify any other elements of the transaction for disclosure?

3. Exceptions

The proposed rules would include categories of transactions that do not fall within the principle and therefore are subject to disclosure exceptions that we believe are consistent with our principles-based approach.²⁶⁰ The first category of transactions involves compensation. Disclosure of compensation to an executive officer would not be required if:

the compensation is reported pursuant to Item 402 of Regulation S-K; or

the executive officer is not an immediate family member of a related person and such compensation would have been reported under Item 402 as compensation earned for services to the company if the executive officer was a named executive officer, 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 company.

Disclosure of compensation to a director (or nominee for director) would not be required if:

the compensation is reported pursuant to proposed Item 402(l).²⁶¹

Since the disclosure either would be reported under Item 402, or would not be required under Item 402, we do not believe the transactions fall within our proposed principle or will have already been disclosed. We believe the transactions involving compensation that do not fall within these exceptions would be within the scope of the proposed Item 404(a) principle for disclosure. These exceptions would clarify the limited situations in which disclosure of compensation to related persons is not required under Item 404.²⁶²

The second category of transactions involves three types of situations we believe do not raise the potential issues underlying our principle for disclosure. First, in the case of transactions involving indebtedness, the following items of indebtedness would be excluded from the calculation of the amount of indebtedness and need not be disclosed because they do not have the potential to impact the parties as the transactions for which disclosure is required: 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. ²⁶³

Second, also 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 T²⁶⁴ and the loans are not disclosed as nonaccrual, past due, restructured or potential problems²⁶⁵ disclosure under proposed paragraph (a) of Item 404 may consist of a statement, if correct, that the loans to such persons satisfied the following conditions:

they were made in the ordinary course of business;

they were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the bank; and

they did not involve more than the normal risk of collectibility or present other unfavorable features.²⁶⁶

This proposed exception is based on a current instruction to Item 404(c),²⁶⁷ and is modified to be more consistent with the prohibition of the Sarbanes-Oxley Act on personal loans to officers and directors.²⁶⁸

Finally, we propose an instruction that indicates that a person who has a position or relationship with a firm, corporation, or other entity that engages in a transaction with the company shall not be deemed to have an indirect "material" interest within the meaning of paragraph (a) of Item 404 if:

the interest arises only: (i) from the 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 related persons, 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

the interest arises only from the persons position as a limited partner in a partnership in which the person and all other related persons, have an interest of less than ten percent, and the person is not a general partner of and does not have another position in the partnership.²⁶⁹

Request for Comment

Does proposed Item 404(a) simplify and clarify the requirements currently contained in paragraphs (a) and (c) of Item 404?

Would the proposed rule clarify the situations in which compensation would be reportable under Item 404? Are there any categories of compensation for which it would be unclear whether disclosure would be required under proposed Item 404?

We propose to exclude from the "amount involved" disclosure requirements indebtedness due for purchases subject to usual trade terms, ordinary business travel and expense payments, and ordinary course business transactions as is currently the case. Is this exclusion appropriate? Why or why not?  

Do the current instructions that we propose to modify or eliminate provide necessary guidance for determining if disclosure is necessary? Should any of these current instructions be retained? Should other instructions be added to make the application of the principle for disclosure clearer?

Does proposed Instruction 8 to Item 404(a), which indicates that a person having the specified positions or relationships with a person that engages in a transaction with the company shall not be deemed to have an indirect material interest in the transaction, provide sufficient guidance for determining whether disclosure is necessary in the circumstances identified in the instruction? Should the potential exclusions contemplated in the current instructions to Item 404(a), including current Instruction 6 (excluding remuneration transactions for services when the persons interest arises solely from a ten percent equity ownership interest) and current Instruction 8.C. (excluding transactions where the interest arises from an equity or creditor interest in another person and the transaction is not material to the other person) be retained or expanded?

B. Procedures for Approval of Related Person Transactions

We propose adopting a new requirement for disclosure of the policies and procedures established by the company and its board of directors regarding related person transactions. State corporate law and increasingly robust corporate governance practices support or provide for such procedures in connection with transactions involving conflicts of interest.²⁷⁰ We believe that this type of information is material to investors, and our rule proposals would therefore require disclosure of policies and procedures regarding related person transactions under new paragraph (b) of Item 404.

Specifically, the proposal would require a description of the companys policies and procedures for the review, approval or ratification of transactions with related persons that would be reportable under paragraph (a) of Item 404. The description would include the material features of these policies and procedures that are necessary to understand them. While the material features of such policies and procedures would vary depending on the particular circumstances, examples of such features may include, in given cases, among other things:

the types of transactions that are covered by such policies and procedures, and the standards to be applied pursuant to such policies and procedures;

the persons or groups of persons on the board of directors or otherwise who are responsible for applying such policies and procedures; and

whether such policies and procedures are in writing and, if not, how such policies and procedures are evidenced.

The proposal would also require identification of any transactions required to be reported under paragraph (a) of Item 404 where the companys policies and procedures did not require review, approval or ratification or where such policies and procedures were not followed.

Request for Comment

Should we require disclosure regarding the review, approval or ratification of related person transactions? Should the rule include the proposed requirements? Are there other types of information that are material that should be included in the description of the approval process?

Should we require disclosure of transactions required to be reported under Item 404(a) where a companys policies and procedures did not require review or were not followed?

C. Promoters

The proposals would require a company to provide disclosure regarding the identity of promoters and its transactions with those promoters if the company had a promoter at any time during the last five fiscal years. The proposed disclosure would be required in Securities Act registration statements on Form S-1 (generally, the registration statement form for initial public offerings, offerings by unseasoned issuers or those with less than $75 million public float and offerings by issuers otherwise ineligible to use Form S-3 or S-4) or on Form SB-2 (a registration statement form that small business issuers may use) and Exchange Act Form 10 (used to register securities initially under the Exchange Act) or Form 10-SB (a registration form that small business issuers may use). The proposed disclosure would include:

the names of the promoters;

the nature and amount of anything of value received by each promoter from the company and the nature and amount of any consideration received by the company; and

additional information regarding any assets acquired by the company from a promoter.

The proposed disclosure requirements are consistent with those currently required regarding promoters. However, this disclosure is not currently required if the company has been organized more than five years ago, even if the company otherwise had a promoter within the last five years. Our staffs experience in reviewing registration statements, especially of smaller companies, suggests that the more appropriate five-year test would relate to the period of time during which the company had a promoter for which the disclosure should be provided, as our proposal provides, rather than the date of organization of the company.²⁷¹ We also are proposing to require the same disclosure that is required for promoters for any person who acquired control, or is part of a group that acquired control, of an issuer that is a shell company.²⁷²

Request for Comment

Does the proposed requirement cover the circumstances where promoter disclosure would be material to investors? If not, what other circumstances should be covered?

Does the proposed requirement cover circumstances where the required disclosure would not be material to investors? If so, in what circumstance?

D. Corporate Governance Disclosure

We propose to consolidate our disclosure requirements regarding director independence and related corporate governance disclosure requirements under a single disclosure item and to update such disclosure requirements regarding director independence to reflect our current requirements and current listing standards. ²⁷³

Our current requirements provide for disclosure of business relationships between a director or nominee for director and the company that may bear on the ability of directors and nominees for director to exercise independent judgment in the performance of their duties.²⁷⁴ In addition, as directed by the Sarbanes-Oxley Act of 2002, we adopted a rule requiring national securities exchanges to adopt listing standards requiring independent audit committees meeting the standards of our rule.²⁷⁵ Further, in 2003 and 2004, we approved amendments to additional listing standards, including those of the New York Stock Exchange and Nasdaq,²⁷⁶ that imposed specific additional independence standards for boards of directors, and the compensation and nominating committees or persons performing similar functions. Currently, each listed company determines whether its directors and committee members are independent based on definitions that it adopts which, at a minimum, are required to comply with the listing standards applicable to the company.

The proposals would include a disclosure requirement identifying the independent directors of the company (and, in the case of disclosure in proxy or information statements, nominees for director) under the definition for determining board independence applicable to it. The proposals would also require disclosure of any members of the compensation, nominating and audit committee that the company had not identified as independent under the definition of independence for that board committee applicable to it.

More specifically, if the company is an issuer²⁷⁷ with securities listed, or for which it has applied for listing, on a national securities exchange²⁷⁸ or in an automated inter-dealer quotation system of a national securities association²⁷⁹ which has requirements that a majority of the board of directors be independent, the proposal would require disclosure of those directors and director nominees that the company identifies as independent (and committee members not identified as independent), using a definition for independence for directors (and for committee members) that is in compliance with the applicable listing standards. If the company is not a listed issuer, the proposals would require disclosure of those directors and director nominees that the company identifies as independent (and committee members not identified as independent) using the definition for independence for directors (and for committee members) of a national securities exchange or a national securities association, specified by the company. The company would be required to apply the same definition consistently to all directors and also to use the independence standards of the same national securities exchange or national securities association for purposes of determining the independence of members of the compensation, nominating and audit committees.²⁸⁰

The proposals would require an issuer that has adopted definitions of independence for directors and committee members to disclose whether those definitions are posted on the companys Web site, or include the definitions as an appendix to the companys proxy materials at least once every three years or if the policies have been materially amended since the beginning of the companys last fiscal year.²⁸¹ Further, if the policies are not on the companys Web site, or included as an appendix to the companys proxy statement, the company would have to disclose in which of the prior fiscal years the policies were included in the companys proxy statement.

In addition, the proposals would require, for each director or director nominee identified as independent, a description of any transactions, relationships or arrangements not disclosed pursuant to paragraph (a) of Item 404 that were considered by the board of directors of the company in determining that the applicable independence standards were met.

This independence disclosure would be required for any person who served as a director of the company during any part of the year for which disclosure must be provided,²⁸² even if the person no longer serves as director at the time of filing the registration statement or report or, if the information is in a proxy statement, if the directors term of office as a director will not continue after the meeting. In this regard, we believe that the independence status of a director is material while the person is serving as director, and not just as a matter of reelection.²⁸³

The proposals also would revise the current disclosure required regarding the audit committee and nominating committee²⁸⁴ to eliminate duplicative committee member independence disclosure and to update the required audit committee charter disclosure requirement for consistency with the more recently adopted nominating committee charter disclosure requirements.²⁸⁵ As a result, the audit committee charter would no longer be required to be delivered to security holders if it is posted on the companys Web site.²⁸⁶ We also propose moving the disclosure required by Section 407 of the Sarbanes-Oxley Act regarding audit committee financial experts to Item 407, although we are not proposing any substantive changes to that requirement.

In addition to the disclosures currently required regarding audit and nominating committees of the board of directors, we propose requiring similar disclosure regarding compensation committees.²⁸⁷ The company would also be required to describe its processes and procedures for the consideration and determination of executive and director compensation including:

the scope of authority of the compensation committee (or persons performing the equivalent functions);

the extent to which the compensation committee (or persons performing the equivalent functions) may delegate any authority to other persons, specifying what authority may be so delegated and to whom;

whether the compensation committees authority is set forth in a charter or other document, and if so, the companys Web site address at which a current copy is available if it is so posted, and if not so posted, attaching the charter to the proxy statement once every three years;

any role of executive officers in determining or recommending the amount or form of executive and director compensation; and

any role of compensation consultants in determining or recommending the amount or form of executive and director compensation, identifying such consultants, stating whether such consultants are engaged directly by the compensation committee (or persons performing the equivalent functions) or any other person, describing the nature and scope of their assignment, 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 any executive officer within the company the consultants contacted in carrying out their assignment.

In addition, as noted above, disclosure would be required regarding each member of the compensation committee that the registrant has identified as not independent.

Further, the rule proposals would consolidate into this compensation committee disclosure requirement the disclosure currently required in Item 402 regarding compensation committee interlocks and insider participation in compensation decisions.²⁸⁸

Finally, for registrants other than registered investment companies, the rule proposals would eliminate an existing proxy disclosure requirement regarding directors that have resigned or declined to stand for re-election²⁸⁹ which is no longer necessary since it has been superseded by a disclosure requirement in Form 8-K.²⁹⁰ For registered investment companies, which do not file Form 8-K, the requirement would be moved to Item 22(b) of Schedule 14A.²⁹¹ Also, the rule proposals would combine various proxy disclosure requirements regarding board meetings and committees into one location.²⁹²

In addition, we propose two instructions to Item 407 to combine repetitive provisions, one relating to independence disclosure, and the other relating to board committee charters.²⁹³

Request for Comment

Should the disclosure requirements proposed to be consolidated in Item 407 continue to remain separate? If so, why? Is the proposed location of this consolidated disclosure appropriate, including the proposed options for disclosing adopted independence definitions?

Are there independence standards that would be preferable to the ones referenced in proposed new Item 407?

Should companies that are not listed on a national securities exchange or on an inter-dealer quotation system of a national securities association be able to reference their own standards of independence that they have adopted, or should those companies be required to refer to established listing standards as proposed?

Should we require as proposed a description of transactions considered (other than those that would be reported under proposed Item 404(a)) when determining if the independence standards were met?

Is there any reason why we should not eliminate the requirement that companies provide disclosure in their proxy statements regarding directors who have resigned or declined to stand for re-election?²⁹⁴

Are there circumstances in which disclosure should not be required under proposed Item 407(a)? Should disclosure not be required for a director who is no longer a director at the time of filing any registration statement or report? Should disclosure not be required if information is being presented in a proxy or information statement for a director whose term of officer as a director will not continue after the meeting to which the statement relates?

Given that registered investment companies do not file Form 8-K, should we continue to require registered investment companies to make proxy statement disclosures pursuant to current Item 7(g) of Schedule 14A regarding directors who have resigned or declined to stand for re-election?

Should we also move the disclosure required by Rule 10A-3(d) (under which companies must disclose whether they have relied on an exemption from the audit committee independence requirements of Rule 10A-3) to proposed Item 407?

Should the audit committee charter disclosure requirement be changed to be consistent with the nominating committee charter disclosure requirements? Should the compensation committee charter disclosure requirement be the same? Should there be any changes to the proposed compensation committee disclosure requirements?

Are there any disclosure requirements regarding compensation consultants that we should add to or delete or change from the proposal?

E. Treatment of Specific Types of Issuers

1. Small Business Issuers

Proposed Item 404 of Regulation S-B is substantially similar to proposed Item 404 of Regulation S-K, except for the following two matters:

paragraph (b) relating to policies and procedures for reviewing related party transactions is proposed not to be included in Regulation S-B, and

Regulation S-B would provide for a disclosure threshold of the lesser of $120,000 or one percent of the average of the small business issuers total assets for the last three completed fiscal years, to require disclosure for small business issuers that may have material related person transactions even though smaller than the absolute dollar amount of $120,000.

Both proposed items would consist of disclosure requirements regarding related person transactions and promoters. These provisions of Item 404 of Regulation S-B would be substantially identical to those of Item 404 of Regulation S-K, except for certain changes conforming proposed Item 404 of Regulation S-B to current Item 404 of Regulation S-B.  

These changes consist of the following:

throughout proposed Item 404 of Regulation S-B using the two year time period for disclosure in current Item 404 of Regulation S-B;

retaining in proposed Item 404 of Regulation S-B an instruction in current Item 404 of Regulation S-B regarding underwriting discounts and commissions;²⁹⁵ and

not including an instruction in proposed Item 404 of Regulation S-B regarding the treatment of foreign private issuers that is included in proposed Item 404 of Regulation S-K.²⁹⁶

In addition, proposed Item 404 of Regulation S-B would retain a paragraph from current Item 404 of Regulation S-B requiring disclosure of a list of all parents of the small business issuer showing the basis of control and as to each parent, the percentage of voting securities owned or other basis of control by its immediate parent, if any.

One conforming change that we are not making, however, concerns the calculation of a related persons interest in a given transaction. Current Item 404(a) of Regulation S-B differs from current Item 404(a) of S-K with respect to, among other things, the calculation of the dollar value of a persons interest in a related transaction. Current Instruction 4 to Item 404(a) of Regulation S-K specifically provides that the amount of such interest shall be computed without regard to the amount of profit or loss involved in the transaction. In contrast, current Item 404(a) of Regulation S-B contains no such instruction. We propose that the method of calculation of a related persons interest in a transaction will be the same for both Regulation S-B and Regulation S-K. We believe that differences, if any, between the types of transactions that small business issuers may engage in with related persons as compared to transactions of larger issuers would not warrant a different approach for calculating a related persons interest in a transaction.

Proposed Item 407 of Regulation S-K is substantially identical to proposed Item 407 of Regulation S-B, ²⁹⁷ except that it would it would not require disclosure regarding compensation committee interlocks and insider participation in compensation decisions, since Regulation S-B currently does not require disclosure of this information.²⁹⁸  

Request for Comment

Should small business issuers be categorically exempted from any additional aspect of the proposed Item 404 or Item 407 disclosure requirements? If so, which requirements and why? Should any of the proposed exclusions not be excluded? If so, why?

Currently Item 404(a) of Regulation S-K states that companies are not to consider the amount of profit or loss when computing the amount involved in a transaction, but Item 404 of Regulation S-B does not include this statement. We propose to provide the same instruction in both Regulation S-K and Regulation S-B. Should Item 404(a) of Regulation S-B continue to omit this instruction? Why or why not?

Currently Item 404(a) of Regulation S-K specifically provides for using the value of the aggregate amount of all periodic payments or installments when computing the amount involved in a transaction, but Item 404 of Regulation S-B does not. Should Item 404(a) of Regulation S-B, as does proposed Instruction 3 to Item 404(a) of Regulation S-B, provide for this?

Is the definition of "related person" in Item 404 of Regulation S-B sufficiently broad? Should this definition be expanded to include consultants and advisors?

Should we use a different alternative threshold for disclosure in proposed Item 404(a) of Regulation S-B? For example the lesser of $120,000 or a percentage of annual corporate expenses?

2. Foreign Private Issuers

Currently a foreign private issuer will be deemed to comply with Item 404 of Regulation S-K if it provides the information required by Item 7.B. of Form 20-F. The proposals would retain this approach, but would require that if more detailed information is required to be disclosed by the issuers home jurisdiction or a market in which its securities are listed or traded, that same information must also be disclosed pursuant to Item 404.

Request for Comment

Is there any reason to discontinue this treatment of foreign private issuers? Should a foreign private issuer that is required to comply with Item 404 (for example, by filing an annual report on Form 10-K) be required to provide all of the information required under Item 404 instead of the information required under Form 20-F?

3. Registered Investment Companies

We propose to revise Items 7 and 22(b) of Schedule 14A to reflect the reorganization that we have proposed with respect to operating companies. Under the proposals, information that is currently required to be provided by registered investment companies under Item 7 would instead be required by Item 22(b).²⁹⁹ The requirements of Item 7 that are currently applicable to registered investment companies regarding the nominating and audit committees, board meetings, the nominating process, and shareholder communications generally would be included in Item 22(b) by crossreferences to the appropriate paragraphs of proposed Item 407 of Regulation S-K.³⁰⁰ The substance of these requirements would not be altered. In addition, the proposed revisions to Item 22(b) would directly incorporate disclosures relating to the independence of members of nominating and audit committees that are similar to those contained in proposed Item 407(a) of Regulation S-K and currently contained in Item 7.³⁰¹

We are also proposing to raise from $60,000 to $120,000 the threshold for disclosure of certain interests, transactions, and relationships of each director or nominee for election as director who is not or would not be an "interested person" of an investment company within the meaning of Section 2(a)(19) of the Investment Company Act.³⁰² This disclosure is required in investment company proxy and information statements and registration statements. The increase in the disclosure threshold would correspond to the proposal to increase the disclosure threshold for Item 404 from $60,000 to $120,000.  

Request for Comment

Should we reorganize in the manner proposed the disclosures that registered investment companies are currently required to make under Item 7 of Schedule 14A? If not, how should these disclosures be organized? Should any substantive changes be made to the proposed disclosures?

Is it appropriate to adjust to $120,000 the threshold for disclosure of certain interests, transactions, and relationships of each director or nominee for election as director who is not or would not be an "interested person" of an investment company? Should there be no threshold? Should the threshold also operate on a sliding scale (for example, the lower of $120,000 or 1% of total or net assets for the last three completed fiscal years or the lower of $120,000 or a percentage of annual expenses) to capture smaller transactions for smaller companies? Explain whether a higher or lower threshold, or no threshold, would result in more effective disclosure.

F. Conforming Amendments

The changes we propose to Item 404 necessitate conforming amendments to other rules that refer specifically to Item 404.

1. Regulation Blackout Trading Restriction

We are proposing conforming changes to Regulation Blackout Trading Restriction,³⁰³ also known as Regulation BTR, which we adopted to clarify the scope and operation of Section 306(a)³⁰⁴ of the Sarbanes-Oxley Act of 2002 and to prevent evasion of the statutory trading restriction.³⁰⁵ Rule 100 of Regulation BTR defines terms used in Section 306(a) and Regulation BTR, including the term "acquired in connection with service or employment as a director or executive officer."³⁰⁶ Under this definition, one of the specified methods by which a director or executive officer directly or indirectly acquires equity securities in connection with such service is an acquisition "at a time when he or she was a director or executive officer, as a result of any transaction or business relationship described in paragraph (a) or (b) of Item 404 of Regulation S-K."³⁰⁷ To conform this provision of Regulation BTR to the proposed Item 404 amendments, we propose to amend Rule 100(a)(2) so that it references only transactions described in paragraph (a) of Item 404.

2. Rule 16b-3 Non-Employee Director Definition

We also are proposing conforming amendments to the definition of Non- Employee Director in Exchange Act Rule 16b-3. Section 16(b) provides an issuer (or shareholders suing on its behalf) the right to recover from an officer, director, or ten percent shareholder profits realized from a purchase and sale of issuer equity securities within a period of less than six months. However, Rule 16b-3 exempts transactions between issuers of securities and their officers and directors if specified conditions are met. In particular, acquisitions from and dispositions to the issuer are exempt if the transaction is approved in advance by the issuers board of directors, or board committee composed solely of two or more Non-Employee Directors.³⁰⁸

The definition of "Non-Employee Director," among other things, limits these directors to those who:

do not directly or indirectly receive compensation from the issuer, its parent or subsidiary for consulting or other non-director services, except for an amount that does not exceed the Item 404(a) dollar disclosure threshold;

do not possess an interest in any other transaction for which Item 404(a) disclosure would be required; and

are not engaged in a business relationship required to be disclosed under Item 404(b).

As described above, the Item 404 proposals would substantially revise or rescind the Item 404 provisions on which the Non-Employee Director definition is based. To minimize potential disruptions and because no problems have been brought to our attention regarding any aspect of the current definition, the proposed conforming amendment would continue to permit consulting and similar arrangements subject to limits measured by reference to the proposed Item 404(a) disclosure requirements.³⁰⁹ The amendment would delete the provision referring to business relationships subject to disclosure under Item 404(b), without otherwise revising the text of the rule.³¹⁰ Because the disclosure threshold of Item 404(a) would be raised from $60,000 to $120,000, however, the effect in some cases may be to permit previously ineligible directors to be Non-Employee Directors.³¹¹ In other cases, where proposed Item 404(a) may require disclosure of business relationships not subject to disclosure under current Item 404(b), some current Non-Employee Directors may become ineligible.

Request for Comment

Should the Rule 16b-3 Non-Employee Director definition continue to permit consulting or similar arrangements with the issuer, as proposed?

Is the proposed Item 404(a) disclosure threshold an appropriate limit for permitting consulting or similar arrangements? Instead, should the dollar limit be lower, such as the current $60,000 threshold? Explain the basis for recommending a different dollar limit.

For business relationships for which disclosure is not required by current Item 404(b), but would be under proposed Item 404(a), should there be a different test? Are there any particular transactions or relationships that would become disclosable under proposed Item 404(a) that should not render a director ineligible to be a Non-Employee Director? If so, explain why.

Would continued use of Item 404 as a measure for defining Non-Employee Directors place an undue burden on companies in forming their Non-Employee Director committees? Would reference to another disclosure requirement or standard be better?

3. Other Conforming Amendments

The changes we propose to Item 404, along with the consolidation of provisions into Item 407, necessitate conforming amendments to various forms and schedules under the Securities Act and the Exchange Act. The rule proposals would amend:

forms that require disclosure of the information required by Item 404 to instead require disclosure of the information required by proposed Items 404 and 407(a);³¹²

some forms that require disclosure of the information required by Item 404(a) or by Items 404(a) and (c), to instead require disclosure of the information required by proposed Items 404(a) and (b), or proposed Item 404(a), as appropriate;³¹³

a form that cross-references an instruction in Item 404 which we propose to eliminate to instead include the text of this instruction;³¹⁴

Item 7 of Schedule 14A to require disclosure of the information required by proposed Item 407(a) rather than current Item 404(b), and to eliminate current paragraphs (d)-(h) which are duplicative of proposed Item 407 and replace them with a requirement to disclose information specified by corresponding paragraphs of Item 407;

forms that require disclosure of the information required by Item 402 to instead require disclosure of the information required by proposed Item 402 and Item 407(e)(4);³¹⁵

some forms that require disclosure of the information required by Item 401 to instead require disclosure of the information required by Item 401 and paragraphs (c)(3), (d)(4) and/or (d)(5) of proposed Item 407, as appropriate;³¹⁶

forms that require disclosure of the information required by Item 401(j), to instead require disclosure of the information required by proposed Item 407(c)(3);³¹⁷ and

Item 10 of Form N-CSR to include a cross reference to proposed Item 407(c)(2)(iv) of Regulation S-K and proposed Item 22(b)(15) of Schedule 14A, in lieu of the current reference to Item 7(d)(2)(ii)(G) of Schedule 14A.

In addition, conforming amendments would be made to a provision in Regulation AB, which currently requires disclosure of the information required by Items 401, 402 and 404, so that instead it would require disclosure of the information required by proposed Items 401, 402, 404 and paragraphs (a), (c)(3), (d)(4), (d)(5) and (e)(4) of Item 407.³¹⁸  

²³¹ See the 1982 Release. For a discussion of these provisions, see also Disclosure of Certain Relationships and Transactions Involving Management, Release No. 33-6416 (July 9, 1982) [47 FR 31394], at Section II.  

²³⁵ These matters are currently required pursuant to various provisions, including Item 7 of Schedule 14A and Items 306, 401(h), (i) and (j), 402(j) and 404(b).

²³² The discussion that follows focuses on changes to Regulation S-K, with Section V.E.1. explaining the modifications proposed for Regulation S-B. References throughout the following discussion are to current or proposed Items of Regulation S-K, unless otherwise indicated.  

²³³ As previously noted, related party transactions are currently disclosed under Item 404(a). Indebtedness is currently disclosed under Item 404(c).  

²³⁴ Disclosure requiring promoters is currently required under Item 404(d).  

²³⁶ The related persons specified in current Item 404(a) are: (1) any director or executive officer of the company; (2) any nominee for election as a director; (3) any security holder who is known to the company to own of record or beneficially more than five percent of any class of the companys voting securities; and (4) any member of the immediate family of any of the foregoing persons.

²³⁷ The related persons specified in current Item 404(c) are: (1) any director or executive officer of the company; (2) any nominee for election as a director; (3) any member of the immediate family of any of the persons specified in (1) or (2) above; (4) any corporation or organization (other than the company or a majority-owned subsidiary of the company) of which any of the persons in (1) or (2) above is an executive officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities; and (5) any trust or other estate in which any of the persons in (1) or (2) above has a substantial beneficial interest or as to which such person serves as a trustee or in a similar capacity.

²³⁸ See Basic v. Levinson and TSC Industries v. Northway.

²³⁹ It is possible that some registrants have been operating under a misconception. The current $60,000 threshold is not, and the proposed $120,000 threshold would not be, a bright line materiality standard. The rule calls for, and would continue to call for, a materiality analysis of transactions above the threshold in order to determine if the related person has a direct or indirect material interest.

²⁴⁰ The "related persons" covered by the rules proposal are discussed below in Section V.A.1.b.

²⁴¹ However, if the disclosure were being incorporated by reference into a registration statement on Form S-4, the additional two years of disclosure would not be required. Proposed Instruction 1 to Item 404.

²⁴² For the same reason, we are eliminating the references to "subsidiaries" in the "compensation committee interlocks and insider participation in compensation decisions" disclosure requirement in current Item 402(j). This proposal would not change the scope of disclosure required under the rule. See proposed Item 407(e)(4).  

²⁴³ This is the standard proposed for Item 404 of Regulation S-B, which is discussed in Section V.E.1. below.  

²⁴⁴ Codified in Section 13(k) of the Exchange Act [15 U.S.C. 78m(k)].

²⁴⁵ The related person transaction disclosure requirement in current Item 404(a) covers significant shareholders, while the indebtedness disclosure requirement in current Item 404(c) does not. The significant shareholders covered would continue to be any security holder who is known to the registrant to own of record or beneficially more than five percent of any class of the registrants voting securities. Proposed Instruction 1.b. to Item 404(a).  

²⁴⁶ As a result of integrating paragraph (c) of Item 404 into paragraph (a) of Item 404, the rule proposals would set a $120,000 threshold and require disclosure only if there is a direct or indirect material interest in such an indebtedness transaction, while Item 404(c) currently generally requires disclosure of all indebtedness exceeding $60,000.  

²⁴⁷ Disclosure of these interests currently is required by subparagraphs (c)(4) and (c)(5) of Item 404. Under the rule proposals, these subparagraphs would be eliminated. See note 237 for a full description of the related parties specified in these subparagraphs.

²⁴⁸ The definition of "transaction" is in proposed Instruction 2 to Item 404(a).

²⁴⁹ The definition of "related person" is in proposed Instruction 1 to Item 404(a).  

²⁵⁰ The principle for disclosure would only apply to nominees for director if disclosure were being provided in a proxy or information statement involving the election of directors. Also, ongoing disclosure would not be required regarding nominees for director who were not elected (unless a nominee was nominated again for director).

²⁵¹ This position, which had been included in the proxy rule provisions that were the precursor to Item 404, was deleted from those provisions in 1967 as duplicative of a note that applied to all of the disclosure required in Schedule 14A (including the related party disclosure requirement in Schedule 14A). Adoption of Amendments to Proxy Rules and Information Rules, Release No. 34- 8206 (Dec. 14, 1967) [32 FR 20960], at "Schedule 14A - Item7(f)." Note C to Schedule 14A currently provides that "information need not be included for any portion of the period during which such person did not hold any such position or relationship, provided a statement to that effect is made." The rule proposals would amend Note C to Schedule 14A so that it would no longer apply to disclosure of related person transactions.  

²⁵² These definitions would replace current instructions to paragraphs (a) and (c) of Item 404.  

²⁵³ The definition of "amount involved" is in proposed Instruction 3 to Item 404(a).

²⁵⁴ This proposal is based on current Instruction 3 to Item 404(a).

²⁵⁵ This proposal is based on and clarifies current Item 404(c).  

²⁵⁶ The release stated that: Registrants shouldconsider the need for [MD&A] disclosure about parties that fall outside the definition of "related parties," but with whom the registrant or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may not be available from other, more clearly independent, parties on an arms-length basis. For example, an entity may be established and operated by individuals that were former senior management of, or have some other current or former relationship with, a registrant. The purpose of the entity may be to own assets used by the registrant or provide financing or services to the registrant. Although former management or persons with other relationships may not meet the definition of a related party pursuant to FAS 57, the former management positions may result in negotiation of terms that are more or less favorable than those available on an arms-length basis from clearly independent third parties that are material to the registrants financial position or results of operations. In some cases, investors may be unable to understand the registrants reported results of operations without a clear explanation of these arrangements and relationships. Commission Statement about Managements Discussion and Analysis of Financial Condition and Results of Operations, Release No. 33-8056 (Jan. 22, 2002) [67 FR 3746], at Section II.C.  

²⁵⁷ As is the case today, the dollar value would be computed without regard to the amount of the profit or loss involved in the transaction. Because of the manner in which the value of the amount involved is calculated for indebtedness, as discussed above, disclosure with respect to indebtedness would include the largest aggregate amount of principal outstanding during the period for which disclosure is provided, as well as the amount of principal and interest paid during the period for which disclosure is provided, the aggregate amount of principal outstanding as of the latest practicable date, and the rate or amount of interest payable on the indebtedness.

²⁵⁸ Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], Rules 10b-5 [17 CFR 240.10b-5] and 12b- 20 [17 CFR 240.12b-20] under the Exchange Act and Section 17 of the Securities Act [15 U.S.C. 77q].

²⁵⁹ Current Instruction 4 to Item 404(c).

²⁶⁰ Proposed Instructions 4, 5, 6, 7 and 8 to Item 404(a).

²⁶¹ Proposed Instructions 5 and 6 to Item 404(a), which would replace current Instruction 1 to Item 404.  

²⁶² In particular, current Instruction 1 to Item 404 covers the scope of Items 402 and 404. We propose to eliminate this instruction.  

²⁶³ This proposal is based on current Instruction 2 to Item 404(c).  

²⁶⁴ 12 CFR Part 220.  

²⁶⁵ See Item III.C.1. and 2. of Industry Guide 3, Statistical Disclosure by Bank Holding Companies [17 CFR 229.802(c)].  

²⁶⁶ Proposed Instruction 7 to Item 404(a).

²⁶⁷ Current Instruction 3 to Item 404(c), which would be eliminated.

²⁶⁸ Specifically, the language of current Instruction 3 to paragraph (c) of Item 404 would be modified to replace the reference "comparable transactions with other persons" with the phrase "comparable loans with persons not related to the lender."

²⁶⁹ Proposed Instruction 8 to Item 404(a). This proposal is based on parts A and B of current Instruction 8 to Item 404(a). This proposal would omit the portion of the current instruction (Instruction 8.C.) regarding interests arising solely from holding an equity or a creditor interest in a person other than the company that is a party to the transaction, when the transaction is not material to the other person. This portion of the current instruction may result in inappropriate non-disclosure of transactions without regard to whether they are material to the company. In addition, we propose to eliminate current Instruction 6 to Item 404(a) that covers a subset of transactions covered by this proposed instruction, and therefore is duplicative.  

²⁷⁰ Del. Code Ann. tit. 8, §144 (2004). See also NYSE, Inc. Listed Company Manual Section 307.00 and NASD Manual, Marketplace Rules 4350(h) and 4360(i).  

²⁷¹ The proposed rules would similarly revise the disclosure requirement referencing promoters in Item 401(g)(1) of Regulation S-K. In addition, our proposal would add Form SB-2 to the list of registration statement forms in Item 404 for which promoter disclosure would be required. While this revision would update the registration statement forms listed in Item 404, it would not change the promoter disclosure requirement of Form SB-2.

²⁷² Proposed Item 404(c)(2). The term "group" would have the same meaning as in Exchange Act Rule 13d-5(b)(1) [17 CFR 240.13d-5(b)(1)], that is, any two or more persons that agree to act together for the purpose of acquiring, holding, voting, or disposing of equity securities of an issuer.

²⁷³ Proposed Item 407 of Regulations S-K and S-B. As proposed, Item 407 would consolidate corporate governance disclosure requirements located in several places under our rules and the principal markets listing standards, including in particular our requirements under current Items 306, 401(h), (i) and (j), 402(j) and 404(b) of Regulation S-K and Item 7 of Schedule 14A under the Exchange Act. We are not proposing any changes to the substance of Item 306, Item 401(h), (i) or (j), or Item 402(j) as part of this consolidation. However, the proposed rules would reorder some provisions in Item 306 and reflect the relevant Public Company Accounting Oversight Board rules. See PCAOB Rulemaking: Public Company Accounting Oversight Board; Order Approving Proposed Technical Amendments to Interim Standards Rules, Release No. 34-49624 (Apr. 28, 2004) [69 FR 24199]; and Order Regarding Section 101(d) of the Sarbanes-Oxley Act of 2002, Release No. 33-8223 (Apr. 25, 2003) [68 FR 2336].

²⁷⁴ Current Item 404(b).

²⁷⁵ Section 10A(m) of the Exchange Act [15 U.S.C. 78j-1(m)], as added by Section 301of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.); Exchange Act Rule 10A-3 [17 CFR 240.10A-3]; and Standards Relating to Listed Company Audit Committees, Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788].

²⁷⁶ NASD and NYSE Listing Standards Release. The other exchanges have also adopted corporate governance listing standards. See Order Granting Approval of Proposed Rule Change by the American Stock Exchange LLC and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 Relating to Enhanced Corporate Governance Requirements Applicable to Listed Companies, Release No. 34-48863 (Dec. 1, 2003) [68 FR 68432]; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock Exchange, Inc. Relating to Corporate Governance, Release No. 34-49881 (June 17, 2004) [69 FR 35408]; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago Stock Exchange, Inc. Relating to Governance of Issuers on the Exchange, Release No. 34-49911 (June 24, 2004) [69 FR 39989]; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Boston Stock Exchange, Inc. to Amend Chapter XXVII, Section 10 of the Rules of the Board of Governors by Adding Requirements Concerning Corporate Governance Standards of Exchange-Listed Companies, Release No. 34-49955 (July 1, 2004) [69 FR 41555]; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the Chicago Board Options Exchange, Incorporated, Relating to Enhanced Corporate Governance Requirements for Listed Companies, Release No. 34-49995 (July 9, 2004) [69 FR 42476]; Notice of Filing ands Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by National Stock Exchange Relating to Corporate Governance, Release No. 34-49998 (July 9, 2004) [69 FR 42788]; and Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. to Amend the Corporate Governance Requirements for PCX Listed Companies, Release No. 34-50677 (Nov. 16, 2004) [69 FR 68205]. The Commission has previously received a rulemaking petition submitted by the AFL/CIO, which requested the Commission to amend Items 401 and 404 of Regulation S-K to require disclosure about transactions with non-profit organizations (letter dated Dec. 12, 2001 from Richard Trumka, Secretary-Treasurer, AFL/CIO, File No. 4-499, available at www.sec.gov/rules/petitions/petn4- 499.pdf) and a rulemaking petition submitted by the Council of Institutional Investors, which requested amendments to Item 401 of Regulation S-K to require disclosure of certain transactions between directors, executive officers and nominees (letter dated Oct. 1, 1997, as amended Oct. 19, 1998, from Sarah A.B. Teslik, Executive Director, Council of Institutional Investors, File No. 4-404). We believe these requests have in large part been addressed by revised listing standards instituted by the exchanges, so that we are not now proposing additional action under these petitions.

²⁷⁷ Under the rule proposals, "listed issuer" would have the same meaning as in Exchange Act Rule 10A-3.

²⁷⁸ Under the rule proposals "national securities exchange" means a national securities exchange registered pursuant to Section 6(a) of Exchange Act [15 U.S.C. 78f(a)].

²⁷⁹ Under the rule proposals "automated inter-dealer quotation system of a national securities association" 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)].

²⁸⁰ Similar disclosure is currently required pursuant to Item 7(d)(2)(ii)(C) and Item 7(d)(3)(iv) of Schedule 14A. As part of our consolidation of these provisions into proposed Item 407, we propose to revise these provisions to reflect the general approach discussed above with regard to disclosure of director independence for board and committee purposes.

²⁸¹ Proposed Item 407(a)(2).

²⁸² However, disclosure would not be required for persons no longer serving as a director in registration statements under the Securities Act or the Exchange Act filed at a time when the company is not subject to the reporting requirements of Exchange Act Sections 13(a) or 15(d). Disclosure would not be required of anyone who was a director only during the time period before the company made its initial public offering if he was no longer a director at the time of the offering. Proposed Instruction to Item 407(a).  

²⁸³ For this reason, we do not propose to incorporate the concept in current Instruction 4 to Item 404(b) into proposed Item 407(a).  

²⁸⁴ Current Item 7 of Schedule 14A.

²⁸⁵ However, we are not proposing to revise the provision that the audit committee report is furnished and not filed.

²⁸⁶ Proposed Item 407(d)(1) and Instruction 2 to Item 407.  

²⁸⁷ Current Item 7(d) of Schedule 14A. These new proposed requirements also would be in proposed Item 407(e).

²⁸⁸ Current Item 402(j).

²⁸⁹ Item 7(g) of Schedule 14A.

²⁹⁰ Item 5.02(a) of Form 8-K.

²⁹¹ Proposed Item 22(b)(17) of Schedule 14A.

²⁹² Current paragraphs (d)(1), (f), and (h)(3) of Item 7 of Schedule 14A would be included in proposed Item 407(b).

²⁹³ Proposed Instructions 1 and 2 to Item 407. Proposed Instruction 2 also includes a requirement that the charter be provided if it is materially amended.

²⁹⁴ Item 7(g) of Schedule 14A.

²⁹⁵ This instruction, which is current Instruction 2 to Item 404 of Regulation S-B, is proposed Instruction 9 to Item 404 of Regulation S-B.

²⁹⁶ This instruction, which is current Instruction 3 to Item 404 of Regulation S-K, is not included in current Item 404 of Regulation S-B.

²⁹⁷ Current paragraphs (e), (f), and (g) of Item 401 of Regulation S-B would become paragraphs (d)(5), (d)(4) and (c)(3), respectively, of Item 407 of Regulation S-B.

²⁹⁸ This disclosure is currently required under Item 402(j) of Regulation S-K.  

²⁹⁹ Proposed amendments to Item 7(e) of Schedule 14A. Business development companies would furnish the information required by Item 7 of Schedule 14A, in addition to the information required by Items 8 and 22(b) of Schedule 14A. See proposed amendments to Items 7, 8, and 22(b) of Schedule 14A.

³⁰⁰ Proposed Items 22(b)(15)(i) and (ii)(A) and 22(b)(16)(i) of Schedule 14A. Proposed Item 22(b)(15)(i) would require the information required by Items 407(b)(1) and (2) and (f), corresponding to the information that registered investment companies are required to provide pursuant to current Items 7(f) and 7(h). Proposed Item 22(b)(15)(ii)(A) would require the information required by proposed Items 407(c)(1) and (2), corresponding to the information that registered investment companies are required to provide pursuant to current Items 7(d)(2)(i) and 7(d)(2)(ii) (other than the nominating committee independence disclosures required by current Item 7(d)(2)(ii)(C)). Proposed Item 22(b)(16)(i) would require closed-end investment companies to provide the information required by proposed Items 407(d)(1) through (3), corresponding to the information that closed-end investment companies are required to provide pursuant to current Item 7(d)(3) (other than the audit committee independence disclosures required by Items 7(d)(3)(iv)(A)(1) and (B)).  

³⁰¹ Proposed Items 22(b)(15)(ii)(B) and (16)(ii) of Schedule 14A. Proposed Item 22(b)(15)(ii)(B) requires disclosure about the independence of nominating committee members that is similar to those required by current Item 7(d)(2)(ii)(C) and proposed Item 22(b)(16)(ii) requires disclosure about the independence of audit committee members that is similar to those required by current Items 7(d)(3)(iv)(A)(1) and (B).  

³⁰² Proposed amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A; proposed amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8) of Form N-1A; proposed amendments to Items 18.9, 18.10, and 18.11 of Form N-2; proposed amendments to Items 20(h), 20(i), and 20(j) of Form N-3.  

³⁰³ 17 CFR 245.100-104.

³⁰⁴ 15 U.S.C. 7244(a), entitled "Prohibition of Insider Trading During Pension Fund Blackout Periods."

³⁰⁵ Insider Trades During Pension Fund Blackout Periods, Release No. 34-47225 (Jan. 22, 2003) [68 FR 4337]. Section 306(a) makes it unlawful for any director or executive officer of an issuer of any equity security (other than an exempted security), directly or indirectly, to purchase, sell, or otherwise acquire or transfer any equity security of the issuer (other than an exempted security) during any pension plan blackout period with respect to such equity security, if the director or executive officer acquired the equity security in connection with his or her service or employment as a director or executive officer. This provision equalizes the treatment of corporate executives and rank-and-file employees with respect to their ability to engage in transactions involving issuer equity securities during a pension plan blackout period if the securities were acquired in connection with their service to, or employment with, the issuer.

³⁰⁶ This term is defined in Rule 100(a) of Regulation BTR.

³⁰⁷ Rule 100(a)(2) of Regulation BTR.

³⁰⁸ Exchange Act Rules 16b-3(d)(1) and 16b-3(e).

³⁰⁹ Because it appears appropriate that the standards for an exemption from Section 16(b) liability be readily determinable by reference to the exemptive rule, and not variable depending upon where the issuers securities are listed, we do not propose to base the amended definition on the listing standards for director independence applicable to the issuer.  

³¹⁰ Exchange Act Rule 16b-3(b)(3)(ii), which defines a Non-Employee Director of a closed-end investment company as "a director who is not an "interested person" of the issuer, as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940," would not be revised.  

³¹¹ As under the current rule, each test referring to Item 404 will be measured by reference to the Regulation S-K Item, even if the disclosure requirements applicable to the company are governed by Regulation S-B.

³¹² See proposed amendments to Item 15 of Form SB-2, Item 11(n) of Form S-1, Item 18(a)(7)(iii) and Item 19(a)(7)(iii) of Form S-4, Item 23 of Form S-11, Item 7 of Form 10, Item 13 of Form 10- K, Item 7 of Form 10-SB, and Item 12 of Form 10-KSB. The proposed amendments to Forms SB- 2, 10-SB and 10-KSB would require disclosure of the information required by proposed Items 404 and 407(a) of Regulation S-B.

³¹³ See proposed amendments to Item 7(b) of Schedule 14A, which refers to proposed Items 404(a) and (b), and Item 22(b)(11) and the Instruction to Item 22(b)(11) of Schedule 14A, and Item 5.02(c)(2) of Form 8-K, which refer to proposed Item 404(a). The proposed amendments to Form 8-K that reference paragraphs (a) and (b) of Item 404 of Regulation S-B would require disclosure of the information required by proposed Item 404(a) of Regulation S-B.

³¹⁴ See proposed amendments to Item 23 of Form S-11.

³¹⁵ See proposed amendments to Item 8 of Schedule 14A, Item 11(l) of Form S-1, General Instruction I.B.4.(c) to Form S-3, Items 18(a)(7)(ii) and 19(a)(7)(ii) of Form S-4, Item 22 of Form S-11, Item 6 of Form 10 and Item 11 of Form 10-K.

³¹⁶ See proposed amendments to General Instruction I.B.4.(c) of Form S-3, and Item 10 of Form 10- K, which refer to Item 401 and paragraphs (c)(3), (d)(4) and (d)(5) of proposed Item 407, and Item 7(b) of Schedule 14A, which refers to Item 401 and paragraphs (d)(4) and (d)(5) of proposed Item 407. The proposed amendments to Forms SB-2, 10-SB and 10-KSB would require disclosure of the information required by proposed Items 401 and 407(c)(3), (d)(4) and (d)(5) of Regulation SB. We are not proposing any changes to the reference to Item 401 in Note G to Form 10-K, however, because the portion of Item 401 applicable in Note G (certain disclosure regarding executive officers) does not include the part of Item 401 that we propose to combine into proposed Item 407.

³¹⁷ See proposed amendments to Item 5 in Part II of Form 10-Q, and Item 5 in Part II of Form 10- QSB. The proposed amendments to Item 5 in Part II of Form 10-QSB would require disclosure of the information required by proposed Item 407(c)(3) of Regulation S-B.

³¹⁸ See proposed amendments to Item 1107(e) of Regulation AB.