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

Release No. IC-27218
 

Securities and Exchange Commission

Executive Compensation and Related Party Disclosure
Section VIII - XII

Release Table of Contents

VIII. Paperwork Reduction Act

A. Background

The proposed rules and amendments contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995.³²⁴ We are submitting these to the Office of Management and Budget for review and approval in accordance with the Paperwork Reduction Act.³²⁵ The titles for this information are:³²⁶

(1) "Regulation S-B" (OMB Control No. 3235-0417);

(2) "Regulation S-K" (OMB Control No. 3235-0071);

(3) "Form SB-2" (OMB Control No. 3235-0418);

(4) "Form S-1" (OMB Control No. 3235-0065);

(5) "Form S-4" (OMB Control Number 3235-0324);

(6) "Form S-11" (OMB Control Number 3235-0067);

(7) "Regulation 14A and Schedule 14A" (OMB Control Number 3235-0059);

(8) "Regulation 14C and Schedule 14C" (OMB Control Number 3235-0057);

(9) "Form 10" (OMB Control No. 3235-0064);

(10) "Form 10-SB" (OMB Control No. 3235-0419);

(11) "Form 10-K" (OMB Control No. 3235-0063);

(12) "Form 10-KSB" (OMB Control No. 3235-0420);

(13) "Form 8-K" (OMB Control No. 3235-0060); and

(14) "Form N-2" (OMB Control No. 3235-0026).

We adopted all of the existing regulations and forms pursuant to the Securities Act and the Exchange Act. In addition, we adopted Form N-2 pursuant to the Investment Company Act. These regulations and forms set forth the disclosure requirements for annual³²⁷ and current reports, registration statements, proxy statements and information statements that are prepared by issuers to provide investors with the information they need to make informed investment decisions in registered offerings and in secondary market transactions, as well as informed voting decisions in the case of proxy statements.

Our proposed amendments to existing forms and regulations are intended to:

provide investors with a clearer and more complete picture of compensation awarded to, earned by or paid to principal executive officers, principal financial officers, the highest paid executive officers other than the principal executive officer and principal financial officer and directors;

provide investors with better information about key financial relationships among companies and their executive officers, directors, significant shareholders and their respective immediate family members;

include more complete information about independence regarding members of the board of directors and board committees;

reorganize and modify the type of executive and director compensation information that must be disclosed in current reports; and

require most of the disclosure required under these proposals to be provided in plain English.

The hours and costs associated with preparing disclosure, filing forms, and retaining records constitute reporting and cost burdens imposed by the collection of information. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number.

The information collection requirements related to annual and current reports, registration statements, proxy statements and information statements would be mandatory. However, the information collection requirements relating exclusively to proxy and information statements would only apply to issuers subject to the proxy rules. There would be no mandatory retention period for the information disclosed, and the information disclosed would be made publicly available on the EDGAR filing system.  

B. Summary of Information Collections

The proposals would increase existing disclosure burdens for annual reports on Form 10-K³²⁸ and registration statements on Forms 10, S-1, S-4 and S-11 by requiring:  

an expanded and reorganized Summary Compensation Table, which would require expanded disclosure of a "total compensation" amount, and information necessary for computing the total amount of compensation, such as the grant date fair value of stock-based and option-based awards computed in accordance with FAS 123R, and the aggregate increase in actuarial value of defined benefit and actuarial pension plans;

disclosure at lower thresholds of information regarding perquisites and other personal benefits;

a more focused presentation of compensation plan awards in a Grants of Performance-Based Awards Table and a Grants of All Other Equity Awards Table, which would build upon existing tabular disclosures regarding long term incentive plans and awards of option and stock appreciation rights to supplement the information proposed to be included in the Summary Compensation Table;  

expanded disclosure regarding holdings and exercises by named executive officers of outstanding previously awarded stock, options and similar instruments which would include the grant date of the award, the vesting date of restricted stock and similar instruments and amounts (both number of shares and value) realized upon vesting and the previously reported grant date fair value of awards exercised or vested;  

improved narrative disclosure accompanying data presented in the executive compensation tables and a new Compensation Discussion and Analysis section to explain material elements of compensation of named executive officers;  

disclosure regarding up to three employees who were not executive officers and whose total compensation for the last completed fiscal year was greater than that of any of the named executive officers;  

new tables and narrative disclosure regarding retirement plans and nonqualified defined contribution and other deferred compensation plans;  

expanded disclosure regarding post-employment payments other than pursuant to retirement and deferred compensation plans;  

a new table and improved narrative disclosure for director compensation to replace current disclosure requirements;  

disclosure regarding additional related persons under the proposed related person transaction disclosure requirement;  

new disclosure regarding a companys policies and procedures for the review, approval or ratification of transactions with related persons;  

new and reorganized disclosure regarding corporate governance matters such as the independence of directors and members of the nominating, compensation and audit committees of the board of directors; and  

additional disclosure regarding pledges of securities by officers and directors and directors qualifying shares.  

At the same time, the proposals would decrease existing disclosure burdens for annual reports on Form 10-K and registration statements on Form 10, S-1, S-4 and S-11 by:  

eliminating requirements to provide a Compensation Committee Report and Performance Graph in proxy materials and information statements, which would substantially offset the increased burdens regarding Compensation Discussion and Analysis that would be required to be included or incorporated by reference in annual reports or registration statements;

eliminating tabular presentation regarding projected stock option values under alternative stock appreciation scenarios, which would substantially offset the increased burdens regarding equity holdings and exercises;

eliminating a generalized tabular presentation regarding defined benefit plans, which would offset in part the increased burdens regarding defined benefit plan disclosure;  

increasing the dollar value threshold for determining if related person transaction disclosure is required from $60,000 to $120,000; and  

eliminating a current disclosure requirement regarding specific director relationships that could affect independence.  

In addition, the proposals may increase or decrease existing disclosure burdens, or not affect them at all, for annual reports on Form 10-K and registration statements on Form 10, S-1, S-4 and S-11, depending on a companys particular circumstances, by:  

eliminating the requirement to include in proxy or information statements a compensation committee report on the repricing of options and stock appreciation rights and a table reporting on the repricing of options and stock appreciation rights over the past ten years, in favor of a narrative discussion of repricings, if any occurred in the last fiscal year, which would be required to be included or incorporated by reference in annual reports and registration statements; and

eliminating or reducing the scope of instructions that provide bright line tests for determining whether transactions with related persons are required to be disclosed in particular circumstances.

Specifically with respect to proxy and information statements, the proposals would impose a new disclosure requirement regarding the companys processes and procedures for the consideration and determination of executive and director compensation, and disclosure regarding the availability of the compensation committees charter (if it has one), either as an appendix to the proxy or information statement at least once every three fiscal years or on the companys Web site. These proposals would not require a compensation committee to establish or maintain a charter. The proposed disclosure that would be required regarding compensation committees is similar to what is currently required for audit committees and nominating committees. The proposals would decrease existing disclosure requirements for proxy and information statements by eliminating a current disclosure requirement regarding the resignation of directors, as well as eliminating current requirements to provide a Compensation Committee Report, Performance Graph and a compensation committee report on the repricing of options and stock appreciation rights. However, the extent to which eliminating current requirements to provide a Compensation Committee Report, Performance Graph and a compensation committee report on the repricing of options and stock appreciation rights reduces burdens for proxy and information statements would be offset to a substantial extent, as discussed above, by the proposed Compensation Discussion and Analysis and narrative disclosure requirement regarding repricings and other modifications, both of which would be required to be included or incorporated by reference in annual reports and registration statements. We estimate that, on balance, the proposed changes that are specific to proxy or information statements would not result in incremental burdens on proxy or information statement collections of information.

The proposals would increase existing disclosure burdens for annual reports on Form 10-KSB³²⁹ and registration statements on Forms 10-SB and SB-2 filed by small business issuers by requiring:

an expanded and reorganized Summary Compensation Table, which would require expanded disclosure of a "total compensation" amount, and information necessary for computing the total amount of compensation, such as the grant date fair value of stock-based and option-based awards computed in accordance with FAS 123R and the aggregate increase in actuarial value of defined benefit and actuarial pension plans;  

disclosure at lower dollar thresholds for information regarding perquisites and other personal benefits;  

expanded disclosure regarding holdings of previously awarded stock, options and similar instruments, which would include the value of stock and other similar incentive plan awards that had not vested;  

a new table for director compensation, to replace current narrative disclosure requirements;  

a narrative description of retirement plans;  

disclosure regarding additional related persons under the proposed related person transaction disclosure requirement;  

new and reorganized disclosure regarding corporate governance matters such as the independence of directors and members of the nominating, compensation and audit committees of the board of directors; and  

additional disclosure regarding pledges of securities by officers and directors, and director qualifying shares.

At the same time, the proposals would decrease existing disclosure burdens for annual reports on Form 10-KSB and registration statements on Form 10-SB and SB-2 filed by small business issuers by:  

reducing by two the number of named executive officers for the purposes of executive compensation disclosure, to include only the principal executive officer and the two most highly compensated executive officers other than the principal executive officer;  

reducing the required information in the Summary Compensation Table from three years to two years of data;  

eliminating tabular disclosure of grants of options and stock appreciation rights in the last fiscal year;  

eliminating tabular disclosure regarding exercises of options and stock appreciation rights;  

eliminating tabular disclosure regarding long term incentive plan awards in the last fiscal year; and  

eliminating a current disclosure requirement regarding specific director relationships that could affect independence.  

In addition, the proposals may increase or decrease, or not affect, existing disclosure burdens for annual reports on Form 10-KSB or registration statements on Form 10-SB and SB-2 filed by small business issuers depending on the small business issuers particular circumstances, by:

eliminating the requirement to include a compensation committee report on the repricing of options and stock appreciation rights, in favor of a narrative discussion of repricings, if any occurred in the last fiscal year;

changing the dollar value threshold used for determining if related person transaction disclosure is required from $60,000 to the lesser of $120,000 or one percent of the average of the small business issuers total assets for the last three completed fiscal years; and  

eliminating or reducing the scope of instructions that provide bright line tests for determining whether transactions with related persons are required to be disclosed in particular circumstances.

The proposals would decrease existing disclosure burdens for Forms N-1A, N-2, and N-3 by increasing to $120,000 the current $60,000 threshold in such forms for disclosure of certain interests, transactions, and relationships of disinterested directors, although as discussed below we do not believe the increase in the disclosure threshold will significantly impact the hours of company personnel time and cost of outside professionals in responding to these items. The proposals would increase the existing disclosure burdens for Form N-2 by requiring business development companies to provide additional disclosure regarding compensation. However, the proposals would decrease the existing disclosure burden by no longer requiring compensation disclosure with respect to certain affiliated persons and the advisory board of business development companies and by no longer requiring business development companies to disclose certain compensation from the fund complex.

The proposals would decrease the Form 8-K disclosure burdens, by limiting both the existing requirement to disclose a companys entry into a material definitive agreement outside of the ordinary course of business or any material amendment to such an agreement and the requirement to collect information regarding directors, executive officers other than named executive officers and officers covered by Item 5.02 of Form 8- K. By focusing the Form 8-K disclosure requirement on more presumptively material employment agreements, plans or arrangements of a narrower group of executive officers, the number of Form 8-Ks filed each year relating to executive and director compensation matters should be reduced.

We do not believe that our proposals regarding exhibit filing requirements for Form 20-F and our proposed treatment for foreign private issuers under the revised rules would impose any incremental increase or decrease in the disclosure burden for these issuers.

C. Paperwork Reduction Act Burden Estimates

For purposes of the Paperwork Reduction Act, we estimate the annual incremental increase in the paperwork burden for companies to comply with our proposed collection of information requirements to be approximately 537,792 hours of in-house company personnel time and to be approximately $69,794,000 for the services of outside

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professionals.³³⁰ These estimates include the time and the cost of preparing and reviewing disclosure, filing documents and retaining records. Our methodologies for deriving the above estimates are discussed below.

Our estimates represent the average burden for all issuers, both large and small. As described below, we expect that the burdens and costs could be greater for larger issuers and lower for smaller issuers. For Exchange Act annual reports on Form 10-K or 10-KSB,³³¹ or current reports on Form 8-K, we estimate that 75% of the burden of preparation is carried by the company internally and that 25% of the burden is carried by outside professionals retained by the issuer at an average cost of $300 per hour.³³² For Securities Act registration statements on Forms SB-2, S-1, S-4, S-11, or N-2 and Exchange Act registration statements on Form 10 or 10-SB, we estimate that 25% of the burden of preparation is carried by the company internally and that 75% of the burden is carried by outside professionals retained by the issuer at an average cost of $300 per hour.³³³ The portion of the burden carried by outside professionals is reflected as a cost, while the portion of the burden carried by the company internally is reflected in hours.

1. Securities Act Registration Statements, Exchange Act Registration Statements and Exchange Act Annual Reports

For the purposes of the Paperwork Reduction Act, we estimate that, over a three year period,³³⁴ the annual incremental disclosure burden imposed by the proposed revisions would average 67 hours per Form 10-K; 35 hours per Form 10-KSB; 60 hours per Form 10; 30 hours per Forms 10-SB and SB-2; 60 hours per Forms S-1, S-4 and S- 11; and 1.675 hours per Form N-2. To the extent that companies incorporate information proposed to be required by reference to proxy or information statements, the proposed plain English requirements would apply to disclosure in those statements, however the incremental burden of preparing plain English disclosure is factored into the burden estimates for Forms 10-K and 10-KSB. We estimate that the proposed amendments to Item 22(b) of Schedule 14A and the proposal to increase to $120,000 the current $60,000 threshold in Forms N-1A, N-2, and N-3 for disclosure of certain interests, transactions, and relationships of disinterested directors will not impose an annual incremental disclosure burden.

These estimates were based on the following assumptions:

On an ongoing basis, the hours of company personnel time and outside professional time required to prepare the disclosure under proposed Item 402 of Regulation S-K (executive and director compensation) would increase in light of the expansion and reorganization of the proposed disclosure requirements relative to the current disclosure requirements on these topics, in particular the requirements regarding Compensation Discussion and Analysis.

Companies filing annual reports on Form 10-K that would be required to include Item 402 of Regulation S-K, as we propose to amend it, and proposed Item 407(e)(4) of Regulation S-K (regarding compensation committee interlocks and insider participation), would experience higher costs in responding to these disclosure requirements in the first year of compliance with them, and, to a lesser extent, in the second year, as systems are implemented to obtain the relevant data and compliance efforts with respect to new or expanded disclosure requirements, with lower incremental costs expected in subsequent years.³³⁵

On an ongoing basis, the hours of company personnel time and outside professional time required to prepare the disclosure under proposed Item 404 (related person transactions), 407(a) (director independence) and paragraphs (e)(1) through (e)(3) of Item 407 (compensation committee functions) of both Regulation S-K and Regulation S-B would be approximately the same as for compliance with the current related party transaction disclosure and disclosure about the board of directors required by existing Item 404 of Regulations S-K and S-B and Item 7 of Schedule 14A.³³⁶ Other revisions proposed to be made by moving disclosure requirements relating to corporate governance to Item 407 of Regulations S-K and S-B would not change the substance of existing disclosure and would therefore not increase burdens, particularly for proxy or information statements where much of the disclosure is currently required.  

Companies filing registration statements on Forms 10, S-1, S-4 and S-11 that are not already filing periodic reports pursuant to Exchange Act Sections 13(a) or 15(d) would in many cases not have been required to comply with the proposed disclosure requirements prior to filing such registration statements, and would therefore take an estimated 60 hours to comply with the proposed changes in the disclosure requirements. The additional time required by these registrants to obtain the relevant data and to compile the required information is offset to some extent by the fact that only one year of compensation information would generally be required for presentation in the Summary Compensation Table, as compared to three years for issuers already subject to Exchange Act reporting requirements.³³⁷  

Small business issuers filing annual reports on Form 10-KSB would be subject to lower incremental costs than other issuers as a result of the proposals, given the reduced disclosure required by Item 402 of Regulation S-B relative to Item 402 of Regulation S-K, as described above. As with companies filing annual reports on Form 10-K, we expect that small business issuers would experience higher costs in responding to the proposed disclosure requirements in the first year of compliance with them, as systems are implemented to obtain the relevant data and compliance efforts with respect to new or expanded disclosure requirements are implemented, with lower incremental costs in subsequent years.³³⁸

Small business issuers filing registration statements on Forms 10-SB and SB-2 that are not already filing periodic reports pursuant to Exchange Act Sections 13(a) or 15(d) would not have been required to comply with the proposed disclosure requirements prior to filing such registration statements, and would therefore take an estimated 30 additional hours to comply with the proposed changes in the disclosure requirements. The additional time required by these registrants to obtain the relevant data and to compile the required information is offset to some extent by the fact that only one year of compensation information would generally be required for presentation in the Summary Compensation Table, as compared to two years for small business issuers already subject to Exchange Act reporting requirements.

Based on our experience with the requirement we adopted in 1998 for companies to write certain sections of prospectuses in plain English, drafting documents in plain English would result in an initial increase in time and cost burdens in the first year of implementation, and to a lesser extent, the second year, with those time or cost burdens decreasing in the year following implementation of the new rules. The plain English rule proposals would not affect the substance of the required disclosure, and companies that have filed registration statements under the Securities Act are already familiar with the requirements.

We estimate that the proposals to increase to $120,000 the current $60,000 threshold for disclosure of certain interests, transactions, and relationships of disinterested directors in Forms N-1A, N-2, and N-3 and in proxy and information statements would neither increase nor decrease the annual paperwork burden, because these forms are already required to disclose these interests, transactions, and relationships in amounts exceeding $60,000, and we do not believe the increase in the disclosure threshold will significantly impact the hours of company personnel time and cost of outside professionals in responding to these items.

Business development companies filing Form N-2 would be required to include Item 402 of Regulation S-K, as we propose to amend it, and would experience higher costs in responding to these disclosure requirements in the first year of complying with them, and, to a lesser extent, in the second year, as systems are implemented to obtain the relevant data and compliance efforts with respect to new or expanded disclosure requirements are implemented, with lower incremental costs expected in subsequent years.³³⁹

Tables 1 and 2 below illustrate the incremental annual compliance burden in the collection of information in hours and cost for Exchange Act periodic reports for companies other than registered investment companies, Securities Act registration statements and Exchange Act registration statements.

Table 1: Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic Reports Form Annual Responses

Table 2: Calculation of Incremental Paperwork Reduction Act Burden Estimates for Securities Act Registration Statements and Exchange Act Registration Statements

2. Exchange Act Current Reports

For purposes of the Paperwork Reduction Act, we estimate that the proposals affecting the collection of information requirements related to current reports on Form 8- K would reduce the annual paperwork burden by approximately 6,458 hours of company personnel time and by a cost of approximately $645,750 for the services of outside professionals. This estimate reflects the reduction in the number of filings that could result from our proposals. These estimates were based on the following assumptions:

the number of annual responses for Form 8-K is estimated to be 110,416.³⁴¹ Based on a study of current reports on Form 8-K filed in September 2005, we estimate that approximately 22,083 current reports filed on Forms 8-K would be filed pursuant to Item 1.01 of Form 8-K.

based on a review of Item 1.01 Form 8-K filings made in September 2005, we estimate that 6,625 of the 22,083 current reports on Form 8-K filed under Item 1.01 would relate to executive or director compensation matters.

based on a review of Item 1.01 Form 8-K filings made in September 2005, we estimate that 1,722 fewer Form 8-Ks would be filed because of more focused current reporting of executive officer and director compensation transactions under proposed Item 5.02(e) of Form 8-K.³⁴²

D. Request for Comment

We request comment in order to: (a) evaluate whether the collections of information are necessary for the proper performance of our functions, including whether the information will have practical utility; (b) evaluate the accuracy of our estimate of the burden of the collections of information; (c) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (d) evaluate whether there are ways to minimize the burden of the collections of information on those who respond, including through the use of automated collection techniques or other forms of information technology.³⁴³

Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing these burdens. Persons who desire to submit comments on the collection of information requirements should direct their comments to the OMB, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington DC 20503, and should send a copy of the comments to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington DC 20549-9303, with reference to File No. S7-03-06. Requests for materials submitted to the OMB by us with regard to this collection of information should be in writing, refer to File No. S7-03-06, and be submitted to the Securities and Exchange Commission, Office of Filings and Information Services, Branch of Records Management, 6432 General Green Way, Alexandria VA 22312. Because the OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, your comments are best assured of having their full effect if the OMB receives them within 30 days of publication.

IX. Cost-Benefit Analysis

A. Background

We are proposing revisions to our rules governing disclosure of executive and director compensation, related person transactions, director independence and other corporate governance matters and security ownership of officers and directors. The proposed revisions to the executive and director compensation disclosure rules are intended to provide investors with a clearer and more complete picture of compensation to principal executive officers, principal financial officers, the highest paid executive officers and directors. We also propose to revise our rules relating to current reports on Form 8-K to require real-time disclosure of only executive and director compensation events that are unquestionably or presumptively material, thereby reducing the number of filings for events relating to executive officers other than named executive officers and those officers specified in Item 5.02. We also propose to revise our closely related rules requiring disclosure regarding the extent to which executive officers, directors, significant shareholders and other related persons participate in financial transactions and relationships with the issuer. We are proposing to amend our beneficial ownership disclosure requirement to require disclosure regarding pledges of securities by management and directors qualifying shares. Finally, we are proposing that most of the disclosure that would be required under the proposed amendments be provided in plain English, so that investors can more easily understand this information when it is required to be included in Exchange Act reports or it is incorporated by reference from proxy or information statements.

B. Summary of Proposals

In light of the complexity of, and variations in, compensation programs, the sometimes inflexible and highly formatted nature of current Item 402 of Regulation S-K and S-B has resulted, in some cases, in disclosure that does not clearly inform investors as to all elements of compensation. The proposed changes to Item 402 would apply a broader approach that would eliminate some tables, simplify or refocus other tables, reflect total current compensation in the Summary Compensation Table, and reorganize the compensation table to group together compensation elements that have similar functions so that the quantitative disclosure is both more informative and more easily understood. This improved quantitative disclosure would be complemented by enhanced narrative disclosure clearly and comprehensively describing the context in which compensation is paid and received. In particular, the narrative disclosure requirements would provide transparency regarding company compensation policies and procedures, and be sufficiently flexible to operate effectively as new forms of compensation continue to evolve.

Under the proposals, the scope and presentation of information in Item 402 of Regulation S-B would differ in a number of significant ways from Item 402 of Regulation S-K. Item 402 of Regulation S-B would:

limit the named executive officers for whom disclosure would be required to a smaller group, consisting of the principal executive officer and the two other highest paid executive officers;³⁴⁴

require a revised Summary Compensation Table to disclose compensation information for the small business issuers two most recent fiscal years, and to require that narrative disclosure accompany the Summary Compensation Table;³⁴⁵

provide a higher threshold for separate identification of categories of "All Other Compensation" in the Summary Compensation Table;

require a new Outstanding Equity Awards at Fiscal Year-End Table that would include expanded disclosure regarding holdings of previously awarded stock, options and similar instruments, which would include the value of stock and other similar incentive plan awards that had not vested;

require additional narrative disclosure addressing the material terms of defined benefit and defined contribution plans and other post-termination compensation arrangements; and

require a new Director Compensation Table. Item 402 of Regulation S-B would not include the following disclosures that would be required by proposed Item 402 of Regulation S-K:

Compensation Discussion and Analysis;

a third fiscal year of Summary Compensation Table disclosure; and

the supplementary Grants of Performance-Based Awards Table and Grants of All Other Equity Awards Table, the Option Exercises and Stock Vested Table, the Retirement Plan Potential Annual Payments and Benefits Table, and the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table and the separate Potential Payments Upon Termination or Change-in- Control narrative section, while providing a general requirement to discuss the material terms of retirement plans and the material terms of contracts providing for payment upon a termination or change in control.  

The application of Item 1.01 of Form 8-K to compensatory arrangements has raised concerns that real-time disclosure may be required for executive compensation events that are not unquestionably or presumptively material, and that are more appropriately disclosed, if at all, in the companys proxy statement for its annual meeting of shareholders. The proposed amendments to Items 1.01 and 5.02 of Form 8-K would focus real-time disclosure on compensation arrangements with executives and directors that we believe are unquestionably or presumptively material, and eliminate the obligation to file Form 8-K with respect to other compensatory arrangements.

Current Item 404 of Regulation S-K was adopted to consolidate various provisions previously adopted in a piecemeal fashion. The proposals would revise Item 404 of Regulation S-K to streamline and modernize it, while making it more principlesbased. Indebtedness of related persons is limited by the Sarbanes-Oxley Act, and the disclosure requirement regarding indebtedness of related persons would be combined into the requirement regarding other transactions with related persons. This consolidated disclosure requirement would apply to an expanded group of related persons. While the current principles for disclosure would be retained, the proposal would increase the $60,000 threshold for disclosure currently in paragraphs (a) and (c) of Item 404 to $120,000 and eliminate or reduce the scope of certain instructions delineating what transactions are reportable or excludable. Existing disclosure requirements in Item 404 regarding transactions with promoters would slightly expanded to apply when a company had a promoter over the past five years, as well as to require analogous disclosure regarding transactions with control persons of a shell company. With respect to registered investment companies and business development companies, proposed amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A and to Forms N- 1A, N-2, and N-3 would similarly increase to $120,000 the current $60,000 threshold for disclosure of certain interests, transactions, and relationships of each director (and, in the case of Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A, each nominee for election as director) who is not or would not be an "interested person" of the fund within the meaning of Section 2(a)(19) of the Investment Company Act (and their immediate family members). In addition, Form N-2 would require business development companies to include the compensation disclosure required by Item 402 of Regulation S-K, as we propose to amend it.

The proposals also would replace the disclosure requirement for certain business relationships currently in Item 404(b) of Regulation S-K, which focuses on relationships relevant to director independence, with requirements for director independence disclosure discussed below. Under the proposals, the disclosure currently required by the certain business relationship disclosure requirement may be required by the consolidated disclosure requirement regarding transactions and relationships with related persons in Item 404(a) of Regulation S-K. Proposed Item 404(b) of Regulation S-K would require disclosure regarding the companys policies for the review, approval or ratification of transactions with related persons.

We propose similar amendments to Item 404 of Regulation S-B, which would result in a more detailed related person transaction disclosure requirement than currently exists in Item 404 of Regulation S-B. However, unlike Item 404 of Regulation S-K, Item 404 of Regulation S-B would not require disclosure regarding the companys policies for the review, approval or ratification of transactions with related persons. We propose to retain the requirement that transactions occurring within the last two years must be disclosed under Item 404 of Regulation S-B, whereas Item 404 of Regulation S-K requires disclosure for the last fiscal year, unless the information is included in a Securities Act or Exchange Act registration statement, where information as to the last three fiscal years is required.

We propose to adopt a new disclosure requirement in Item 407 of Regulations SK and S-B that would consolidate disclosures required in several places throughout our rules addressing director independence, board committee functions and other related corporate governance matters. This proposed Item, which would require new disclosure regarding independence of members of the board of directors and board committees, is intended to enhance disclosures regarding independence required by corporate governance listing standards of the national securities exchanges and the inter-dealer quotation systems of a national securities association.³⁴⁶

To the extent that shares beneficially owned by named executive officers, directors and director nominees are used as collateral for loans, these shares are subject to risks or contingencies that do not apply to other shares beneficially owned by these persons. These circumstances have the potential to influence managements performance and decisions. As a result, we believe that the existence of these securities pledges could be material to shareholders and should be disclosed. We therefore propose to amend Item 403 of Regulation S-K and Regulation S-B to require this disclosure as well as disclosure regarding directors beneficial ownership of qualifying shares.

We propose to require that most of the information that is required by these amendments be provided in plain English in Exchange Act reports or in proxy or information statements incorporated by reference into those reports. The plain English requirements would make these documents easier to understand.

The proposed changes to Item 402 of Regulation S-K, Items 402 and 404 of Regulation S-B, and Form 8-K would affect all companies reporting under Sections 13(a) and 15(d) of the Exchange Act, other than registered investment companies. The proposed changes to Item 404 of Regulation S-K would affect all companies reporting under Sections 13(a) and 15(d) of the Exchange Act, other than registered investment companies, and all companies, including registered investment companies, filing proxy or information statements with respect to the election of directors. The proposed changes to Items 402 and 404 of Regulation S-K and Regulation S-B would also affect additional companies filing Securities Act and Exchange Act registration statements. The proposed changes to Item 22(b) of Schedule 14A will affect business development companies and registered investment companies filing proxy statements with respect to the election of directors. The proposed changes to Form N-1A will affect open-end investment companies registering with the Commission on Form N-1A. The proposed changes to Form N-2 will affect closed-end investment companies (including business development companies) registering with the Commission on Form N-2. The proposed changes to Form N-3 will affect separate accounts, organized as management investment companies and offering variable annuities, registering with the Commission on Form N-3.

C. Benefits

As discussed, the overall goal of the executive and director compensation proposals would be to provide investors with clearer, better organized and more complete disclosure regarding the mix, size and incentive components of executive and director compensation. This goal would be accomplished by eliminating some tables and other disclosures that we believe may no longer be useful to investors, revising other tables so that they are more informative, and requiring new tabular and new quantitative estimate disclosure for retirement plans and similar benefits and director compensation. The proposals would require enhanced narrative disclosure, in the form of a Compensation Discussion and Analysis section and narrative disclosure accompanying the tables, to explain the significant factors underlying the compensation decisions reflected in the tabular data. The proposals also would require companies to report the total amount of compensation for named executive officers and directors, and provide important context to the disclosure of total compensation.

Improved disclosure under the proposals of certain forms of compensation, such as stock-, option- and incentive plan-based compensation, as well as retirement and other post-employment compensation, combined with the ability of investors to track the elements of executive and director compensation and the relative weights of those elements over time (and the reasons why companies allocate compensation in the manner that they do), would enable investors to make comparisons both within and across companies. A presentation facilitating the comparability and different elements of compensation in different companies should make it easier for investors to analyze both the manner of compensation across companies and the quality of disclosure of compensation across companies. Disclosure of total compensation would benefit investors by reducing the need to make individual computations in order to assess the size of current compensation. Further, improved executive and director compensation disclosure would enhance investors understanding of this use of corporate resources and the actions of boards of directors and compensation committees in making decisions in this area.³⁴⁷ Particularly with respect to the proxy statement for the annual meeting at which directors are elected, this improved disclosure would provide better information to shareholders for purposes of evaluating the actions of the board of directors in fulfilling its responsibilities to the company and its shareholders.

We believe that the extent to which increased transparency and completeness in executive and director compensation disclosure would result in broader benefits depends at least in part on the extent to which current executive and director compensation practices are aligned with the interests of investors as reflected in their investment and voting decisions. Any changes to a company that might occur, including changes in corporate governance, changes in control, changes in the employment of particular executives or other changes could depend to some extent on the degree to which improved transparency in executive and director compensation would affect investors decision-making with respect to that company.

Improved transparency in executive and director compensation under these proposals could have other benefits in terms of the allocative efficiency of affected corporations with regard to the use of resources for executive compensation relative to other corporate needs, as well as improvements in efficiency of managerial labor markets. Benefits such as these depend on the extent to which the proposals, including requirements to disclose a total amount of compensation and more detail regarding compensation policies, could alter existing policies or practices in these areas. We emphasize that we are not seeking to foster any given directional or other impacts. Our objective is to increase transparency to enable decision-makers to make more informed decisions, which could result in different policies or practices or increase investor confidence in existing policies or practices.

The proposed amendments to Form 8-K would facilitate shareholder and investor access to real-time disclosure of public companies significant personnel and compensation decisions by focusing this disclosure only on what we believe are the most important compensatory arrangements with executive officers and directors. This information would be filed pursuant to Item 5.02(e) of Form 8-K. To find this information, shareholders and investors no longer would need to examine multiple Item 1.01 disclosures relating to other actions. Companies would also be relieved of obligations to quickly report arguably less important compensation information on Form 8-K.

The proposed amendments to Item 404 would provide investors with more complete disclosure of related person transactions and director independence, and new disclosure regarding a companys policies and procedures for the review, approval or ratification of relationships with related persons. These proposals would enhance investors understanding of how corporate resources are used in related person transactions, and provide improved information to shareholders for purposes of better evaluating the actions of the board of directors and executive officers in fulfilling their responsibilities to the company and its shareholders.

In addition, by combining similar provisions of current Item 404 into a single combined disclosure requirement, the proposals would reduce confusion regarding the disclosure required when more than one of the items current provisions applies to a relationship. Improved corporate governance disclosure in proposed Item 407 would provide investors with better organized and more complete information regarding the independence of members of the board of directors. In addition, companies would benefit from having one disclosure item to satisfy in making required corporate governance disclosures. The proposed amendments to Item 403 of Regulation S-K and Regulation S-B would provide investors with disclosure of pledges of the securities beneficially owned by management and directors and full disclosure of beneficial ownership by directors, including directors qualifying shares.

Proposed changes to Items 22(b)(7), 22(b)(8) and 22(b)(9) of Schedule 14A and to Forms N-1A, N-2, and N-3 would decrease the disclosure burden imposed on registered investment companies by increasing the threshold for disclosure of certain interests, transactions, and relationships of each director (and, in the case of Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A, each nominee for election as director) who is not or would not be an "interested person" of the fund within the meaning of Section 2(a)(19) of the Investment Company Act (and their immediate family members).  

Finally, presentation in plain English would facilitate investor understanding of most of the matters contemplated by our proposals.

The benefits of clearer, more useful disclosure are difficult to quantify.  

D. Costs

In our view, the proposed revisions to the executive officer and director compensation disclosure requirements would increase the costs of complying with the Commissions rules. The proposed revisions to the related person transaction, director independence and corporate governance disclosure requirements would generally not increase costs. We further believe that the costs related to preparing required disclosure in plain English would be short-term costs arising mainly in the first two years of implementation.³⁴⁸ Increased costs under the proposals would largely impact companies required to comply with the proposals; any net increase in costs would ultimately be borne by shareholders of those companies. If our assumptions regarding these costs and current practices are not correct or complete, then costs may prove to be higher.

We believe that compliance with these proposals would, on balance, be more costly for companies than compliance with the existing disclosure requirements, with the highest incremental annual costs occurring principally in the first two years as companies and their advisors would determine how best to compile and report information in response to new or expanded disclosure requirements.

The improved quantitative and textual disclosure regarding executive and director compensation that we are proposing would incrementally increase costs for companies in several ways as a result of the new or expanded requirements. First, we propose that companies provide a Compensation Discussion and Analysis involving a discussion and analysis of material factors underlying compensation decisions reflected in the tabular presentations.³⁴⁹ Second, we propose to require narrative disclosure to accompany tabular presentations so that the data included in the tables may be understood in context. Third, we propose to expand disclosure regarding compensation-related equity-based and other plan-based holdings, as well as retirement and similar plans. Finally, we propose a director compensation table that would require more detailed information regarding director compensation than is specified in the current narrative disclosure requirement.³⁵⁰ Each of these proposed revisions would seek to elicit more complete and clearer information than is currently required under existing rules.

While the Summary Compensation Table as proposed to be revised would require reporting of the grant date fair value of stock-based and option-based awards under the proposals, we do not believe that this change would increase costs for companies, because the computation of the grant date fair values of stock, options and similar instruments already is required for financial statement purposes as a result of the implementation of FAS 123R. Companies may incur additional costs, however, in determining incremental changes in the actuarial value of retirement benefits for the purposes of reporting such compensation in the Summary Compensation Table. Costs may also arise from the reporting of other compensation in the All Other Compensation Column of the Summary Compensation Table. We do not believe that the addition of a "Total" column to the Summary Compensation Table in and of itself would increase costs, because existing disclosure requirements already mandate the disclosure of all compensation, and the mechanical process of adding up disclosure amounts would not be significant. Additional costs may be incurred in preparing and presenting required disclosures regarding up to three highly paid non-executive employees, retirement benefits, deferred compensation and post-termination or change in control payments to the extent that information regarding these matters is not currently collected in a way that would facilitate disclosure under the proposals. In addition, because named executive officers would be based on total compensation rather than salary and bonus, some companies may need to track more employees to determine which are the most highly compensated.

Under the proposals regarding Form 8-K, disclosure regarding executive and director arrangements and other plans that would no longer be required to be reported within four days under Item 1.01 of Form 8-K would be required to be disclosed by way of the exhibit filing requirements on at least a quarterly basis. To the extent that a reduction in timeliness of this information would reduce its value to investors, the proposals may impose costs on investors.

We believe that there would not be a significant increase in the cost of complying with the related person transaction disclosure requirement. The proposals may increase the cost of complying with this disclosure requirement by eliminating or reducing the scope of certain instructions and by expanding the group of related persons covered to include additional "immediate family members" and also, in the case of indebtedness transactions, significant shareholders.³⁵¹ Similarly, with respect to registered investment companies and business development companies, proposed amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A and to Forms N-1A, N-2, and N-3 would increase to $120,000 the current $60,000 threshold for disclosure of certain interests, transactions, and relationships of each director (and, in the case of Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A, each nominee for election as director) who is not or would not be an "interested person" of the fund within the meaning of Section 2(a)(19) of the Investment Company Act (and their immediate family members). Since these forms already require such disclosure using the $60,000 threshold, we do not believe the proposals would impose additional costs.

Proposed Item 404(b) of Regulation S-K would introduce new costs by imposing new disclosure requirements on companies regarding their policies for review, approval or ratification of related person transactions. In order to comply with their policies for the review, approval or ratification of related person transactions or the determination of executive and director compensation we understand that companies would incur costs of collecting the type of information that would be required to be disclosed. These costs would be higher to the extent companies do not already collect this information either pursuant to their corporate governance policies or through directors and officers questionnaires. The proposed rules would not require companies to create new policies for review, approval or ratification of relationships with related persons or the determination of executive and director compensation; however, to the extent that companies do create new policies that require the collection of different or additional information, they may incur incremental costs.

The proposed disclosures regarding director independence are similar to existing disclosure requirements under the proxy rules regarding the independence of directors who are members of the companys audit and nominating committees. Thus, for companies that are subject to the proxy rules, the task of complying with the proposed disclosure requirement regarding director independence could be performed by the same person or group of persons responsible for compliance under the current rules. Because the current rules already require companies subject to the proxy rules to collect and disclose information about the independence of directors who serve on the audit and nominating committees, this proposed disclosure should not impose significant new costs for the collection of information by companies that are subject to the proxy rules. The new disclosure requirement regarding director and committee member independence may require disclosure of additional relationships with related persons. Additional costs may be incurred in seeking this information. However, such costs are limited by the extent to which companies already identify and track the relationships that may be required to be disclosed for the purposes of complying with existing disclosure requirements or corporate governance listing standards.

We believe that, overall, the costs noted above that are associated with the proposed disclosure requirements for related person transactions and director independence will be offset by cost decreases associated with narrowing the scope of other disclosure requirements under the proposal. In this regard, we believe that companies will generally be required to provide an amount of information that is comparable to what is currently required by our rules, but under the proposals the information regarding these matters would be presented in a manner that recognizes recent changes such as the imposition of corporate governance listing standards at the major markets.

Our plain English proposal would require that companies use a clear writing style to present the information about executive and director compensation, related person transactions, beneficial ownership and some corporate governance matters that would be required to be disclosed in Exchange Act reports such as annual reports on Forms 10-K or 10-KSB. We believe the proposed rules, if adopted, would result in a short-term increase in costs for companies as they rewrite the information required to be included in annual reports or incorporated by reference from proxy or information statements, but few additional costs after the first year or two of implementation, as companies become familiar with the organizational, language, and document structure changes necessary to comply with these proposals. Additional costs, if any, should be one-time or otherwise short-term.

We believe that there would be little, if any, increase in the cost of complying with the beneficial ownership rule proposals. A company would be required to disclose named executive officer, director and director nominee pledges of securities, and directors full beneficial ownership of equity securities, including directors qualifying shares. The company could inquire as to this information in questionnaires it already circulates to the companys officers and directors.

For purposes of the Paperwork Reduction Act, we have estimated the annual incremental increase in the paperwork burden for companies to comply with our proposed collection of information requirements to be approximately 537,792 hours of in-house company personnel time and to be approximately $69,794,000 for the services of outside professionals. These costs are based on our estimates that the annual incremental disclosure burden imposed by the revisions that we propose today would average 67 hours per Form 10-K; 35 hours per Form 10-KSB; 60 hours per Form 10; 30 hours per Forms 10-SB and SB-2; 60 hours per Forms S-1, S-4 and S-11; and 1.675 hours per Form N-2. We estimate that the proposed amendments to Item 22(b) of Schedule 14A and the proposal to increase to $120,000 the current $60,000 threshold for disclosure of certain interests, transactions, and relationships of each director in Forms N-1A, N-2, and N-3 will not impose an annual incremental disclosure burden. These estimated costs include an estimated reduction in costs attributable to current reports on Form 8-K of approximately 6,458 hours of company personnel time and by a cost of approximately $645,750 for the services of outside professionals, based on an estimate that 1,722 fewer Form 8-Ks would be filed because of more focused current reporting of compensation transactions. Based on these estimates for the purposes of the Paperwork Reduction Act and assuming that the cost of in-house company personnel time is $175, the total estimated incremental costs of the proposals would be approximately $163,908,000. We have not quantified other costs which might arise as a result of implementation of the rules, especially to the extent that such costs could arise as a result of changes in policies, practices or other behavior attributable to the proposed disclosure requirements. These costs could be more than those estimated for the purposes of the Paperwork Reduction Act.

E. Request for Comment

We solicit quantitative data to assist our assessment of the benefits and costs of increased disclosure resulting from: (1) requiring narrative disclosure regarding executive and director compensation in the form of Compensation Discussion and Analysis and narrative disclosures accompanying the tabular presentations, and eliminating the Compensation Committee Report and Performance Graph; (2) expanding disclosure, in a tabular format, of director compensation; and (3) requiring the more focused and in some cases expanded tabular presentation of executive compensation. We also solicit such data regarding the benefits and costs of any other aspects of the executive compensation disclosure proposals.

We solicit quantitative data to assist our assessment of the benefits and costs of revising the requirements for current reporting of executive and director compensation arrangements on Form 8-K to focus on those arrangements which are unquestionably material.  

We solicit quantitative data to assist our assessment of the benefits and costs of increased disclosure resulting from: (1) expanding the group of related persons covered by current Item 404(a) to include additional "immediate family members;" (2) expanding the required relationship disclosure to include significant shareholders as related persons who may have reportable indebtedness relationships; and (3) requiring disclosure of a registrants policies for approval of relationships involving related persons and the independence of directors. We also solicit such data regarding the benefits and costs of any other aspects of the related person transactions disclosure requirements.  

Do companies currently have policies and procedures regarding the review, approval, authorization or ratification of relationships with related persons? If not, what cost would a company incur to institute such policies?  

Are there any public companies that currently provide information to the public regarding their policies and procedures related to the review, approval, authorization or ratification of relationships with related persons? If so, is there any information available as to whether investors find this information to be useful?  

We solicit quantitative data to assist our assessment of the benefits and costs associated with increased disclosure and the proposed application of plain English principles to the disclosure resulting from most of the proposed requirements.  

What are the direct and indirect costs associated with the proposals?  

What are the costs in the first year of compliance versus subsequent years?  

We solicit comments on the degree to which companies already collect the information that the proposed rules would require to be disclosed.  

X. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation  

Exchange Act Section 23(a)(2)³⁵² requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. In addition, Section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Furthermore, Securities Act Section 2(b),³⁵³ Exchange Act Section 3(f)³⁵⁴ and Investment Company Act Section 2(c)³⁵⁵ require us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

The proposed amendments to Regulations S-K and S-B, to Items 8 and 22(b) of Schedule 14A, and to Forms N-1A, N-2, and N-3 are intended to improve the completeness and clarity of executive compensation and related person transaction disclosure available to investors and the financial markets. These proposals would enhance investors understanding of how corporate resources are used, and enable shareholders to better evaluate the actions of the board of directors and executive officers in fulfilling their responsibilities.

The proposed amendments to Form 8-K are intended to facilitate the ability of investors and shareholders to access real-time disclosure of public companies employee compensation events that are unquestionably or presumptively material by requiring this disclosure only for the compensatory agreements with specified executive officers. To find this information, shareholders and investors no longer would need to examine multiple Form 8-K disclosures relating to other executive officers or other material nonordinary course definitive agreements.

The proposals to expand and consolidate into one item the director independence and related corporate governance disclosure requirements in proposed Item 407 of Regulation S-K would improve shareholders and investors understanding of the composition and functions of the board of directors and board committees. Proposed amendments to beneficial ownership reporting requiring disclosure of pledged securities and director qualifying shares are intended to improve the disclosure regarding security holdings of directors and executive officers.

The proposal to require most of the information required in these proposals to be written in plain English is intended to make Exchange Act reports and proxy or information statements incorporated by reference in those reports easier to understand.

Thus, the proposed rules would enhance existing reporting requirements by providing more effective material disclosure to investors in a timely manner. We anticipate that these proposals would improve investors ability to make informed investment and voting decisions and, therefore lead to increased efficiency and competitiveness of the U.S. capital markets.

Because only companies subject to the reporting requirements of Sections 13 and 15 of the Exchange Act, and companies filing registration statements under the Securities Act, would be required to make the proposed disclosures required by Items 402, 404 and 407, competitors not in those categories could gain an informational advantage. However, with respect to executive compensation, as under current Item 402, registrants would not be required to disclose target levels with respect to specific quantitative or qualitative performance-related factors, or any factors or criteria involving confidential commercial or business information, the disclosure of which would have an adverse effect on the company. Notwithstanding this exception for competitively sensitive information, competitors could potentially gain additional insight into the executive compensation policies of companies through disclosure required in Compensation Discussion and Analysis and in other portions of the required disclosure. Further, the availability of more broad-based compensation disclosure may provide additional information to be used by competitors in recruiting executive talent.

We request comment on whether the proposals, if adopted, would promote efficiency, competition, and capital formation or have an impact or burden on competition. Commenters are requested to provide empirical data and other factual support for their views, if possible.

XI. Initial Regulatory Flexibility Act Analysis

This Initial Regulatory Flexibility Act Analysis has been prepared in accordance with 5 U.S.C. 603. It relates to proposed revisions to the rules and forms under the Securities Act and Exchange Act that seek to improve the clarity and completeness of companies disclosure of the compensation earned by the principal executive officer, principal financial officer,³⁵⁶ other highly paid executive officers and all members of the board of directors, and of related person transactions. These proposed revisions include revising the executive and director compensation disclosure requirements, modifying our rules so that only elements of compensation that are unquestionably or presumptively material to investors must be disclosed in current reports of Form 8-K, streamlining and modernizing disclosure requirements regarding related person transactions, adding disclosure regarding pledges of securities beneficially owned by executive officers and directors and regarding directors qualifying shares, consolidating corporate governance disclosure requirements and expanding disclosure regarding the independence of the board of directors, as well as requiring that all disclosure required by the proposed items to be provided in plain English.

A. Reasons for the Proposed Action

Since the enactment of the Securities Act and the Exchange Act, the Commission has on a number of occasions explored the best methods for communicating clear, concise and meaningful material information about executive and director compensation and relationships with the issuer. With regard to compensation, at different times, the Commission has adopted rules mandating narrative, tabular, and combinations of narrative and tabular disclosure as the best method for presenting compensation disclosure in a manner that is concise and useful to investors. From time to time, the Commission has reconsidered executive and director compensation information requirements in light of changing trends in executive compensation, or due to concerns about the usefulness of disclosure elicited under then applicable rules. Most recently, in 1992, the Commission proposed and adopted amendments to the disclosure rules that moved away from the mostly narrative disclosure approach adopted in 1983 to formatted tables which sought to capture the various elements of compensation and promote comparability from year to year and from company to company.

While this tabular approach remains a sound basis for disclosure, its sometimes inflexible and formatted nature has, especially in light of the complexity of and variations in compensation programs, resulted in some cases in disclosure that does not clearly inform investors as to all elements of compensation, notwithstanding the express requirement to do so in the rules. Accordingly, the proposals under current consideration seek a broader-based approach to eliciting executive compensation disclosure while retaining comparability.

Form 8-K requires disclosure of the entry into, amendment of and termination of material definitive agreements entered into outside the ordinary course of business. Under our current definitions in Regulation S-K, many agreements regarding executive compensation are deemed to be material agreements entered into outside the ordinary course, and when for purposes of consistency we adopted those definitions for use in the expanded Form 8-K requirements, we incorporated all of these executive compensation agreements into the current Form 8-K disclosure requirements. Therefore, many agreements regarding executive compensation are required to be disclosed within four business days of the applicable triggering event. Because it was not our intent in adopting the expanded Form 8-K requirements to make all elements of compensation for all executive officers potential items of real-time disclosure, but only to capture in this area, as in others, events that are unquestionably or presumptively material to investors, we believe it is appropriate to modify our rules so that only those events must be disclosed on Form 8-K.

We believe that disclosure of executive and director compensation is closely related to disclosure regarding financial transactions and relationships involving companies and their directors, executive officers, significant shareholders and respective immediate family members. These disclosure requirements have historically been interconnected, given that relationships among these persons and the company can include transactions that involve compensation or analogous features. Such disclosure also represents material information in evaluating the overall relationship with a companys executive officers and directors. Further, this disclosure provides material information regarding the independence of directors. The current related party transaction disclosure requirements were adopted piecemeal over the years and were combined in one disclosure requirement beginning in 1982. In light of the many developments, including the increasing focus on corporate governance and director independence, we believe it is necessary to revise the rule. We propose to replace the current requirement for disclosure about relationships that can affect director independence with a narrative explanation of the independence status of directors under a companys independence policies for the majority of the board and for the nominating, audit and compensation committees. We also propose to consolidate this and other requirements regarding director independence, board committees and other corporate governance matters in a new disclosure Item. In addition, we are also proposing corresponding changes to items in our registration forms and proxy and information statements filed by registered investment companies and business development companies that impose requirements to disclose 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 the fund within the meaning of Section 2(a)(19) of the Investment Company Act (and their immediate family members).

To the extent that shares beneficially owned by named executive officers, directors and director nominees are pledged, these shares are subject to risks and contingencies that do not apply to other shares beneficially owned by these persons. These circumstances have the potential to influence managements performance and decisions, and for this reason, it appears that the existence of these securities pledges could be material to shareholders and should be disclosed under proposed revisions to Item 403 of Regulations S-K and S-B. An exclusion from the beneficial ownership disclosure requirement for directors qualifying shares is also proposed to be removed.

In order for most of these amended requirements to result in disclosure that is clear, concise and understandable for investors when responsive disclosure is included in Exchange Act reports or incorporated by reference from proxy or information statements, we propose to add Exchange Act rules to require that the disclosure regarding executive and director compensation, beneficial ownership, related person transactions and most corporate governance matters be provided in plain English.

B. Objectives

The overall goal of the rule proposals is to provide investors with a clearer and more complete picture of executive and director compensation, related person transactions and corporate governance matters. We believe that the proposals would:

confirm our current requirement that all elements of compensation must be disclosed;

retain the comparability of executive and director compensation while also providing material qualitative information about the context in which compensation is granted, awarded and earned;

reorganize and modify the type of compensation information that must be disclosed in current reports;

streamline and modernize the related person transaction disclosure requirements, while making them more principles-based;

update the disclosure requirements regarding director independence to reflect current listing standards and consolidate all such disclosure under a single disclosure item so that it is easier to locate; and

facilitate more informed voting decisions in the face of complex information about directors, executive officers and corporate governance, by requiring that most of the information required by these proposals be written in plain English.  

C. Legal Basis

We are proposing the amendments pursuant to Sections 3(b), 6, 7, 10 and 19(a) of the Securities Act; Sections 10(b), 12, 13, 14(a), 15(d), and 23(a) of the Exchange Act; Sections 8, 20(a), 24(a), 30, and 38 of the Investment Company Act; and Section 3(a) of the Sarbanes-Oxley Act of 2002.

D. Small Entities Subject to the Proposed Amendments

The proposals would affect small entities, the securities of which are registered under Section 12 of the Exchange Act or that are required to file reports under Section 15(d) of the Exchange Act. The proposals also would affect small entities that file, or have filed, a registration statement that has not yet become effective under the Securities Act and that has not been withdrawn. Securities Act Rule 157³⁵⁷ and Exchange Act Rule 0-10(a)³⁵⁸ define an issuer to be a "small business" or "small organization" for purposes of the Regulatory Flexibility Act if it had total assets of $5 million or less on the last day of its most recent fiscal year. We believe that the proposals would affect small entities that are operating companies. We estimate that there are approximately 2,500 issuers, other than investment companies, that may be considered small entities. An investment company is considered to be a "small business" if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year.³⁵⁹ We believe that the proposals would affect small entities that are investment companies. We estimate that there are approximately 240 investment companies that may be considered small entities.

E. Reporting, Recordkeeping and Other Compliance Requirements

The proposed amendments to Item 402 of Regulation S-K would expand some existing disclosure requirements, and consolidate or eliminate others. The proposed amendments to Item 402 of Regulation S-B would require less extensive disclosure for small business issuers than would be required for companies complying with Item 402 of Regulation S-K. Under the proposals, the scope and presentation of information in Item 402 of Regulation S-B would differ in a number of significant ways from Item 402 of Regulation S-K. Item 402 of Regulation S-B would:

limit the named executive officers for whom disclosure would be required to a smaller group, consisting of the principal executive officer and the two other highest paid executive officers;

require that the Summary Compensation Table disclose the two most recent fiscal years and that narrative disclosure accompany the Summary Compensation Table;  

provide a higher threshold for separate identification of categories of "All Other Compensation" in the Summary Compensation Table;  

require the Outstanding Equity Awards at Fiscal Year-End Table;

require additional narrative disclosure addressing the material terms of defined benefit and defined contribution plans and other post-termination compensation arrangements; and

require the Director Compensation Table.

Item 402 of Regulation S-B would not include the following disclosures that would be required by proposed Item 402 of Regulation S-K:

Compensation Discussion and Analysis;

information regarding two additional executives;

the third fiscal year of Summary Compensation Table disclosure; and

the supplementary Grants of Performance-Based Awards Table and Grants of All Other Equity Awards Table, the Option Exercises and Stock Vested Table, the Retirement Plan Potential Annual Payments and Benefits Table, and the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table and the separate Potential Payments Upon Termination or Change-in- Control narrative section, while providing a general requirement to discuss the material terms of retirement plans and the material terms of contracts providing for payment upon a termination or change in control.

As a result, the proposed amendments to Item 402 of Regulation S-B would not result in the same level of incremental increase in costs or burdens as would the requirements of proposed amendments to Item 402 of Regulation S-K.

The proposed amendments to Item 404 of Regulation S-K and S-B would decrease the existing related person transaction disclosure requirement that companies, including small entities, must comply with in some respects and expand it in other respects. The proposed amendments to Item 404 of Regulation S-B would potentially decrease the scope of the related person transaction disclosure requirement by changing the $60,000 threshold for disclosure of related person transactions to 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.³⁶⁰ At the same time, the proposed amendments to Item 404 of Regulation S-B would increase the scope of the related person transaction disclosure requirement by expanding the group of related persons covered to include additional "immediate family members," and in the case of indebtedness relationships, significant shareholders. In addition, the proposals may decrease or increase the scope of the related person transaction disclosure requirement by eliminating or reducing the scope of instructions that provide bright line tests for whether related person transaction disclosure is required.

Unlike the proposed amendments to Item 404 of Regulation S-K, the proposed amendments to Item 404 of Regulations S-B would not impose an additional disclosure requirement for small business issuers, including small entities, regarding their policies and procedures for the review, approval or ratification of relationships with related persons. The proposed amendments to Item 404 of Regulation S-B and proposed Item 407 of Regulation S-B would require, depending upon the particular circumstances of a company, more or less disclosure by changing the disclosure requirement regarding director independence.³⁶¹

Similar to proposed Item 404(a) of Regulation S-K, proposed amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A and to Forms N-1A, N-2, and N-3 would decrease the scope of the requirement imposed on registered investment companies and business development companies to disclose certain interests, transactions, and relationships of each director (and, in the case of Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A, each nominee for election as director) who is not or would not be an "interested person" of the fund within the meaning of Section 2(a)(19) of the Investment Company Act (and their immediate family members) by increasing to $120,000 the current $60,000 threshold for disclosure of such interests, transactions, and relationships.

The proposed amendments to Item 403 of Regulation S-K and S-B would require footnote disclosure to the beneficial ownership table of the number of shares pledged by named executive officers, directors and director nominees and disclosure of directors qualifying shares. This would impose an additional disclosure requirement on companies, including small entities.

The proposed plain English rules applicable to Exchange Act reports and proxy or information statements incorporated by reference into Exchange Act reports would not affect the substance of disclosures that companies must make. The proposed plain English rules would also not impose any new recordkeeping requirements or require reporting of additional information. Other proposed changes to our rules would decrease the scope of the disclosure requirements for Form 8-K, and thereby result in a reduction in the number of current reports on Form 8-K filed each year.

Overall, the proposals are expected to result in increased costs to all subject companies, large or small, as follows:

incremental increase in costs is expected with proposed changes to executive and director compensation disclosure requirements;  

no incremental increase in costs is expected from the amendments to the related person transaction rules and corporate governance disclosures; and  

decreased costs are expected as a result of the proposed revisions to Form 8-K. Because the current proxy rules require a subject registrant to collect and disclose information about the independence of its directors who serve on the audit or nominating committee of its board, the proposed disclosure should not impose on companies subject to the proxy rules significant new costs for the collection of information regarding the independence of directors. Thus, the task of complying with the proposed expanded director independence disclosure in Item 407 of Regulation S-K or S-B could be performed by the same person or group of persons responsible for compliance under the current rules at a minimal incremental cost.  

Our plain English proposal would require that companies use a clear writing style to present the information about executive and director compensation, related person transactions, beneficial ownership and some corporate governance matters that would be required to be disclosed in Exchange Act reports such as annual reports on Forms 10-K or 10-KSB. We believe the proposed rules, if adopted, would result in a short-term increase in costs for companies as they rewrite the information required to be included in annual reports or incorporated by reference from proxy or information statements, but few additional costs after the first year or two of implementation, as companies become familiar with the organizational, language, and document structure changes necessary to comply with these proposals. Additional costs, if any, should be one-time or otherwise short-term.

For purposes of the Paperwork Reduction Act, we estimate that with respect to Form 10-KSB, it would take issuers 70 additional hours to prepare the proposed disclosure in year one, 25 additional hours in year two, and 10 additional hours in year three and thereafter, which results in an average of 35 additional hours over the three year period. The same estimates would apply to preparation of information in the proxy or information statement that is then incorporated by reference into the Form 10-KSB. With regard to persons other than small business issuers who would file a Form 10-K, we estimate for purposes of the Paperwork Reduction Act that it would take issuers 120 additional hours to prepare the proposed disclosure in year one, and 55 hours in year two, and 25 hours in year three and thereafter, which results in an average of 67 hours over the three year period. If we assume that a small entity complies with the disclosure provisions of Regulation S-B rather than Regulation S-K and 75% of the burden would be performed by the company internally at a cost of $175 per hour and 25% of the burden would be carried by outside professionals retained by the company at a cost of $300 per hour, the average annual cost to comply with the proposed disclosure requirements in periodic reports and/or proxy or information statements would be approximately $7,219. The extent to which an additional average compliance cost of approximately $7,219 per small entity over a three year period would constitute a significant economic impact for small entities would depend on the relative revenues, costs and allocation of resources toward compliance with the Commissions rules for small entities both individually and as a group.

For purposes of the Paperwork Reduction Act, we estimate that with respect to Form N-2, it would take business development companies 100 additional hours to prepare the proposed disclosure in year one, 50 hours in year two and 25 hours in year three and thereafter, which results in an average of 58 hours for each business development company to comply with the proposed compensation disclosures that would be required on Form N-2. If we assume that 25% of the burden would be borne internally at a cost of $175 per hour and 75% of the burden would be carried by outside professionals retained by the company at a cost of $300 per hour, the average annual cost for business development companies to comply with the proposed disclosure requirements on Form N-2 would be approximately $15,588. The extent to which an additional average compliance cost of approximately $15,588 per small entity over a three year period would constitute a significant economic impact for small entities would depend on the relative assets, income, operating expenses and the allocation of resources toward compliance with the Commissions rules for small entities both individually and as a group.

We encourage written comments regarding this analysis. We solicit comments as to whether the proposed amendments could have an effect that we have not considered. We request that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of the impact.

F. Duplicative, Overlapping or Conflicting Federal Rules

We believe that there are no federal rules that conflict with or completely duplicate the proposed rules.

G. Significant Alternatives

The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish the stated objectives, while minimizing any significant adverse impact on small entities. In connection with the proposals, we considered the following alternatives:

1. establishing different compliance or reporting requirements which take into account the resources available to smaller entities;  

2. the clarification, consolidation or simplification of disclosure for small entities;  

3. use of performance standards rather than design standards; and  

4. exempting smaller entities from coverage of the disclosure requirements, or any part thereof.  

With regard to Alternative 1, we have proposed some different compliance or reporting requirements for small entities and solicited comments on others. We nevertheless believe improving the clarity and completeness of disclosure regarding executive and director compensation and related person transactions requires a high degree of comparability between all issuers. Regarding Alternative 2, the amendments would clarify, consolidate and simplify the requirements for all public companies, and some especially for small entities. Regarding Alternative 3, we believe that design rather than performance standards are appropriate, because design standards for small entities would be necessary to promote the goal of relatively uniform presentation of comparable information for the benefit of investors. Finally, although we propose to exempt some information required of larger issuers, a wholesale exemption for small entities would not be appropriate because the proposals are designed to make uniform the application of the disclosure and other requirements that would be amended.

We note that small business issuers,³⁶² which is a broader category of issuers than small entities, in certain circumstances may provide the executive compensation and relationships with related persons and promoters disclosure specified, respectively, in Items 402 and 404 of Regulation S-B, rather than the corresponding disclosure specified in Items 402 and 404 of Regulation S-K. We have proposed disclosure amendments that would require clear and straightforward disclosure of executive compensation, and relationships with related persons and promoters, respectively. We have proposed what we believe to be appropriate revisions to the small business issuer reporting requirements under Regulation S-B, given that small business issuer compensation structures are likely to be less complex than those of registrants that are not small business issuers. Separate disclosure requirements for small entities that would differ from the proposed reporting requirements of Regulation S-B would not yield the disclosure we believe to be necessary to achieve our disclosure objectives. In particular, we believe the changes that are reflected in the proposed amendments to Regulation S-B would balance the informational needs of investors in smaller companies with the burdens imposed on such companies by the disclosure requirements.

We have used design rather than performance standards in connection with the proposals for two reasons. First, based on our past experience, we believe the proposed disclosure would be more useful to investors if there were specific informational requirements. The proposed mandated disclosures are intended to result in more focused and comprehensive disclosure. Second, the specific disclosure requirements in the proposals would promote more consistent disclosure among public companies because they would provide greater certainty as to the scope of required disclosure. In addition, specific disclosure requirements would improve the Commissions ability to enforce the proposed rules. Therefore, amending the disclosure requirements of Items 402 and 404 of Regulations S-K and Regulation S-B and Exchange Act Form 8-K, and adopting Item 407 of Regulation S-K and S-B, appears to be the most effective method of eliciting the disclosure.

H. Solicitation of Comment

We encourage the submission of comments with respect to any aspect of this Initial Regulatory Flexibility Analysis. In particular, we request comments regarding: (i) the number of small entity issuers that may be affected by the proposed revisions; (ii) the existence or nature of the potential impact of the proposed revisions on small entity issuers discussed in the analysis; and (iii) how to quantify the impact of the proposed revisions. Commenters are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact. Such comments will be considered in the preparation of the Final Regulatory Flexibility Analysis, if the proposed revisions are adopted, and will be placed in the same public file as comments on the proposed amendments.

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996,363 a rule is "major" if it has resulted, or is likely to result in: