Release No. 33-8732A Release No. 34-54302A Release No. IC-27444A

Securities and Exchange Commission

Executive Compensation and Related Person Disclosure
Section II.B.

II. Executive and Director Compensation Disclosure

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B. Compensation Discussion and Analysis

We are adopting a new Compensation Discussion and Analysis section.⁷¹ As we proposed, this section will be an overview providing narrative disclosure that puts into context the compensation disclosure provided elsewhere.⁷² Commenters generally supported the new Compensation Discussion and Analysis section.⁷³ This overview will explain material elements of the particular companys compensation for named executive officers by answering the following questions:

• What are the objectives of the companys compensation programs?
• What is the compensation program designed to reward?
• What is each element of compensation?
• Why does the company choose to pay each element?
• How does the company determine the amount (and, where applicable, the formula) for each element?
• How do each element and the companys decisions regarding that element fit into the companys overall compensation objectives and affect decisions regarding other elements?

As proposed, the second question also asked what the compensation program is designed not to reward. Commenters stated that compensation committees often may not consider this objective in developing compensation programs, expressing concern that the question could generate potentially limitless disclosure that would not add meaning to disclosure of what the compensation program is designed to award.⁷⁴ In response to this concern, we have not included this question in the rule as adopted.

1. Intent and Operation of the Compensation Discussion and Analysis

The purpose of the Compensation Discussion and Analysis disclosure is to provide material information about the compensation objectives and policies for named executive officers without resorting to boilerplate disclosure. The Compensation Discussion and Analysis is intended to put into perspective for investors the numbers and narrative that follow it.

As described in the Proposing Release and as adopted, the Compensation Discussion and Analysis requirement is principles-based, in that it identifies the disclosure concept and provides several illustrative examples. Some commenters suggested that a principles-based approach would be better served without examples, on the theory that laundry lists would lead to boilerplate.⁷⁵ Other commenters expressed the opposite view that more specific description of required disclosure topics would more effectively elicit meaningful disclosure.⁷⁶

As we explained in the Proposing Release, overall we designed the proposals to state the requirements sufficiently broadly to continue operating effectively as future forms of compensation develop, without suggesting that items that do not fit squarely within a box specified by the rules need not be disclosed. We believe that the adopted principles-based Compensation Discussion and Analysis, utilizing a disclosure concept along with illustrative examples, strikes an appropriate balance that will effectively elicit meaningful disclosure, even as new compensation vehicles develop over time.

We wish to emphasize, however, that the application of a particular example must be tailored to the company and that the examples are non-exclusive. We believe using illustrative examples helps to identify the types of disclosure that may be applicable. A company must assess the materiality to investors of the information that is identified by the example in light of the particular situation of the company. We also note that in some cases an example may not be material to a particular company, and therefore no disclosure would be required. Because the scope of the Compensation Discussion and Analysis is intended to be comprehensive, a company must address the compensation policies that it applies, even if not included among the examples. The Compensation Discussion and Analysis should reflect the individual circumstances of a company and should avoid boilerplate disclosure.

We have adopted, substantially as proposed, the following examples of the issues that would potentially be appropriate for the company to address in given cases in the Compensation Discussion and Analysis:

• Policies for allocating between long-term and currently paid out compensation;
• Policies for allocating between cash and non-cash compensation, and among different forms of non-cash compensation;
• For long-term compensation, the basis for allocating compensation to each different form of award;
• How the determination is made as to when awards are granted, including awards of equity-based compensation such as options;
• What specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions;
• How specific elements of compensation are structured and implemented to reflect these items of the companys performance and the executives individual performance;
• The factors considered in decisions to increase or decrease compensation materially;
• How compensation or amounts realizable from prior compensation are considered in setting other elements of compensation (e.g., how gains from prior option or stock awards are considered in setting retirement benefits);
• The impact of accounting and tax treatments of a particular form of compensation;
• The companys equity or other security ownership requirements or guidelines and any company policies regarding hedging the economic risk of such ownership;
• Whether the company engaged in any benchmarking of total compensation or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies); and
• The role of executive officers in the compensation process.

At the suggestion of a commenter,⁷⁷ we have expanded the example addressing how specific forms of compensation are structured to reflect company performance to also address implementation. We have made a similar change with regard to the example regarding the executives individual performance.⁷⁸ As adopted, this example includes not only whether discretion can be exercised (either to award compensation absent attainment of the relevant performance goal(s) or to reduce or increase the size of any award or payout), as proposed, but also whether such discretion has been exercised. By doing this, we move to the Compensation Discussion and Analysis overview an example of a material factor that had been proposed for the narrative disclosure that follows the Summary Compensation Table,⁷⁹ and expand its scope so that it is no longer limited to non-equity incentive plans. Because of the policy significance of decisions to waive or modify performance goals, we believe that they are more appropriately discussed in the Compensation Discussion and Analysis.

As discussed in Section II.A. above, a companys policies, programs and practices regarding the award of stock options and other equity-based instruments to compensate executives may require disclosure and discussion in the Compensation Discussion and Analysis. As with all disclosure in the Compensation Discussion and Analysis, a company must evaluate the specific facts and circumstances of its grants of options and equity-based instruments and provide such disclosure if it supplies material information about the companys compensation objectives and policies for named executive officers.

Further in response to comment,⁸⁰ we have revised the example addressing how the determination is made as to when awards are granted so that it is not limited to equity-based compensation, as was proposed, but we clarify in the rule as adopted that it would include equity-based compensation, such as stock options.⁸¹ Regarding the example noting the impact of accounting and tax treatments of a particular form of compensation, some commenters urged that companies be required to continue to disclose their Internal Revenue Code Section 162(m) policy.⁸² The adoption of this example should not be construed to eliminate this discussion. Rather, this example indicates more broadly that any tax or accounting treatment, including but not limited to Section 162(m), that is material to the companys compensation policy or decisions with respect to a named executive officer is covered by Compensation Discussion and Analysis. Tax consequences to the named executive officers, as well as tax consequences to the company, may fall within this example.

In addition, we have followed commenters recommendations to add the following specific examples addressing additional factors:

• Company policies and decisions regarding the adjustment or recovery of awards or payments if the relevant company performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment;⁸³ and
• The basis for selecting particular events as triggering payment with respect to post-termination agreements (e.g., the rationale for providing a single trigger for payment in the event of a change-in-control).⁸⁴

Commenters also requested clarification as to whether Compensation Discussion and Analysis is limited to compensation for the last fiscal year, like the former Board Compensation Committee Report on Executive Compensation that was required prior to these amendments.⁸⁵ While the Compensation Discussion and Analysis must cover this subject, the Compensation Discussion and Analysis may also require discussion of post-termination compensation arrangements, on-going compensation arrangements, and policies that the company will apply on a going-forward basis.⁸⁶ Compensation Discussion and Analysis should also cover actions regarding executive compensation that were taken after the last fiscal years end. Actions that should be addressed might include, as examples only, the adoption or implementation of new or modified programs and policies or specific decisions that were made or steps that were taken that could affect a fair understanding of the named executive officers compensation for the last fiscal year. Moreover, in some situations it may be necessary to discuss prior years in order to give context to the disclosure provided.

The Compensation Discussion and Analysis should be sufficiently precise to identify material differences in compensation policies and decisions for individual named executive officers where appropriate. Where policies or decisions are materially similar, officers can be grouped together. Where, however, the policy or decisions for a named executive officer are materially different, for example in the case of a principal executive officer, his or her compensation should be discussed separately.

2. Instructions to Compensation Discussion and Analysis

We are adopting instructions to make clear that the Compensation Discussion and Analysis should focus on the material principles underlying the companys executive compensation policies and decisions, and the most important factors relevant to analysis of those policies and decisions, without using boilerplate language or repeating the more detailed information set forth in the tables and related narrative disclosures that follow. The instructions also provide that the Compensation Discussion and Analysis should concern the information contained in the tables and otherwise disclosed.⁸⁷ Because this section is intended to provide meaningful analysis, it may specifically refer to the tabular or other disclosures where helpful to make the discussion more robust. A commenter raised a concern that the instruction not to repeat information set forth in the other disclosures might somehow limit the disclosure made in Compensation Discussion and Analysis.⁸⁸ We have revisited this instruction, which is intended to encourage analysis and to forestall mere repetition of the information in the tables, to provide that repetition and boilerplate language should be avoided. The instruction does not prohibit or discourage discussion of that specific information.

We are adopting an instruction to make clear that, as was the case with the Board Compensation Committee Report on Executive Compensation required prior to the adoption of these amendments, companies are not required to disclose target levels with respect to specific quantitative or qualitative performance-related factors considered by the compensation committee or the board of directors, or any other factors or criteria involving confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to the company.⁸⁹ Some commenters objected that this instruction would impair the quality of information disclosed by making it difficult to assess the link between pay and company performance, and suggested that competitive harm would be mitigated if disclosure were required on an after-the-fact basis, after the performance related to the award is measured.⁹⁰ Different commenters stated that performance targets often are based on confidential, competitively sensitive business plans, and that requiring disclosure could encourage the use of more generic targets that could hinder a companys goal of pay-for-performance.⁹¹ Other commenters observed that companies rarely use a performance metric for a single year or plan cycle, but select measures because of their relevance to the companys business strategy over several years, so that even disclosure on an after-the-fact basis could reveal proprietary business information that would be useful to competitors.⁹² Having considered these comments, we remain persuaded that this disclosure, even on an after-the-fact basis could pose significant risk of competitive harm and we are therefore not requiring it in those cases in which the factors or criteria considered involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to the company.

As noted in the Proposing Release, in applying this instruction, we intend the standard for companies to use in making a determination that this information does not have to be disclosed to be the same one that would apply when companies request confidential treatment of confidential trade secrets or confidential commercial or financial information that otherwise is required to be disclosed in registration statements, periodic reports and other documents filed with us.⁹³ Under this approach, to the extent a performance target has otherwise been disclosed publicly, non-disclosure pursuant to this instruction would not be permitted. To make these standards clearer and respond to commenters concerns that companies may exploit the instruction to exclude information in inappropriate circumstances, we are revising this instruction as adopted to clearly apply the same standard as for confidential treatment requests. Companies will not be required, however, to submit confidential treatment requests in order to rely on the instruction.⁹⁴ To mitigate commenters concerns that omission of specific performance targets would impair the quality of disclosure, the instruction requires additional disclosure regarding the significance of the undisclosed target. Specifically, if the company uses target levels for specific quantitative or qualitative performance-related factors, or other factors or criteria that it does not disclose in reliance on the instruction, the company must discuss how difficult it will be for the executive or how likely it will be for the company to achieve the undisclosed target levels or other factors. In addition, as discussed below, the Compensation Discussion and Analysis will be considered soliciting material and will be filed with the Commission. This disclosure will be subject to review by the Commission and its staff. Therefore, if a company uses target levels that otherwise would need to be disclosed but does not disclose them in reliance on the instruction, the company may be required to demonstrate to the Commission or its staff that the particular factors or criteria involve confidential trade secrets or confidential commercial or financial information and why disclosure would result in competitive harm. If the Commission or its staff ultimately determines that a company has not met these standards, then the company will be required to disclose publicly the factors or criteria used. In response to a commenters concern,⁹⁵ we have also added an instruction to clarify that disclosure of a target level that applies a non-GAAP financial measure will not be subject to the general rules regarding disclosure of non-GAAP financial measures but the company must disclose how the number is calculated from the audited financial statements.⁹⁶

One commenter stated that the Compensation Discussion and Analysis of a new public company should be permitted to be a prospective-only discussion.⁹⁷ While we agree the most significant disclosure in that situation may be future plans, we do not believe a prospective-only discussion is appropriate. Instead, companies may emphasize the new plans or policies.

3. Filed Status of Compensation Discussion and Analysis and the Furnished Compensation Committee Report

We proposed that the Compensation Discussion and Analysis would be considered a part of the proxy statement and any other filing in which it was included. Unlike the Board Compensation Committee Report on Executive Compensation that was required prior to these amendments, we proposed that the Compensation Discussion and Analysis would be soliciting material and would be filed with the Commission. Therefore, it would be subject to Regulation 14A or 14C and to the liabilities of Section 18 of the Exchange Act.⁹⁸ In addition, to the extent that the Compensation Discussion and Analysis and any of the other disclosure regarding executive officer and director compensation or other matters are included or incorporated by reference into a periodic report, the disclosure would be covered by the certifications that principal executive officers and principal financial officers are required to make under the Sarbanes-Oxley Act of 2002.⁹⁹ Likewise, a companys disclosure controls and procedures¹⁰⁰ apply to the preparation of the companys proxy statement and Form 10-K, including the Compensation Discussion and Analysis.

We noted in the Proposing Release that in adopting the rules that have applied since 1992, the Commission took into account comments that the Board Compensation Committee Report on Executive Compensation should be furnished rather than filed to allow for more open and robust discussion in the reports.¹⁰¹ The Board Compensation Committee Reports on Executive Compensation that were provided prior to todays amendments in general did not suggest that this treatment resulted in such discussion, nor the more transparent disclosure that the comments suggested would result.¹⁰² Further, we noted that we believe that it is appropriate for companies to take responsibility for disclosure involving board matters as with other disclosure.

Some commenters supported the proposal to have the Compensation Discussion and Analysis filed, noting among other things that filing should lead to increased accuracy and better disclosure.¹⁰³ Other commenters objected to this treatment, claiming that certification by principal executive officers and principal financial officers with regard to the disclosure included in the annual report on Form 10-K, including particularly the Compensation Discussion and Analysis, would inappropriately insert these officers into the compensation committees deliberative process, potentially calling into question the committees independence.¹⁰⁴ Further, many commenters expressed the view that the Compensation Discussion and Analysis should, in effect, be the report of the compensation committee, submitted under the names of its members, for which they should be accountable.¹⁰⁵

Some of these objections may reflect a misconception of the purpose of the Compensation Discussion and Analysis. Although the Compensation Discussion and Analysis discusses company compensation policies and decisions, the Compensation Discussion and Analysis does not address the deliberations of the compensation committee, and is not a report of that committee. Consequently, in certifying the Compensation Discussion and Analysis, principal executive officers and principal financial officers will not need to certify as to the compensation committee deliberations.

However, in response to concerns of commenters that compensation committees should continue to be focused on the executive compensation disclosure process, we are adopting a Compensation Committee Report similar to the Audit Committee Report.¹⁰⁶ Drawing on commenters suggestions for a new Compensation Committee Report,¹⁰⁷ the rules we adopt today require the compensation committee to state whether:

• The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management; and
• Based on the review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the companys annual report on Form 10-K and, as applicable, the companys proxy or information statement.

Unlike the Audit Committee Report, the Compensation Committee Report will be required to be included or incorporated by reference into the companys annual report on Form 10-K, so that it is presented along with the Compensation Discussion and Analysis when that disclosure is provided in the Form 10-K or incorporated by reference from a proxy or information statement.¹⁰⁸ Like the Audit Committee Report, the Compensation Committee Report will only be required one time during any fiscal year.¹⁰⁹ The name of each member of the companys compensation committee (or, in the absence of a compensation committee, the persons performing equivalent functions or the entire board of directors) must appear below the disclosure.¹¹⁰ This report will be furnished rather than filed. The principal executive officer and principal financial officer will be able to look to the Compensation Committee Report in providing their certifications required under Exchange Act Rules 13a-14 and 15d-14.¹¹¹

4. Retention of the Performance Graph

In light of the Compensation Discussion and Analysis requirement, we proposed to eliminate both the Board Compensation Committee Report on Executive Compensation and the Performance Graph.¹¹² The report and the graph were intended to be related and to show the relationship, if any, between compensation and corporate performance, as reflected by stock price. The rules we adopt today eliminate the Board Compensation Committee Report on Executive Compensation, as we proposed, in favor of the more comprehensive Compensation Discussion and Analysis and the new Compensation Committee Report, as described immediately above.¹¹³

Given the widespread availability of stock performance information about companies, industries and indexes through business-related Web sites or similar sources, we proposed to eliminate the requirement for the Performance Graph in the belief that it was outdated, particularly since the disclosure in the Compensation Discussion and Analysis regarding the elements of corporate performance that a given companys policies might reach is intended to allow broader discussion than just that of the relationship of compensation to the performance of the company as reflected by stock price. Many commenters objected to eliminating the Performance Graph, however, stating that it provides an easily accessible visual comparison of a companys performance relative to its peers and the market, and provides a standardized source for this type of information.¹¹⁴ In light of the significance of this disclosure to a broad spectrum of commenters, we have decided to retain the Performance Graph in the amendments we adopt today.

However, we remain of the view that the Performance Graph should not be presented as part of executive compensation disclosure. In particular, as noted above, the disclosure in the Compensation Discussion and Analysis regarding the elements of corporate performance that a given companys policies consider is intended to encourage broader discussion than just that of the relationship of executive compensation to the performance of the company as reflected by stock price. Presenting the Performance Graph as compensation disclosure may weaken this objective. Accordingly, we have decided to retain the requirements for the Performance Graph, but have moved them to the disclosure item entitled Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters.¹¹⁵ As retained, the Performance Graph will continue to be furnished rather than filed. The Performance Graph will be required only in the companys annual report to security holders that accompanies or precedes a proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting), and will not be deemed to be soliciting material under the proxy rules or incorporated by reference into any filing except to the extent that the company specifically incorporates it.¹¹⁶

⁷¹ Item 402(b). In addition to the narrative Compensation Discussion and Analysis, we are amending the rules so that, to the extent material, additional narrative disclosure will be provided following certain tables to supplement the disclosure in the table. See, e.g., Section II.C.3.a., discussing the narrative disclosure to the Summary Compensation Table and the Grants of Plan-Based Awards Table. We are also requiring disclosure of compensation committee procedures and processes as well as information regarding compensation committee interlocks and insider participation in compensation decisions as part of new Item 407 of Regulation S-K. See Section V.D., below.

⁷² See Jeffrey N. Gordon, Executive Compensation: Whats the Problem, Whats the Remedy? The Case for Compensation Discussion and Analysis, 30 J. Corp. L. 695 (2005) (arguing that the Commission should require proxy disclosure that includes a Compensation Discussion and Analysis section that collects and summarizes all the compensation elements for senior executives, providing a bottom line assessment of the different compensation elements and an explanation as to why the board thinks such compensation is warranted).

⁷³ See, e.g., letters from British Columbia Investment Management Corporation (BCIMC); Leo J. Burns (L. Burns); CFA Centre for Financial Market Integrity, dated April 13, 2006 (CFA Centre 1); Chamber of Commerce of the United States of America (Chamber of Commerce); Board of Fire and Police Pension Commissioners of the City of Los Angeles (F&P Pension Board); F&C Asset Management; Foley & Lardner LLP (Foley); Hermes Investment Management Limited; Governance for Owners USA, Inc. (Governance for Owners); International Association of Machinists and Aerospace Workers (IAM); Board of Trustees of the International Brotherhood of Electrical Workers Pension Benefit Fund (IBEW PBF); International Brotherhood of Teamsters (Teamsters); Remuneration Committee of the International Corporate Governance Network; Investment Company Institute (ICI); Institutional Shareholder Services (ISS); jointly, California Public Employees Retirement System, California State Teachers Retirement System, Co-operative Insurance Society UK, F&C Asset Management UK, Illinois State Board of Investment, London Pensions Fund Authority UK, New York State Common Retirement Fund, New York City Pension Funds, Ontario Teachers Pension Plan, PGGM Investments Netherlands, Public Sector and Commonwealth Super (PSS/CSS) Australia, RAILPEN Investments UK, State Board of Administration (SBA) of Florida, Stichting Pensioenfonds ABP Netherlands, UniSuper Limited Australia, and Universities Superannuation Scheme UK (Institutional Investors Group); The Pension Boards United Church of Christ (PB-UCC); State of Wisconsin Investment Board; and T. Rowe Price Associates, Inc.

⁷⁴ See, e.g., letters from American Bar Association, Committee on Federal Regulation of Securities (ABA); Committee on Securities Regulation of the New York City Bar (NYCBA); and WorldatWork (WorldatWork).

⁷⁵ See, e.g., letter from Curt Kollar (C. Kollar).

⁷⁶ See, e.g., letters from CFA Centre 1 and Hewitt Associates LLC (Hewitt).

⁷⁷ See letter from ABA.

⁷⁸ We have also reordered this example, so it is clearer that the items of company performance referenced are the ones noted in the immediately preceding example.

⁷⁹ This example had been proposed as Item 402(f)(1)(iv).

⁸⁰ See letter from ABA.

⁸¹ This example is discussed in more detail above in Section II.A., the discussion of stock option disclosure.

⁸² See, e.g., letters from Buck Consultants; Frederic W. Cook & Co., Inc., dated March 9, 2006 (Frederic W. Cook & Co.); Thomas Rogers; and WorldatWork. The Commission has construed the Board Compensation Committee Report on Executive Compensation (which had been required to be furnished by Item 402(k) prior to these amendments) to require discussion of this policy. 1993 Release at Section III.

⁸³ See, e.g., letters from Amalgamated Bank Long-View Funds (Amalgamated); CFA Centre 1; and Council of Institutional Investors, dated March 29, 2006 (CII). Section 304 of the Sarbanes-Oxley Act of 2002 [codified at 15 U.S.C. 7243] provides that if a company is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the principal executive officer and principal financial officer of the company shall reimburse the company for any bonus or other incentive-based or equity-based compensation received by that person from the company during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement, and any profits realized from the sale of securities of the company during that 12-month period. This example would not necessarily be limited to policies covering only situations contemplated by Section 304.

⁸⁴ See letter from Anonymous, dated April 10, 2006.

⁸⁵ See, e.g., letters from Buck Consultants; Frederic W. Cook & Co.; and Mercer Human Resource Consulting, Inc., dated April 10, 2006 (Mercer).

⁸⁶ Forward looking information in the Compensation Discussion and Analysis will fall within the safe harbors for disclosure of such information. See, e.g., Securities Act Section 27A [15 U.S.C. 77z-2] and Exchange Act Section 21E [15 U.S.C. 78u-5].

⁸⁷ Instruction 2 to Item 402(b).

⁸⁸ See letter from ABA.

⁸⁹ Instruction 4 to Item 402(b). Prior to these amendments, Instruction 2 to Item 402(k) had provided a similar exclusion for this type of information.

⁹⁰ See, e.g., letters from American Federation of Labor and Congress of Industrial Organizations, dated April 5, 2006 (AFL-CIO); CII; Governance for Owners; IAM; and The Honorable Barney Frank, United States Representative (MA).

⁹¹ See, e.g., letter from Sullivan & Cromwell LLP (Sullivan).

⁹² See, e.g., letter from Mercer.

⁹³ See Securities Act Rule 406 [17 CFR 230.406], Exchange Act Rule 24b-2 [17 CFR 240.24b-2], Exemption 4 of the Freedom of Information Act [5 U.S.C. 552(b)(4)], and Rule 80(b)(4) promulgated under the Freedom of Information Act [17 CFR 200.80(b)(4)].

⁹⁴ While the instruction adopted today, like the instruction that it replaces, does not require a company to seek confidential treatment under the procedures in Securities Act Rule 406 and Exchange Act Rule 24b-2 with regard to the exclusion of the information from the disclosure provided in response to this item, the standards specified in Rule Securities Act Rule 406, Exchange Act Rule 24b-2, Exemption 4 of the Freedom of Information Act and Rule 80(b)(4) promulgated under the Freedom of Information Act still apply and are subject to review and comment by the staff of the Commission.

⁹⁵ See letter from ABA.

⁹⁶ Instruction 5 to Item 402(b). The non-GAAP financial measure provisions are specified in Regulation G [17 CFR 244.100 - 102], Item 10(e) of Regulation S-K [17 CFR 229.10] and Item 10(h) of Regulation S-B [17 CFR 228.10].

⁹⁷ See letter from ABA.

⁹⁸ 15 U.S.C. 78r.

⁹⁹ Exchange Act Rules 13a-14 [17 CFR 240.13a-14] and 15d-14 [17 CFR 240.15d-14]. See also Certification of Disclosure in Companies Quarterly and Annual Reports, Release No. 34-46427 (Aug. 29, 2002) [67 FR 57275], at n. 35 (the Certification Release) (stating that the certification in the annual report on Form 10-K or 10-KSB would be considered to cover the Part III information in a registrants proxy or information statement as and when filed).

¹⁰⁰ Exchange Act Rules 13a-15 [17 CFR 240.13a-15] and 15d-15 [17 CFR 240.15d-15].

¹⁰¹ 1992 Release, at Section II.H.

¹⁰² See also Martin D. Mobley, Compensation Committee Reports Post-Sarbanes-Oxley: Unimproved Disclosure for Executive Compensation Policies and Practices, 2005 Colum. Bus. L. Rev. 111 (2005).

¹⁰³ See, e.g., letters from AFL-CIO; American Federation of State, County and Municipal Employees; California Public Employees Retirement System (CalPERS); Paul Hodgson, Senior Research Associate, Executive and Board Compensation, the Corporate Library (Corporate Library); Connecticut Retirement Plans and Trust Funds, dated April 10, 2006 (CRPTF); Southwestern Pennsylvania and Western Maryland Area Teamsters and Employers Pension Fund (Teamsters PA/MD); Teamsters Local 671 Health Services and Insurance Plan (Teamsters Local 671); Walden Asset Management (Walden); and Western PA Teamsters & Employers Welfare Fund (Western PA Teamsters Fund).

¹⁰⁴ See, e.g., letters from The Corporate & Securities Law Committee and the Employment & Labor Law Committee of the Association of Corporate Counsel (ACC); Compass Bancshares, Inc. (Compass Bancshares); National Association of Manufacturers (NAM); Peabody Energy Corporation (Peabody Energy); and WorldatWork.

¹⁰⁵ See, e.g., letters from Jesse Brill, Chair of CompensationStandards.com and Chair of the National Association of Stock Plan Professionals, dated March 1, 2006 (J. Brill 1); CFA Centre 1; CRPTF; Frederic W. Cook & Co.; and Hewitt.

¹⁰⁶ We are moving the audit committee report previously required by Item 306 of Regulations S-K and S-B to Item 407(d) under the amendments adopted today. See Section V.D., below.

¹⁰⁷ See, e.g., letters from J. Brill 1; California State Teachers Retirement System (CalSTRS); CFA Centre 1; and Professor William J. Heisler.

¹⁰⁸ The audit committee report is only required in a company proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). See Instruction 3 to Item 407(d).

¹⁰⁹ Instruction 3 to Item 407(e)(5). The audit committee instruction is specified in Instruction 2 to Item 407(d).

¹¹⁰ Item 407(e)(5)(ii).

¹¹¹ We note that one commenter suggested that the Compensation Discussion and Analysis should not be required of companies that have only registered the offer and sale of debt securities. See letter from Financial Security Assurance Holdings Ltd. The Compensation Discussion and Analysis is intended to put into perspective for investors the numbers and narrative that follow it. This section will provide a broader discussion than just that of the relationship of compensation to the performance of the company as reflected by stock price. Therefore, we believe it is appropriate for all companies that are not small business issuers or foreign private issuers filing on forms specified for their use to include the information.

¹¹² Prior to these amendments, the Board Compensation Committee Report on Executive Compensation had been required by Item 402(k) and the Performance Graph had been required by Item 402(l).

¹¹³ Section II.B.3.

¹¹⁴ See, e.g., letters from CalSTRS; CFA Centre 1; CII; IUE-CWA Pension Fund and 401(k) Plan (IUE-CWA); John W. Hamm; NYCBA; Standard Life Investments Limited (Standard Life); and Vivient Consulting LLC.

¹¹⁵ New Item 201(e) of Regulation S-K [17 CFR 229.201(e)] will require the Performance Graph. Consistent with our belief that the Performance Graph should not be linked to the compensation disclosure, we have not retained the portion of the language that was included in Instruction 4 to Item 402(l) prior to these amendments, which conditioned that other performance measures in addition to total return may be included in the graph only so long as the compensation committee (or persons performing equivalent functions or the entire board if there is no such committee) provided a description of the link between the measure and the level of compensation in the Board Compensation Committee Report on Executive Compensation. As a result, companies may include other performance measures, such as return on average common shareholders equity, so long as the meaning of any such measures is clear from the Performance Graph and any related legend or other disclosure.

¹¹⁶ Instructions 7 and 8 to Item 201(e). A small business issuer as defined in Regulation S-B, is not required to provide the Performance Graph. Instruction 6 to Item 201(e). Because Nasdaq has registered as a national securities exchange under Section 6 of the Exchange Act [15 U.S.C. 78f], the former separate reference to Nasdaq market is not retained. See Release No. 34-53128 (Jan. 13, 2006) ordering that the application of The NASDAQ Stock Market LLC for registration as a national securities exchange be granted. We also adopt a conforming revision to Rules 304(d) and (e) of Regulation S-T [17 CFR 232.304(d) and (e)], and we make technical revisions to those rules to correctly reference Item 22(b)(7)(ii) of Form N-1A and to eliminate the references to prospectuses.