Securities and Exchange CommissionExecutive Compensation and Related Person Disclosure |
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IV. Beneficial Ownership Disclosure
Item 403 requires disclosure of company voting securities beneficially owned by more than five percent holders,397 and company equity securities beneficially owned by directors, director nominees and named executive officers.398 These disclosure requirements provide investors with information regarding concentrated holdings of voting securities and managements equity stake in the company, including securities for which these holders have the right to acquire beneficial ownership within 60 days.399 Item 403 also requires disclosure of arrangements known to the company that may result in a change in control of the company.400
As proposed, we are amending Item 403(b)401 by adding a requirement for footnote disclosure of the number of shares pledged as security by named executive officers, directors and director nominees.402 To the extent that shares beneficially owned by named executive officers, directors and director nominees are used as collateral, these shares may be subject to material risk 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.403 As a result, we believe that the existence of these securities pledges could be material to shareholders. Because significant shareholders who are not members of management are in a different relationship with other shareholders and have different obligations to them, the amendments do not require disclosure of their pledges pursuant to Item 403(a), other than pledges that may result in a change of control currently required to be disclosed.404 The amendments also specifically require disclosure of beneficial ownership of directors qualifying shares, which was not required prior to these amendments, because we believe the beneficial ownership disclosure should include a complete tally of the securities beneficially owned by directors.
One commenter recommended that we expand this section to also require disclosure of hedging arrangements whereby the executive has altered his or her economic interest in the securities that he or she beneficially owns.405 These transactions frequently involve the purchase or sale of a derivative security that the named executive officer would be required to report within two business days under Section 16(a) of the Exchange Act.406 Because information concerning these transactions frequently would be available on a prompt basis in the Section 16(a) filings and companies would disclose their policies regarding these transactions in Compensation Discussion and Analysis,407 we have not followed the commenters recommendation.
399 As specified in Exchange Act Rule 13d-3(d)(1) [17 CFR 240.13d-3(d)(1)].
401 Item 403(b) of Regulation S-K and Item 403(b) of Regulation S-B are both amended in the same manner.
402 This was similar to a proposal the Commission made in 2002. See Form 8-K Disclosure of Certain Management Transactions, Release No. 33-8090 (Apr. 12, 2002) [67 FR 19914].
403 See, e.g., Marianne M. Jennings, The Disconnect Between and Among Legal Ethics, Business Ethics, Law, and Virtue: Learning Not to Make Ethics So Complex, 1 U. St. Thomas L.J. 995, 1010 (Spring 2004) (arguing that the extension of loans to the CEO of WorldCom, which were collateralized by WorldCom shares owned by the CEO, contributed to WorldComs financial demise). Regarding commenters views, contrast letters from Frederic W. Cook & Co.; PB-UCC; and SBAF with letters from FSR; NACCO Industries; Unitrin; and Compass Bancshares.
404 Item 403(c) of Regulation S-K. See also Items 6 and 7(3) of Schedule 13D [17 CFR 240.13d-101].
406 15 U.S.C. 78p(a).
407 See Item 402(b)(2)(xiii) of Regulation S-K, discussed in Section II.B.1., above.
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