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

Securities and Exchange Commission

Executive Compensation and Related Person Disclosure
Section V.E.

V. Certain Relationships and Related Transactions Disclosure

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E. Treatment of Specific Types of Issuers

1. Small Business Issuers

We are adopting amendments to Item 404 of Regulation S-B substantially as proposed. Amended Item 404 of Regulation S-B is substantially similar to amended Item 404 of Regulation S-K, except for the following two matters:

• Paragraph (b) of Item 404 of Regulation S-K relating to policies and procedures for reviewing related person transactions is not included in Regulation S-B, and
• Regulation S-B provides for a disclosure threshold of the lesser of $120,000 or one percent of the average of the small business issuers total assets at year-end for the last three completed fiscal years,⁵⁰⁴ to require disclosure for small business issuers that may have material related person transactions even though smaller than the absolute dollar amount of $120,000.

Both amended items consist of disclosure requirements regarding related person transactions and promoters. These provisions of Item 404 of Regulation S-B are substantially identical to those of Item 404 of Regulation S-K, except for certain changes conforming amended Item 404 of Regulation S-B to former Item 404 of Regulation S-B. These changes consist of the following:

• Retaining in amended Item 404 of Regulation S-B an instruction in former Item 404 of Regulation S-B regarding underwriting discounts and commissions;⁵⁰⁵ and
• Not including an instruction in amended Item 404 of Regulation S-B regarding the treatment of foreign private issuers that is included in amended Item 404 of Regulation S-K.⁵⁰⁶

The two year time period for disclosure embodied in Item 404 of Regulation S-B prior to these amendments was retained in the principle for disclosure in proposed Item 404(a) of Regulation S-B. Amended Item 404(a) of Regulation S-B continues to require two years of disclosure, but does so by including an instruction to Item 404(a) of Regulation S-B⁵⁰⁷ requiring a second year of disclosure, rather than by including the two year time period in the principle for disclosure in Item 404(a) of Regulation S-B as was proposed. This change from the proposal clarifies that for purposes of applying the definition of related person to determine whether disclosure is required of a transaction that occurred prior to a person having the relationship that resulted in the person becoming a related person, a one year time period should be used rather than a two year time period.⁵⁰⁸ This change from the proposal also results in the structure of Item 404(a) of Regulation S-B more closely resembling the structure of Item 404(a)(5) of Regulation S-K, particularly in situations where Item 404(a)(5) of Regulation S-K applies to time periods longer than one year.

In addition, amended Item 404 of Regulation S-B retains a paragraph requiring disclosure of a list of all parents of the small business issuer showing the basis of control and as to each parent, the percentage of voting securities owned or other basis of control by the small business issuers immediate parent, if any.⁵⁰⁹

One conforming change that we are not making to Regulation S-B, however, concerns the calculation of a related persons interest in a given transaction. Prior to todays amendments, Item 404(a) of Regulation S-B differed from Item 404(a)(5) of Regulation S-K with respect to, among other things, the calculation of the dollar value of a persons interest in a related person transaction. Prior to these amendments, Instruction 4 to Item 404(a)(5) of Regulation S-K had specifically provided that the amount of such interest was to be computed without regard to the amount of profit or loss involved in the transaction. In contrast, Item 404(a) of Regulation S-B contained no such instruction prior to these amendments. We are adopting amendments as proposed so that the method of calculation of a related persons interest in a transaction will be the same for both Regulation S-B and Regulation S-K. We believe that differences, if any, between the types of transactions that small business issuers may engage in with related persons as compared to transactions of larger issuers would not warrant a different approach for calculating a related persons interest in a transaction.

As proposed, new Item 407 of Regulation S-K is substantially identical to new Item 407 of Regulation S-B,⁵¹⁰ except that it would not require disclosure regarding compensation committee interlocks and insider participation in compensation decisions or the Compensation Committee Report, since Regulation S-B did not require disclosure of this information prior to adoption of these amendments.

2. Foreign Private Issuers

Before todays amendments, a foreign private issuer would be deemed to comply with Item 404 of Regulation S-K if it provided the information required by Item 7.B. of Form 20-F. The amendments retain this approach, but require that if more detailed information is otherwise made publicly available or required to be disclosed by the issuers home jurisdiction or a market in which its securities are listed or traded, that same information must also be disclosed pursuant to Item 404.⁵¹¹

3. Registered Investment Companies

We are revising Items 7 and 22(b) of Schedule 14A, substantially as proposed, to reflect the reorganization that we have undertaken with respect to operating companies. Under the amendments, information that was required to be provided by registered investment companies under Item 7 prior to the amendments is instead required by Item 22(b).⁵¹² The requirements of Item 7 that prior to the amendments applied to registered investment companies regarding the nominating and audit committees, board meetings, the nominating process, and shareholder communications generally will be included in Item 22(b) by cross-references to the appropriate paragraphs of new Item 407 of Regulation S-K.⁵¹³ The substance of these requirements has not been altered. In addition, the revisions to Item 22(b) directly incorporate disclosures relating to the independence of members of nominating and audit committees that are similar to those contained in new Item 407(a) of Regulation S-K and contained in Item 7 prior to the amendments.⁵¹⁴ We are also adding instructions that are similar to new Instruction 1 to Item 407(a).⁵¹⁵

As proposed, we are also raising from $60,000 to $120,000 the threshold for disclosure of certain interests, transactions, and relationships of each director or nominee for election as director who is not or would not be an interested person of an investment company within the meaning of Section 2(a)(19) of the Investment Company Act.⁵¹⁶ This disclosure is required in investment company proxy and information statements and registration statements. The increase in the disclosure threshold corresponds to the increase in the disclosure threshold for amended Item 404 from $60,000 to $120,000.

⁵⁰⁴ We are revising Item 404(a) of Regulation S-B from the proposal to clarify that the determination of a small business issuers total assets for purposes of this Item shall be made as of the issuers fiscal year-end for its last three completed fiscal years.

⁵⁰⁵ Instruction 8 to Item 404(a) of Regulation S-B.

⁵⁰⁶ This is consistent with the requirements of Regulation S-B prior to these amendments.

⁵⁰⁷ Instruction 9 to Item 404(a) of Regulation S-B.

⁵⁰⁸ For example, if an employee had a material interest in a transaction with the small business issuer which occurred in February 2005 and then became an executive officer in July 2005, disclosure would be required in the small business issuers Form 10-KSB for the fiscal year ended December 31, 2005. However, if the transaction had occurred in February 2004, disclosure would not be required in the small business issuers 2005 Form 10-KSB.

⁵⁰⁹ Item 404(b) of Regulation S-B.

⁵¹⁰ The requirements that were specified in paragraphs (e), (f), and (g) of Item 401 of Regulation S-B prior to these amendments are now specified in paragraphs (d)(5), (d)(4) and (c)(3), respectively, of Item 407 of Regulation S-B.

⁵¹¹ Instruction 2 to Item 404 of Regulation S-K.

⁵¹² Amendments to Item 7(e) of Schedule 14A. Business development companies will furnish the information required by Item 7 of Schedule 14A, in addition to the information required by Items 8 and 22(b) of Schedule 14A. See amendments to Items 7, 8, and 22(b) of Schedule 14A.

⁵¹³ Amendments to Items 22(b)(15)(i) and (ii)(A) and 22(b)(16)(i) of Schedule 14A. Amended Item 22(b)(15)(i) requires the information required by new Items 407(b)(1) and (2) and (f), corresponding to the information that registered investment companies have been required to provide pursuant to Items 7(f) and 7(h) prior to todays amendments. Amended Item 22(b)(15)(ii)(A) requires the information required by new Items 407(c)(1) and (2), corresponding to the information that registered investment companies have been required to provide pursuant to Items 7(d)(2)(i) and 7(d)(2)(ii) (other than the nominating committee independence disclosures required prior to todays amendments by Item 7(d)(2)(ii)(C)). Amended Item 22(b)(16)(i) requires closed-end investment companies to provide the information required by new Items 407(d)(1) through (3), corresponding to the information that closed-end investment companies have been required to provide prior to todays amendments pursuant to Item 7(d)(3) (other than the audit committee independence disclosures required prior to todays amendments by Items 7(d)(3)(iv)(A)(1) and (B)).

⁵¹⁴ Amendments to Items 22(b)(15)(ii)(B) and (16)(ii) of Schedule 14A. Amended Item 22(b)(15)(ii)(B) requires disclosure about the independence of nominating committee members that is similar to those required by Item 7(d)(2)(ii)(C) prior to todays amendments and amended Item 22(b)(16)(ii) requires disclosure about the independence of audit committee members that is similar to those required by Items 7(d)(3)(iv)(A)(1) and (B) prior to todays amendments.

⁵¹⁵ Instruction to Item 22(b)(15)(ii)(B) of Schedule 14A; Instruction to Item 22(b)(16)(ii) of Schedule 14A.

⁵¹⁶ Amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A; amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8) of Form N-1A; amendments to Items 18.9, 18.10, and 18.11 of Form N-2; amendments to Items 20(h), 20(i), and 20(j) of Form N-3.