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

Securities and Exchange Commission

Executive Compensation and Related Person Disclosure
Section V.F.

V. Certain Relationships and Related Transactions Disclosure

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F. Conforming Amendments

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

1. Regulation Blackout Trading Restriction

We are adopting, as proposed, conforming changes to Regulation Blackout Trading Restriction,⁵¹⁷ also known as Regulation BTR, which we originally adopted to clarify the scope and operation of Section 306(a)⁵¹⁸ of the Sarbanes-Oxley Act of 2002 and to prevent evasion of the statutory trading restriction.⁵¹⁹ Rule 100 of Regulation BTR defines terms used in Section 306(a) and Regulation BTR, including the term acquired in connection with service or employment as a director or executive officer.⁵²⁰ Under this definition as originally adopted, one of the specified methods by which a director or executive officer directly or indirectly acquires equity securities in connection with such service is an acquisition at a time when he or she was a director or executive officer, as a result of any transaction or business relationship described in paragraph (a) or (b) of Item 404 of Regulation S-K.⁵²¹ To conform this provision of Regulation BTR to the Item 404 amendments, we are amending Rule 100(a)(2) so that it references only transactions described in paragraph (a) of Item 404, as we proposed.

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

We also are adopting conforming amendments to the definition of Non-Employee Director in Exchange Act Rule 16b-3.⁵²² Section 16(b) provides an issuer (or shareholders suing on its behalf) the right to recover from an officer, director, or ten percent shareholder profits realized from a purchase and sale of issuer equity securities within a period of less than six months. However, Rule 16b-3 exempts transactions between issuers of securities and their officers and directors if specified conditions are met. In particular, acquisitions from and dispositions to the issuer are exempt if the transaction is approved in advance by the issuers board of directors, or board committee composed solely of two or more Non-Employee Directors.⁵²³

Before adoption of these amendments, the definition of Non-Employee Director, among other things, limited these directors to those who:

• Do not directly or indirectly receive compensation from the issuer, its parent or subsidiary for consulting or other non-director services, except for an amount that does not exceed the Item 404(a)(5) dollar disclosure threshold;
• Do not possess an interest in any other transaction for which Item 404(a)(5) disclosure would be required; and
• Are not engaged in a business relationship required to be disclosed under Item 404(b).

As described above, the Item 404 amendments substantially revise or rescind the Item 404 provisions on which the Non-Employee Director definition was based. To minimize potential disruptions and because no problems were brought to our attention regarding any aspect of the definition as it was stated before adoption of these amendments, we proposed a conforming amendment that would delete the provision referring to business relationships subject to disclosure under Item 404(b) as it was stated prior to todays amendments, without otherwise revising the text of the rule.

In the interest of providing certainty regarding Non-Employee Director status and to recognize corporate governance changes since the definition was adopted, one commenter suggested basing the definition instead on whether a director meets the independence standards under the rules of the principal national securities exchange where the companys securities are traded.⁵²⁴ If the company has no securities traded on an exchange, the commenter suggested relying on the directors eligibility to serve on the issuers audit committee under Exchange Act Section 10A(m) and Exchange Act Rule 10A-3.⁵²⁵ We are not following the suggested approach. As we stated in the Proposing Release, the standards for an exemption from Section 16(b) liability should be readily determinable by reference to the exemptive rule, and not variable depending upon where the issuers securities are listed.⁵²⁶ Further, basing the Non-Employee Director definition on eligibility to serve on the issuers audit committee could burden the audit committee with a compensation committee function.

As proposed and adopted, the Non-Employee Director definition continues to permit consulting and similar arrangements subject to limits measured by reference to the revised Item 404(a)(5) disclosure requirements. Because the disclosure threshold of Item 404(a)(5) is raised from $60,000 to $120,000, however, the effect in some cases may be to permit previously ineligible directors to be Non-Employee Directors. In other cases, where revised Item 404(a)(5) may require disclosure of director indebtedness and disclosure of business relationships not subject to disclosure under former Item 404(b), some formerly eligible directors may become ineligible.

In response to concerns of commenters about the potential difficulty of making a determination,⁵²⁷ we have revised the rule as it was proposed to include an additional note to Rule 16b-3.⁵²⁸ The Non-Employee Director definition contemplates that the director must satisfy the definitions tests at the time he or she votes to approve a transaction. For purposes of determining a directors status under those tests that are based on Item 404(a)(5), a company may rely on the disclosure provided under Item 404 of Regulation S-K for the issuers most recent fiscal year contained in the most recent filing in which Item 404 disclosure is presented.⁵²⁹ Where a transaction disclosed in that filing was terminated before the directors proposed service as a Non-Employee Director, that transaction will not bar such service. The issuer must believe in good faith that any current or contemplated transaction in which the director participates will not require Item 404(a)(5) disclosure, based on information readily available to the issuer and the director at the time such director proposes to act as a Non-Employee Director. At such time as the issuer believes in good faith, based on readily available information, that a current (or contemplated) transaction with a director will require Item 404(a)(5) disclosure in a future filing, the director no longer is eligible to serve as a Non-Employee Director. However, this determination does not result in retroactive loss of a Rule 16b-3 exemption for a transaction previously approved by the director while serving as a Non-Employee director consistent with the note. In making determinations under the note, an issuer may rely on information it obtains from the director, for example pursuant to a response to an inquiry.

3. Other Conforming Amendments

The changes to Item 404, along with the consolidation of provisions into Item 407, necessitate conforming amendments to various forms and schedules under the Securities Act and the Exchange Act. The amendments modify:

• Forms that prior to these amendments required disclosure of the information required by Item 404 to instead require disclosure of the information required by amended Item 404 and new Item 407(a);⁵³⁰
• Some forms that prior to these amendments required disclosure of the information required by Item 404(a)(5) or by Items 404(a) and (c), to instead require disclosure of the information required by Items 404(a) and (b) as amended, or amended Item 404(a)(5), as appropriate;⁵³¹
• A form that prior to these amendments cross-referenced an instruction in Item 404 which we are eliminating to instead include the text of this instruction;⁵³²
• Item 7 of Schedule 14A, to require disclosure of the information required by new Item 407(a) rather than the disclosure that was required prior to these amendments by Item 404(b), to eliminate paragraphs (d)-(h) of Item 7 that were duplicative of new Item 407 and replace them with a requirement to disclose information specified by corresponding paragraphs of new Item 407;
• Forms that prior to these amendments required disclosure of the information required by Item 402 to instead require disclosure of the information required by amended Item 402 and new Item 407(e)(4), and, in the case of proxy statements and annual reports on Form 10-K, new Item 407(e)(5);⁵³³
• Some forms that prior to these amendments required disclosure of the information required by Item 401 to instead require disclosure of the information required by Item 401 as amended and paragraphs (c)(3), (d)(4) and/or (d)(5) of new Item 407, as appropriate;⁵³⁴
• Forms that prior to these amendments required disclosure of the information required by Item 401(j), to instead require disclosure of the information required by new Item 407(c)(3);⁵³⁵ and
• Item 10 of Form N-CSR to include a cross reference to new Item 407(c)(2)(iv) of Regulation S-K and new Item 22(b)(15) of Schedule 14A, in lieu of the former reference to Item 7(d)(2)(ii)(G) of Schedule 14A.

In addition, conforming amendments have been made to a provision in Regulation AB, which prior to these amendments required disclosure of the information required by Items 401, 402 and 404, so that instead it will require disclosure of the information required by amended Items 401, 402, 404 and paragraphs (a), (c)(3), (d)(4), (d)(5) and (e)(4) of new Item 407.⁵³⁶

⁵¹⁷ 17 CFR 245.100-104.

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

⁵¹⁹ Insider Trades During Pension Fund Blackout Periods, Release No. 34-47225 (Jan. 22, 2003) [68 FR 4337]. Section 306(a) makes it unlawful for any director or executive officer of an issuer of any equity security (other than an exempted security), directly or indirectly, to purchase, sell, or otherwise acquire or transfer any equity security of the issuer (other than an exempted security) during any pension plan blackout period with respect to such equity security, if the director or executive officer acquires the equity security in connection with his or her service or employment as a director or executive officer. This provision equalizes the treatment of corporate executives and rank-and-file employees with respect to their ability to engage in transactions involving issuer equity securities during a pension plan blackout period if the securities were acquired in connection with their service to, or employment with, the issuer.

⁵²⁰ This term is defined in Rule 100(a) of Regulation BTR.

⁵²¹ Rule 100(a)(2) of Regulation BTR.

⁵²² Exchange Act Rule 16b-3(b)(3)(ii), which defines a Non-Employee Director of a closed-end investment company as a director who is not an interested person of the issuer, as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940, is not amended.

⁵²³ Exchange Act Rules 16b-3(d)(1) and 16b-3(e).

⁵²⁴ See letter from Sullivan.

⁵²⁵ 15 U.S.C. 78j-1(m) and 17 CFR 240.10A-3.

⁵²⁶ Proposing Release at n. 309.

⁵²⁷ See, e.g., letter from SCSGP.

⁵²⁸ Note 4 to Rule 16b-3.

⁵²⁹ As under Rule 16b-3 prior to these amendments, each test referring to Item 404 is measured by reference to Regulation S-K, even if the disclosure requirements applicable to the company are governed by Regulation S-B.

⁵³⁰ See amendments to Item 15 of Form SB-2, Item 11(n) of Form S-1, Item 18(a)(7)(iii) and Item 19(a)(7)(iii) of Form S-4, Item 23 of Form S-11, Item 7 of Form 10, Item 13 of Form 10-K, Item 7 of Form 10-SB and Item 12 of Form 10-KSB. The amendments to Forms SB-2, 10-SB and 10-KSB require disclosure of the information required by amended Item 404 and new Item 407(a) of Regulation S-B.

⁵³¹ See amendment to Item 7(b) of Schedule 14A, which refers to amended Items 404(a) and (b), and Item 22(b)(11) and the Instruction to Item 22(b)(11) of Schedule 14A, and Item 5.02(c)(2) of Form 8-K, which refer to amended Item 404(a)(5). The amendments to Form 8-K that reference Regulation S-B require disclosure of the information required by amended Item 404(a)(5) of Regulation S-B.

⁵³² See amendments to Item 23 of Form S-11.

⁵³³ See amendments to Item 8 of Schedule 14A, Item 11(l) of Form S-1, General Instruction I.B.4.(c) of Form S-3, Items 18(a)(7)(ii) and 19(a)(7)(ii) of Form S-4, Item 22 of Form S-11, Item 6 of Form 10 and Item 11 of Form 10-K.

⁵³⁴ See amendments to General Instruction I.B.4.(c) of Form S-3, and Item 10 of Form 10-K, which refer to Item 401 and paragraphs (c)(3), (d)(4) and (d)(5) of new Item 407, and Item 7(b) of Schedule 14A, which refers to Item 401 and paragraphs (d)(4) and (d)(5) of new Item 407. The amendments to Form 10-KSB require disclosure of the information required by amended Item 401 and new Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-B. We are not making any changes to the reference to Item 401 in Note G to Form 10-K, however, because the portion of Item 401 applicable in Note G (certain disclosure regarding executive officers) does not include the part of Item 401 that we are combining into new Item 407.

⁵³⁵ See amendments to Item 5 in Part II of Form 10-Q, and Item 5 in Part II of Form 10-QSB. The amendments to Item 5 in Part II of Form 10-QSB require disclosure of the information required by new Item 407(c)(3) of Regulation S-B.

⁵³⁶ See amendments to Item 1107(e) of Regulation AB.