53158 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

1 17 CFR 229.201 and 17 CFR 228.201. 

2 17 CFR 229.306 and 17 CFR 228.306. 

3 17 CFR 229.401 and 17 CFR 228.401. 

4 17 CFR 229.402 and 17 CFR 228.402. 

5 17 CFR 229.403 and 17 CFR 228.403. 

6 17 CFR 229.404 and 17 CFR 228.404. 

7 17 CFR 229.10 et seq. 

8 17 CFR 228.10 et seq. 

9 17 CFR 229.601. 

10 17 CFR 229.1107. 

11 17 CFR 229.1100 et seq. 

12 17 CFR 232.304. 

13 17 CFR 232.10 et seq. 

14 17 CFR 245.100. 

15 17 CFR 245.100 et seq. 

16 17 CFR 240.13a–11. 

17 17 CFR 240.14a–3. 

18 17 CFR 240.14a–6. 

19 17 CFR 240.14c–5. 

20 17 CFR 240.15d–11. 

21 17 CFR 240.16b–3. 

22 15 U.S.C. 78a et seq. 

23 17 CFR 240.14a–101. 

24 17 CFR 249.308. 

25 17 CFR 249.210. 

26 17 CFR 249.210b. 

27 17 CFR 249.308a. 

28 17 CFR 249.308b. 

29 17 CFR 249.310. 

30 17 CFR 249.310b. 

31 17 CFR 249.220f. 

32 17 CFR 239.10. 

33 17 CFR 239.11. 

34 17 CFR 239.13. 

35 17 CFR 239.25. 

36 17 CFR 239.18. 

37 15 U.S.C. 77a et seq. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 228, 229, 232, 239, 240, 

245, 249 and 274 

[Release Nos. 33–8732A; 34–54302A; IC– 

27444A; File No. S7–03–06] 

RIN 3235–AI80 

Executive Compensation and Related 

Person Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission is adopting amendments to 

the disclosure requirements for 

executive and director compensation, 

related person transactions, director 

independence and other corporate 

governance matters and security 

ownership of officers and directors. 

These amendments apply to disclosure 

in proxy and information statements, 

periodic reports, current reports and 

other filings under the Securities 

Exchange Act of 1934 and to registration 

statements under the Exchange Act and 

the Securities Act of 1933. We are also 

adopting a requirement that disclosure 

under the amended items generally be 

provided in plain English. The 

amendments are intended to make 

proxy and information statements, 

reports and registration statements 

easier to understand. They are also 

intended to provide investors with a 

clearer and more complete picture of the 

compensation earned by a company’s 

principal executive officer, principal 

financial officer and highest paid 

executive officers and members of its 

board of directors. In addition, they are 

intended to provide better information 

about key financial relationships among 

companies and their executive officers, 

directors, significant shareholders and 

their respective immediate family 

members. In Release No. 33–8735, 

published elsewhere in the proposed 

rules section of this issue of the Federal 

Register, we also request additional 

comments regarding the proposal to 

require compensation disclosure for 

three additional highly compensated 

employees. 

DATES: Effective Date: November 7, 

2006. 

Comment Date: Comments regarding 

the request for comment in Section 

II.C.3.b. of this document should be 

received on or before October 23, 2006. 

Compliance Dates: Companies must 

comply with these disclosure 

requirements in Forms 8–K for 

triggering events that occur on or after 

November 7, 2006 and in Forms 10–K 

and 10–KSB for fiscal years ending on 

or after December 15, 2006. Companies 

other than registered investment 

companies must comply with these 

disclosure requirements in Securities 

Act registration statements and 

Exchange Act registration statements 

(including pre-effective and posteffective amendments), and in any 

proxy or information statements filed on 

or after December 15, 2006 that are 

required to include Item 402 and 404 

disclosure for fiscal years ending on or 

after December 15, 2006. Registered 

investment companies must comply 

with these disclosure requirements in 

initial registration statements and posteffective amendments that are annual 

updates to effective registration 

statements on Forms N–1A, N–2 (except 

those filed by business development 

companies) and N–3, and in any new 

proxy or information statements, filed 

with the Commission on or after 

December 15, 2006. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/final.shtml): or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–03–06 on the subject line; 

or 

• Use the Federal Rulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington DC 

20549–1090. 

All submissions should refer to File 

Number S7–03–06. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/final/shtml). 

Comments are also available for public 

inspection and copying in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC, 

20549. All comments received will be 

posted without change; we do not edit 

personal identifying information from 

submissions. You should submit only 

information that you wish to make 

publicly available. 

FOR FURTHER INFORMATION CONTACT: 

Anne Krauskopf, Carolyn Sherman, or 

Daniel Greenspan, at (202) 551–3500, in 

the Division of Corporation Finance, 

U.S. Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–3010 or, with 

respect to questions regarding 

investment companies, Kieran Brown in 

the Division of Investment Management, 

at (202) 551–6784. 

SUPPLEMENTARY INFORMATION: We are 

amending: Items 201,1 306,2 401,3 402,4

403 5 and 404 6 of Regulations S–K 7 and 

S–B,8 Item 601 9 of Regulation S–K, Item 

1107 10 of Regulation AB,11 Item 304 12

of Regulation S–T,13 and Rule 100 14 of 

Regulation BTR.15 We are also adding 

new Item 407 to Regulations S–K and S– 

B. In addition, we are amending Rules 

13a–11,16 14a–3,17 14a–6,18 14c–5,19

15d–11 20 and 16b–3 21 under the 

Securities Exchange Act of 1934.22 We 

are adding Rules 13a–20 and 15d–20 

under the Exchange Act. We are further 

amending Schedule 14A 23 under the 

Exchange Act, as well as Exchange Act 

Forms 8–K,24 10,25 10SB,26 10–Q,27 10– 

QSB,28 10–K,29 10–KSB30 and 20–F.31

Finally, we are amending Forms SB–2,32

S–1,33 S–3,34 S–4 35 and S–11 36 under 

the Securities Act of 1933,37 Forms N– 


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38 17 CFR 239.15A and 274.11A. 

39 17 CFR 239.14 and 274.11a–1. 

40 17 CFR 239.17a and 274.11b. 

41 15 U.S.C. 80a–1 et seq. 

42 17 CFR 249.331 and 274.128. 

43Executive Compensation and Related Party 

Disclosure, Release No. 33–8655 (Jan. 27, 2006) [71 

FR 6542] (the ‘‘Proposing Release’’). 

44 Initially, disclosure requirements regarding 

executive and director compensation were set forth 

in Schedule A to the Securities Act and Section 

12(b) of the Exchange Act, which list the type of 

information to be included in Securities Act and 

Exchange Act registration statements. Item 14 of 

Schedule A called for disclosure of the 

‘‘remuneration, paid or estimated to be paid, by the 

issuer or its predecessor, directly or indirectly, 

Continued 

1A,38 N–2,39 and N–3 40 under the 

Securities Act and the Investment 

Company Act of 1940,41 and Form N–

CSR42 under the Investment Company 

Act and the Exchange Act. 

Table of Contents 

I. Background and Overview 

II. Executive and Director Compensation 

Disclosure 

A. Options Disclosure 

1. Background 

2. Required Option Disclosures 

a. Tabular Disclosures 

b. Compensation Discussion and Analysis 

i. Timing of Option Grants 

ii. Determination of Exercise Price 

B. Compensation Discussion and Analysis 

1. Intent and Operation of the 

Compensation Discussion and Analysis 

2. Instructions to Compensation Discussion 

and Analysis 

3. ‘‘Filed’’ Status of Compensation 

Discussion and Analysis and the 

‘‘Furnished’’ Compensation Committee 

Report 

4. Retention of the Performance Graph 

C. Compensation Tables 

1. Compensation to Named Executive 

Officers in the Last Three Completed 

Fiscal Years—The Summary 

Compensation Table and Related 

Disclosure 

a. Total Compensation Column 

b. Salary and Bonus Columns 

c. Plan-Based Awards 

i. Stock Awards and Option Awards 

Columns 

ii. Non-Equity Incentive Plan 

Compensation Column 

d. Change in Pension Value and 

Nonqualified Deferred Compensation 

Earnings Column 

i. Earnings on Deferred Compensation 

ii. Increase in Pension Value 

e. All Other Compensation Column 

i. Perquisites and Other Personal Benefits 

ii. Additional All Other Compensation 

Column Items 

f. Captions and Table Layout 

2. Supplemental Grants of Plan-Based 

Awards Table 

3. Narrative Disclosure to Summary 

Compensation Table and Grants of PlanBased Awards Table 

a. Narrative Description of Additional 

Material Factors 

b. Request for Additional Comment on 

Compensation Disclosure for up to Three 

Additional Employees 

4. Exercises and Holdings of Previously 

Awarded Equity 

a. Outstanding Equity Awards at Fiscal 

Year-End Table 

b. Option Exercises and Stock Vested Table 

5. Post-Employment Compensation 

a. Pension Benefits Table 

b. Nonqualified Deferred Compensation 

Table 

c. Other Potential Post-Employment 

Payments 

6. Officers Covered 

a. Named Executive Officers 

b. Identification of Most Highly 

Compensated Executive Officers; Dollar 

Threshold for Disclosure 

7. Interplay of Items 402 and 404 

8. Other Changes 

9. Compensation of Directors 

D. Treatment of Specific Types of Issuers 

1. Small Business Issuers 

2. Foreign Private Issuers 

3. Business Development Companies 

E. Conforming Amendments 

III. Revisions to Form 8–K and the Periodic 

Report Exhibit Requirements 

A. Items 1.01 and 5.02 of Form 8–K 

1. Item 1.01—Entry into a Material 

Definitive Agreement 

2. Item 5.02—Departure of Directors or 

Certain Officers; Election of Directors; 

Appointment of Certain Officers; 

Compensatory Arrangements of Certain 

Officers 

B. Extension of Limited Safe Harbor under 

Section 10(b) and Rule 10b–5 to Item 

5.02(e) of Form 8–K and Exclusion of 

Item 5.02(e) from Form S–3 Eligibility 

Requirements 

C. General Instruction D to Form 8-K 

D. Foreign Private Issuers 

IV. Beneficial Ownership Disclosure 

V. Certain Relationships and Related 

Transactions Disclosure 

A. Transactions with Related Persons 

1. Broad Principle for Disclosure 

a. Indebtedness 

b. Definitions 

2. Disclosure Requirements 

3. Exceptions 

B. Procedures for Approval of Related 

Person Transactions 

C. Promoters and Control Persons 

D. Corporate Governance Disclosure 

E. Treatment of Specific Types of Issuers 

1. Small Business Issuers 

2. Foreign Private Issuers 

3. Registered Investment Companies 

F. Conforming Amendments 

1. Regulation Blackout Trading Restriction 

2. Rule 16b–3 Non-Employee Director 

Definition 

3. Other Conforming Amendments 

VI. Plain English Disclosure 

VII. Transition 

VIII. Paperwork Reduction Act 

A. Background 

B. Summary of Information Collections 

C. Summary of Comment Letters and 

Revisions to Proposals 

D. Revisions to Paperwork Reduction Act 

Burden Estimates 

1. Securities Act Registration Statements, 

Exchange Act Registration Statements, 

Exchange Act Annual Reports, Proxy 

Statements and Information Statements 

2. Exchange Act Current Reports 

IX. Cost-Benefit Analysis 

A. Background 

B. Summary of Amendments 

C. Benefits 

D. Costs 

X. Consideration of Burden on Competition 

and Promotion of Efficiency, 

Competition and Capital Formation 

XI. Final Regulatory Flexibility Act Analysis 

A. Need for the Rules and Amendments 

B. Significant Issues Raised by Public 

Comment 

C. Small Entities Subject to the Rules and 

Amendments 

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

E. Agency Action to Minimize Effect on 

Small Entities 

XII. Statutory Authority and Text of the 

Amendments 

I. Background and Overview 

On January 27, 2006, we proposed 

revisions to our rules governing 

disclosure of executive compensation, 

director compensation, related party 

transactions, director independence and 

other corporate governance matters, 

current reporting regarding 

compensation arrangements and 

beneficial ownership.43 We received 

over 20,000 comment letters in response 

to our proposals. In general, 

commenters supported the proposals 

and their objectives. We are adopting 

the rules and amendments substantially 

as proposed, with certain modifications 

to address a number of points that 

commenters raised. 

The amendments to the 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 other highest paid 

executive officers and directors. Closely 

related to executive officer and director 

compensation is the participation by 

executive officers, directors, significant 

shareholders and other related persons 

in financial transactions and 

relationships with the company. We are 

also adopting revisions to our disclosure 

rules regarding related party 

transactions and director independence 

and board committee functions. 

Finally, some compensation 

arrangements must be disclosed under 

our rules relating to current reports on 

Form 8–K. Accordingly, we are 

reorganizing and more appropriately 

focusing our requirements on the type of 

compensation information that should 

be disclosed on a real-time basis. 

Since the enactment of the Securities 

Act and the Exchange Act,44 the 


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53160 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

during the past year and ensuing year to (a) the 

directors or persons performing similar functions, 

and (b) its officers and other persons, naming them 

wherever such remuneration exceeded $25,000 

during any such year.’’ Section 12(b) of the 

Exchange Act as enacted required disclosure of ‘‘(D) 

the directors, officers, and underwriters, and each 

security holder of record holding more than 10 per 

centum of any class of any equity security of the 

issuer (other than an exempted security), their 

remuneration and their interests in the securities of, 

and their material contracts with, the issuer and any 

person directly or indirectly controlling or 

controlled by, or under direct or indirect common 

control with, the issuer;’’ and ‘‘(E) remuneration to 

others than directors and officers exceeding $20,000 

per annum.’’

45 In 1938, the Commission promulgated its first 

executive and director compensation disclosure 

rules for proxy statements. Release No. 34–1823 

(Aug. 11, 1938) [3 FR 1991]. At different times 

thereafter, the Commission has adopted rules 

mandating narrative, tabular, or combinations of 

narrative and tabular disclosure as the best method 

for presenting compensation disclosure in a manner 

that is clear and useful to investors. See, e.g., 

Release No. 34–3347 (Dec. 18, 1942) [7 FR 10653] 

(introducing first tabular disclosure); Release No. 

34–4775 (Dec. 11, 1952) [17 FR 11431] (introducing 

separate table for pensions and deferred 

remuneration); Uniform and Integrated Reporting 

Requirements: Management Remuneration, Release 

No. 33–6003 (Dec. 4, 1978) [43 FR 58151] (the 

‘‘1978 Release’’) (expanding tabular disclosure to 

cover all forms of compensation); and Disclosure of 

Executive Compensation, Release No. 33–6486 

(Sept. 23, 1983) [48 FR 44467] (the ‘‘1983 Release’’) 

(limiting tabular disclosure to cash remuneration). 

46Executive Compensation Disclosure, Release 

No. 33–6962 (Oct. 16, 1992) [57 FR 48126] (the 

‘‘1992 Release’’); See also Executive Compensation 

Disclosure; Securityholder Lists and Mailing 

Requests, Release No. 33–7032 (Nov. 22, 1993) [58 

FR 63010] (the ‘‘1993 Release’’), at Section II. 

47 Item 303 of Regulation S–K [17 CFR 229.303]. 

See also Commission Guidance Regarding 

Management’s Discussion and Analysis of Financial 

Condition and Results of Operations, Release No. 

33–8350 (Dec. 19, 2003) [68 FR 75055], at Section 

III.A. 

48The Audit Committee Report, required by Item 

306 of Regulations S–B [17 CFR 228.306] and S–K 

[17 CFR 229.306] prior to these amendments, will 

now be required by Item 407(d) of Regulations S–

B and S–K. 

49The Compensation Committee Report that we 

adopt today is not deemed to be ‘‘soliciting 

material’’ or to be ‘‘filed’’ with the Commission or 

subject to Regulation 14A or 14C [17 CFR 240.14a–

1 et seq. or 240.14c–1 et seq.], other than as 

specified, or to the liabilities of Section 18 of the 

Exchange Act [15 U.S.C. 78r], except to the extent 

a company specifically requests that the report be 

treated as filed or as soliciting material or 

specifically incorporates it by reference into a filing 

under the Securities Act or the Exchange Act, other 

than by incorporating by reference the report from 

a proxy or information statement into the Form 10–

K. Instructions 1 and 2 to Item 407(e)(5). 

50This narrative disclosure, together with the 

Compensation Discussion and Analysis noted 

above, will replace the narrative discussion that 

was required in the Board Compensation Report on 

Executive Compensation prior to these 

amendments. The narrative disclosure, along with 

the rest of the amended executive officer and 

director compensation disclosure, other than the 

new Compensation Committee Report, will be 

company disclosure filed with the Commission. 

Commission has on a number of 

occasions explored the best methods for 

communicating clear, concise and 

meaningful information about executive 

and director compensation and 

relationships with the company.45 The 

Commission also has had to reconsider 

executive and director compensation 

disclosure requirements in light of 

changing trends in executive 

compensation. Most recently, in 1992, 

the Commission adopted amendments 

to the disclosure rules that eschewed a 

mostly narrative disclosure approach 

adopted in 1983 in favor of formatted 

tables that captured all compensation, 

while categorizing the various elements 

of compensation and promoting 

comparability from year to year and 

from company to company.46

We believe this tabular approach 

remains a sound basis for disclosure. 

However, especially in light of the 

complexity of and variations in 

compensation programs, the very 

formatted nature of those rules has 

resulted in too many cases in disclosure 

that does not inform investors 

adequately as to all elements of 

compensation. In those cases investors 

may lack material information that we 

believe they should receive. 

We are thus today adopting an 

approach that builds on the strengths of 

the requirements adopted in 1992 rather 

than discarding them. However, today’s 

amendments do represent a thorough 

rethinking of the rules in place prior to 

these amendments, combining a 

broader-based tabular presentation with 

improved narrative disclosure 

supplementing the tables. This 

approach will promote clarity and 

completeness of numerical information 

through an improved tabular 

presentation, continue to provide the 

ability to make comparisons using 

tables, and call for material qualitative 

information regarding the manner and 

context in which compensation is 

awarded and earned. 

The amendments that we publish 

today require that all elements of 

compensation must be disclosed. We 

also have sought to structure the revised 

requirements sufficiently broadly so that 

they will continue to operate effectively 

as new forms of compensation are 

developed in the future. 

Under the amendments, 

compensation disclosure will now begin 

with a narrative providing a general 

overview. Much like the overview that 

we have encouraged companies to 

provide with their Management’s 

Discussion and Analysis of Financial 

Condition and Results of Operations 

(MD&A),47 the new Compensation 

Discussion and Analysis calls for a 

discussion and analysis of the material 

factors underlying compensation 

policies and decisions reflected in the 

data presented in the tables. This 

overview addresses in one place these 

factors with respect to both the separate 

elements of executive compensation and 

executive compensation as a whole. We 

are adopting the overview substantially 

as proposed, but, in response to 

comments, we are requiring a separate 

report of the compensation committee 

similar to the report required of the 

audit committee,48 which will be 

considered furnished and not filed.49

Following the Compensation 

Discussion and Analysis, we have 

organized detailed disclosure of 

executive compensation into three 

broad categories: 

• Compensation with respect to the 

last fiscal year (and the two preceding 

fiscal years), as reflected in an amended 

Summary Compensation Table that 

presents compensation paid currently or 

deferred (including options, restricted 

stock and similar grants) and 

compensation consisting of current 

earnings or awards that are part of a 

plan, and as supplemented by a table 

providing back-up information for 

certain data in the Summary 

Compensation Table; 

• Holdings of equity-related interests 

that relate to compensation or are 

potential sources of future gains, with a 

focus on compensation-related equity 

interests that were awarded in prior 

years and are ‘‘at risk,’’ whether or not 

these interests are in-the-money, as well 

as recent realization on these interests, 

such as through vesting of restricted 

stock or the exercise of options and 

similar instruments; and 

• Retirement and other postemployment compensation, including 

retirement and deferred compensation 

plans, other retirement benefits and 

other post-employment benefits, such as 

those payable in the event of a change 

in control. 

We are requiring improved tabular 

disclosure for each of the above three 

categories and appropriate narrative 

disclosure that provides material 

information necessary to an 

understanding of the information 

presented in the individual tables.50 We 

have made some modifications from the 

proposal in response to comments. 

In Release No. 33–8735, published 

elsewhere in the proposed rules section 

of this issue of the Federal Register and 

for which comments are due on or 

before October 23, 2006, we also solicit 

additional comments regarding the 

proposed disclosure requirement of the 

total compensation and job description 

of up to an additional three most highly 

compensated employees who are not 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53161 

51We had proposed similar amendments, which 

we did not act on, regarding director compensation 

in 1995. Streamlining and Consolidation of 

Executive and Director Compensation Disclosure, 

Release No. 33–7184 (Aug. 6, 1995) [60 FR 35633] 

(the ‘‘1995 Release’’), at Section I.B. 

52 Disclosure of Certain Relationships and 

Transactions Involving Management, Release No. 

33–6441 (Dec. 2, 1982) [47 FR 55661] (the ‘‘1982 

Release’’). 

53Prior to these amendments, related party 

transactions were disclosed under Item 404(a) of 

Regulations S–K and S–B, while indebtedness was 

separately required to be disclosed under Item 

404(c) of Regulation S–K. 

54See, e.g., NASD and NYSE Rulemaking: 

Relating to Corporate Governance, Release No. 34–

48745 (Nov. 4, 2003) [68 FR 64154] (the ‘‘NASD and 

NYSE Listing Standards Release’’). This new 

requirement will replace the disclosure requirement 

about director relationships that could affect 

independence specified in Item 404(b) of 

Regulation S–K prior to these amendments. 

55New Item 407 of Regulations S–K and S–B. 

56 Item 403(b) of Regulations S–K and S–B. 

57 1992 Release. 

58See, e.g., Council of Institutional Investors’

Discussion Paper on Executive Pay Disclosure, 

Executive Compensation Disclosure: How it Works 

Now, How It Can Be Improved, at 11 (available at 

www.cii.org/site_files/pdfs/ 

CII%20pay%20primer%20edited.pdf). 

executive officers or directors but who 

earn more than the named executive 

officers. In particular, we have specific 

requests for comment as to whether the 

proposal should be modified to apply 

only to large accelerated filers who 

would disclose the total compensation 

for the most recent fiscal year and a 

description of the job position for each 

of their three most highly compensated 

employees whose total compensation is 

greater than any of the named executive 

officers, whether or not such persons are 

executive officers. Under this approach, 

employees who have no responsibility 

for significant policy decisions within 

either the company, a significant 

subsidiary or a principal business unit, 

division, or function, would be 

excluded from the determination of the 

three most highly compensated 

employees and no disclosure regarding 

them would be required. 

Finally, we are adopting a director 

compensation table that is similar to the 

amended Summary Compensation 

Table.51

We also highlight in the release that 

the principles-based disclosure rules we 

are adopting today, including but not 

limited to the Compensation Discussion 

and Analysis section, may require 

disclosure of various aspects of a 

company’s use of options in 

compensating its executives and 

directors, including any programs, plans 

or practices a company may have with 

regard to the timing or dating of option 

grants. 

We are also modifying, as proposed, 

some of the Form 8–K requirements 

regarding compensation. Form 8–K 

requires disclosure within four business 

days of the entry into, amendment of, 

and termination of, material definitive 

agreements that are entered into outside 

of the ordinary course of business. 

Under our definition of material 

contracts in Item 601 of Regulation S–

K for the purposes of determining what 

exhibits are required to be filed, many 

agreements regarding executive 

compensation are deemed to be material 

agreements entered into outside the 

ordinary course. When, in 2004, for 

purposes of consistency, we looked to 

this definition for use in the Form 8–K 

requirements, we incorporated all of 

these executive compensation 

agreements into the Form 8–K 

disclosure requirements. Therefore, 

many agreements regarding executive 

compensation, including some not 

related to named executive officers, 

have been required to be disclosed on 

Form 8–K within four business days of 

the applicable triggering event. 

Consistent with our intent that Form 8–

K capture only events that are 

unquestionably or presumptively 

material to investors, we are today 

amending the Form 8–K requirements 

substantially as proposed. 

We believe that executive and director 

compensation is closely related to 

financial transactions and relationships 

involving companies and their directors, 

executive officers and significant 

shareholders and respective immediate 

family members. Disclosure 

requirements regarding these matters 

historically have been interconnected, 

given that relationships among these 

parties 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 company’s executive officers and 

directors. Further, this disclosure 

provides material information regarding 

the independence of directors. The 

related party transaction disclosure 

requirements were adopted piecemeal 

over the years and were combined into 

one disclosure requirement beginning in 

1982.52 In light of many developments 

since then, including the increasing 

focus on corporate governance and 

director independence, we believe it is 

necessary to revise our requirements. 

Today’s amendments update, clarify 

and somewhat expand the related party 

transaction disclosure requirements. 

The amendments fold into the 

disclosure requirements for related 

party transactions what had been a 

separate disclosure requirement 

regarding indebtedness of management 

and directors.53 Further, we are 

adopting a requirement that calls for a 

narrative explanation of the 

independence status of directors under 

a company’s director independence 

policies. We intend this requirement to 

be consistent with recent significant 

changes to the listing standards of the 

nation’s principal securities trading 

markets.54 We also are consolidating 

this and other corporate governance 

disclosure requirements regarding 

director independence and board 

committees, including new disclosure 

requirements about the compensation 

committee, into a single expanded 

disclosure item.55

In order to ensure that these amended 

requirements result in disclosure that is 

clear, concise and understandable for 

investors, we are adding Rules 13a–20 

and 15d–20 under the Exchange Act to 

require that most of the disclosure 

provided in response to the amended 

items be presented in plain English. 

This extends the plain English 

requirements currently applicable to 

portions of registration statements under 

the Securities Act to the disclosure 

required under the items that we have 

amended, which impose requirements 

for Exchange Act reports and proxy or 

information statements incorporated by 

reference into those reports. 

Finally, we are amending our 

beneficial ownership disclosure 

requirements as proposed to require 

disclosure of shares pledged by named 

executive officers, directors and director 

nominees, as well as directors’

qualifying shares.56

II. Executive and Director 

Compensation Disclosure 

Executive and director compensation 

disclosure has been required since 1933, 

and the Commission has had disclosure 

rules in this area applicable to proxy 

statements since 1938. In 1992, the 

Commission proposed and adopted 

substantially revised rules that embody 

our current requirements.57 In doing so, 

the Commission moved away from 

narrative disclosure and back to using 

tables that permit comparability from 

year to year and from company to 

company. As we noted in the Proposing 

Release, although the reasoning behind 

this approach remains fundamentally 

sound, significant changes are 

appropriate. Much of the concern with 

the tables adopted in 1992 had also been 

their strength: they were highly 

formatted and rigid.58 Thus, information 

not specifically called for in the tables 

had sometimes not been provided. For 

example, the highly formatted and 

specific approach had led some to 


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53162 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

59For examples, see, e.g., The Corporate Counsel 

(Sept.–Oct. 2005) at 6–7; The Corporate Counsel 

(Sept.–Oct. 2004) at 7; but see Alan L. Beller, 

Director, Division of Corporation Finance, U.S. 

Securities and Exchange Commission, Remarks 

Before Conference of the NASPP, The Corporate 

Counsel and the Corporate Executive (Oct. 20, 

2004), available at www.sec.gov/news/speech/ 

spch102004alb.htm. 

60The discussion that follows focuses on 

amendments to Item 402 of Regulation S–K, with 

Section II.D.1. explaining the different amendments 

to Item 402 of Regulation S–B. References 

throughout the following discussion are to Items of 

Regulation S–K, unless otherwise indicated. 

61More complex stock options can include 

provisions that alter the terms of the instrument 

based on whether performance or other targets are 

met. 

62Our existing rules for companies’ disclosure do 

prohibit material misrepresentations of option grant 

dates, as well as any resulting material 

misstatements of affected financial statements. 

Companies are also required under our existing 

rules to disclose any material information that may 

be necessary to make their other disclosures, in the 

light of the circumstances under which they are 

made, not misleading. See, e.g., Rule 12b–20 under 

the Exchange Act [17 CFR 240.12b–20]. 

63We note that Exchange Act Rule 16a–3 [17 CFR 

240.16a–3] setsforth the general reporting 

requirements under Exchange Act Section 16(a). 

Prior to August 2002, a number of transactions 

between an issuer and its officers or directors—such 

as the granting of options—were required to be 

disclosed following the end of the fiscal year in 

which the transaction took place although 

individuals could disclose those transactions earlier 

if they chose to. In implementing Section 403(a) of 

the Sarbanes-Oxley Act of 2002, in August 2002, the 

Commission required immediate disclosure of these 

transactions for the first time. As a result, since 

August 2002, grants, awards and other acquisitions 

of equity-based securities from the issuer, including 

those pursuant to employee benefit plans (which 

were previously reportable on an annual basis on 

Form 5) have been required to be reported by 

officers and directors on Form 4 within two 

business days. Ownership Reports and Trading by 

Officers, Directors and Principal Security Holders, 

Release No. 34–46421 (Aug. 27, 2002) [56 FR 56461] 

at Section II.B. 

suggest that items that did not fit 

squarely within a ‘‘box’’ specified by the 

rules need not have been disclosed.59 As 

another example, because the tables did 

not call for a single figure for total 

compensation, that information had 

generally not been provided prior to 

today’s amendments, although there had 

been considerable commentary 

indicating that a single total figure is 

high on the list of information that some 

investors wish to have. To preserve the 

strengths of the former approach and 

build on them, we are taking several 

steps in adopting amendments to Item 

402,60 substantially as we proposed: 

• First, we are retaining the tabular 

approach to provide clarity and 

comparability while improving the 

tabular disclosure requirements; 

• Second, we are confirming that all 

elements of compensation must be 

included in the tables; 

• Third, we are providing a format for 

the amended Summary Compensation 

Table that requires disclosure of a single 

figure for total compensation; and 

• Finally, we are requiring narrative 

disclosure comprising both a general 

discussion and analysis of 

compensation and specific material 

information regarding tabular items 

where necessary to an understanding of 

the tabular disclosure. 

A. Options Disclosure 

1. Background 

Many companies use stock options to 

compensate their employees, including 

executives. In a simple stock option, a 

company may grant an employee the 

right to purchase a specified number of 

shares of the company’s stock at a 

specific price, called the exercise price 

and usually set as the market price of 

the company’s stock on the grant date. 

While some options require no future 

service from the employee, most include 

vesting provisions, such that the 

employee does not earn the option 

unless he remains employed by the 

company for a specified period of 

service. Often a company will grant a 

specific number of options that will 

then vest proportionately in staggered 

increments over a set time period. For 

example, if the grant vests at a rate of 

20% per year for five years, the option 

for the last 20% is earned by the 

employee’s provision of five years of 

services. Most options become 

exercisable upon vesting and remain 

exercisable until their stated expiration. 

Generally, upon termination of the 

employment relationship, however, an 

employee loses unvested options, and 

has a limited term (e.g., 90 days) to 

exercise vested options.61

Options have most often been issued 

‘‘at-the-money’’—i.e., with an exercise 

price equal to the market price of the 

underlying stock at the date of grant—

but may also be issued either ‘‘in-themoney’’—i.e., with an exercise price 

below the market price of the 

underlying stock at the date of grant—

or ‘‘out-of-the-money’’—i.e., with an 

exercise price above the market price of 

the underlying stock at the date of grant. 

An option holder benefits only when 

the company’s stock price is above the 

exercise price when the employee 

exercises the option. Hence, setting a 

lower exercise price increases the value 

of the option. 

As some commentators have 

observed, using options for 

compensation purposes may have 

advantages. These commentators point 

out that, unlike salary and bonus 

compensation, stock option 

compensation does not require the 

payment of cash by the company, and 

therefore can be particularly attractive 

to companies for which cash is a scarce 

resource. Stock option compensation 

may also provide an incentive for 

employees to work to increase the 

company’s stock price. Additionally, 

some companies may be able to use 

stock option compensation to help 

retain employees, because an employee 

with unvested in-the-money options 

forfeits their potential value if he leaves 

the company’s employ. 

At the same time, other commentators 

stress that option compensation is not 

without costs and disadvantages. 

Options granted to employees, if 

ultimately exercised with the resulting 

issuance of the underlying stock, give 

rise to a dilution of the interests in the 

company held by existing stockholders. 

Options that are not in-the-money may 

not provide a retention benefit, and 

some managers believe that options that 

fall out-of-the-money (or are 

‘‘underwater’’) not only fail to motivate 

employees but, in fact, can result in 

poor employee morale and resultant 

turnover, especially at companies where 

option compensation is an important 

component of total compensation. In 

addition, options with shorter vesting 

periods or longer term options 

approaching their vesting dates may 

provide incentives to employees to 

focus on increasing the company’s stock 

price in the short term rather than 

working toward achieving longer term 

business goals and objectives that would 

enable the company to achieve and 

sustain future success. 

The Commission does not seek to 

encourage or discourage the use of stock 

options or any other particular form of 

executive compensation. The federal 

securities laws, however, do require full 

and fair disclosure of compensation 

information to the extent material or 

required by Commission rule. 

2. Required Option Disclosures 

The Commission acknowledged the 

importance to investors of proper 

disclosure of executives’ option 

compensation throughout the Proposing 

Release. The existing body of rules 

regarding disclosure of executive stock 

option grants, however, has not 

previously contained a line-item 

requirement with respect to information 

regarding programs, plans or practices 

concerning the selection of stock option 

grant dates or exercise prices.62 The 

disclosure we proposed in January, 

along with related disclosure we also 

adopt today, should provide investors 

with more information about option 

compensation.63 We have summarized 


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64We also note that under our rules regarding 

disclosure of director compensation, the concerns 

and considerations for disclosure of option timing 

or dating practices in the executive compensation 

realm would also apply when the recipients of the 

stock option grants are directors of the company. 

65 Item 402(c)(2)(vi). 

66 Item 402(d)(2)(ii) and Item 402(a)(6)(iv). 

67 Item 402(d)(2)(vii). 

68 Item 402(d)(2)(ii). 

69 Instruction 3 to Item 402(d). 

70Relevant material information might include 

disclosure in response to the examples in Item 

402(b)(2) in the Compensation Discussion and 

Analysis section, discussed below. 

below the various provisions of the 

rules that we adopt today that relate to 

options disclosure.64

a. Tabular Disclosures 

The following disclosures are 

required in the tables we adopt today. 

These provisions are discussed in more 

detail later in the section relating to 

each particular table. 

• As proposed and adopted, grants of 

stock options will be disclosed in the 

Summary Compensation Table at their 

fair value on the date of grant, as 

determined under FAS 123R. By basing 

the executive compensation disclosure 

on the full grant date fair value 

computed in accordance with FAS 

123R, companies will give shareholders 

an accurate picture of the value of 

options at the time they are actually 

granted to the highest-paid executive 

officers.65

• A separate table including 

disclosure of equity awards, the Grants 

of Plan-Based Awards Table, requires 

disclosure of the grant date as 

determined pursuant to FAS 123R.66

The grant date is generally considered 

the day the decision is made to award 

the option as long as recipients of the 

award are notified promptly. Even if the 

option’s exercise price is set based on 

trading prices as of an earlier date or 

dates, the grant date does not change. 

• If the exercise price is less than the 

closing market price of the underlying 

security on the date of the grant, a 

separate, adjoining column would have 

to be added to this table showing that 

market price on the date of the grant.67

• If the grant date is different from the 

date the compensation committee or full 

board of directors takes action or is 

deemed to take action to grant an 

option, a separate, adjoining column 

would have to be added to this table 

showing the date the compensation 

committee or full board of directors took 

action or was deemed to take action to 

grant the option.68

Further, if the exercise or base price 

of an option grant is not the closing 

market price per share on the grant date, 

we require a description of the 

methodology for determining the 

exercise or base price.69

b. Compensation Discussion and 

Analysis 

Companies will also be required to 

address matters relating to executives’

option compensation in the new 

Compensation Discussion and Analysis 

section, particularly as they relate to the 

timing and pricing of stock option 

grants. Without being an exhaustive list, 

several of the examples provided in 

Item 402(b)(2) illustrate how these types 

of issues and questions might be 

covered in a company’s disclosure. For 

example, Item 402(b)(2)(iv) shows that 

how the determination is made as to 

when awards are granted could be 

required disclosure. This example was 

included in part to note that material 

information to be disclosed under 

Compensation Discussion and Analysis 

may include the reasons a company 

selects particular grant dates for awards, 

such as for stock options. Similarly, 

other examples we provide in Item 

402(b)(2) illustrate how the material 

information to be disclosed under 

Compensation Discussion and Analysis 

might need to include the methods a 

company uses to select the terms of 

awards, such as the exercise prices of 

stock options. 

i. Timing of Option Grants 

We understand that some companies 

grant options in coordination with the 

release of material non-public 

information. If the company had since 

the beginning of the last fiscal year, or 

intends to have during the current fiscal 

year, a program, plan or practice to 

select option grant dates for executive 

officers in coordination with the release 

of material non-public information, the 

company should disclose that in the 

Compensation Discussion and Analysis 

section. For example, a company may 

grant awards of stock options while it 

knows of material non-public 

information that is likely to result in an 

increase in its stock price, such as 

immediately prior to a significant 

positive earnings or product 

development announcement. Such 

timing could occur in at least two ways: 

• The company grants options just 

prior to the release of material nonpublic information that is likely to 

result in an increase in its stock price 

(whether the date of that release of 

material non-public information is a 

regular date or otherwise preannounced, or not); or 

• The company chooses to delay the 

release of material non-public 

information that is likely to result in an 

increase in its stock price until after a 

stock option grant date. 

Although the facts would be slightly 

different, a company also may 

coordinate its grant of stock options 

with the release of negative material 

non-public information. Again, such 

timing could occur in at least two ways: 

• The company delays granting 

options until after the release of material 

non-public information that is likely to 

result in a decrease in its stock price; or 

• The company chooses to release 

material non-public information that is 

likely to result in a decrease in its stock 

price prior to an upcoming stock option 

grant. 

The Commission does not express a 

view as to whether or not a company 

may or may not have valid and 

sufficient reasons for such timing of 

option grants, consistent with a 

company’s own business purposes. 

Some commentators have expressed the 

view that following these practices may 

enable a company to receive more 

benefit from the incentive or retention 

effect of options because recipients may 

value options granted in this manner 

more highly or because doing so 

provides an immediate incentive for 

employee retention because an 

employee who leaves the company 

forfeits the potential value of unvested, 

in-the-money options. Other 

commentators believe that timing option 

grants in connection with the release of 

material non-public information may 

unfairly benefit executives and 

employees. 

Regardless of the reasons a company 

or its board may have, the Commission 

believes that in many circumstances the 

existence of a program, plan or practice 

to time the grant of stock options to 

executives in coordination with material 

non-public information would be 

material to investors and thus should be 

fully disclosed in keeping with the rules 

we adopt today. Consistent with 

principles-based disclosure, companies 

should consider their own facts and 

circumstances and include all relevant 

material information in their 

corresponding disclosures.70 If the 

company has such a program, plan or 

practice, the company should disclose 

that the board of directors or 

compensation committee may grant 

options at times when the board or 

committee is in possession of material 

non-public information. Companies 

might also need to consider disclosure 

about how the board or compensation 

committee takes such information into 


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53164 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

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. 

72See Jeffrey N. Gordon, Executive 

Compensation: What’s the Problem, What’s 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). 

73See, 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. 

74See, 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’’). 

account when determining whether and 

in what amount to make those grants. 

Although it is not an exhaustive list, 

there are some elements and questions 

about option timing to which we believe 

a company should pay particular 

attention when drafting the appropriate 

corresponding disclosure. 

• Does a company have any program, 

plan or practice to time option grants to 

its executives in coordination with the 

release of material non-public 

information? 

• How does any program, plan or 

practice to time option grants to 

executives fit in the context of the 

company’s program, plan or practice, if 

any, with regard to option grants to 

employees more generally? 

• What was the role of the 

compensation committee in approving 

and administering such a program, plan 

or practice? How did the board or 

compensation committee take such 

information into account when 

determining whether and in what 

amount to make those grants? Did the 

compensation committee delegate any 

aspect of the actual administration of a 

program, plan or practice to any other 

persons? 

• What was the role of executive 

officers in the company’s program, plan 

or practice of option timing? 

• Does the company set the grant date 

of its stock option grants to new 

executives in coordination with the 

release of material non-public 

information? 

• Does a company plan to time, or has 

it timed, its release of material nonpublic information for the purpose of 

affecting the value of executive 

compensation? 

Disclosure would also be required 

where a company has not previously 

disclosed a program, plan or practice of 

timing option grants, but has adopted 

such a program, plan or practice or has 

made one or more decisions since the 

beginning of the past fiscal year to time 

option grants. 

ii. Determination of Exercise Price 

Separate from these timing issues, 

some companies may have a program, 

plan or practice of awarding options and 

setting the exercise price based on the 

stock’s price on a date other than the 

actual grant date. Such a program, plan 

or practice would also require 

disclosure, including, as appropriate, in 

the tables described in II.A.2.a above 

and in the Compensation Discussion 

and Analysis section. Again, as with the 

timing matters discussed above, 

companies should consider their own 

facts and circumstances and include all 

relevant material information in their 

corresponding disclosures. 

Similar to such a practice of setting 

the exercise price based on a date other 

than the actual grant date, some 

companies have provisions in their 

option plans or have followed practices 

for determining the exercise price by 

using formulas based on average prices 

(or lowest prices) of the company’s 

stock in a period preceding, 

surrounding or following the grant date. 

In some cases these provisions may 

increase the likelihood that recipients 

will be granted in-the-money options. 

As these provisions or practices relate to 

a material term of a stock option grant, 

they should be discussed in the 

Compensation Discussion and Analysis 

section. 

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 company’s compensation for 

named executive officers by answering 

the following questions: 

• What are the objectives of the 

company’s 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 

company’s decisions regarding that 

element fit into the company’s 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. 


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

76See, e.g., letters from CFA Centre 1 and Hewitt 

Associates LLC (‘‘Hewitt’’). 

77See letter from ABA. 

78We 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. 

79This example had been proposed as Item 

402(f)(1)(iv). 

80See letter from ABA. 

81This example is discussed in more detail above 

in Section II.A., the discussion of stock option 

disclosure. 

82See, 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. 

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 longterm 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 company’s performance and the 

executive’s 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 company’s 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 executive’s 

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 

company’s 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 

company’s 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 

company’s compensation policy or 

decisions with respect to a named 


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53166 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

83See, e.g., letters from Amalgamated Bank LongView 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. 

84See letter from Anonymous, dated April 10, 

2006. 

85See, e.g., letters from Buck Consultants; 

Frederic W. Cook & Co.; and Mercer Human 

Resource Consulting, Inc., dated April 10, 2006 

(‘‘Mercer’’). 

86Forward 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). 

88See 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. 

90See, 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). 

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

(‘‘Sullivan’’). 

92See, e.g., letter from Mercer. 

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 posttermination 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 year’s 

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 officer’s 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 

company’s 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 company’s goal of payfor-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 company’s 

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 


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93See 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)]. 

94While 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 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. 

95See 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]. 

97See letter from ABA. 

98 15 U.S.C. 78r. 

99Exchange 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 

registrant’s proxy or information statement as and 

when filed’’). 

100Exchange Act Rules 13a–15 [17 CFR 240.13a–

15] and 15d–15 [17 CFR 240.15d–15]. 

101 1992 Release, at Section II.H. 

102See 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). 

103See, 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’’). 

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, nondisclosure 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 commenter’s 

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 company’s 

disclosure controls and procedures 100

apply to the preparation of the 

company’s 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 today’s 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 


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104See, 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. 

105See, 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. 

106We 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. 

107See, e.g., letters from J. Brill 1; California State 

Teachers’ Retirement System (‘‘CalSTRS’’); CFA 

Centre 1; and Professor William J. Heisler. 

108The 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). 

111We 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. 

112Prior 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). 

113Section II.B.3. 

114See, 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. 

115New 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 

committee’s deliberative process, 

potentially calling into question the 

committee’s 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 company’s annual report on Form 

10–K and, as applicable, the company’s 

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 

company’s 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 company’s 

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 company’s 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 

company’s 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 company’s 

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 

Registrant’s Common Equity and 

Related Stockholder Matters.’’ 115 As 


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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.’’

117The tabular disclosure and related narrative 

disclosure under amended Item 402 applies, as it 

did prior to today’s amendments, to named 

executive officers, with amended Item 402(k) 

applying to directors, as described in Section II.C.9. 

below. As discussed below in Section II.C.6.a., we 

are adopting certain changes to the definition of 

named executive officer. 

118The table supplementing the Summary 

Compensation Table is the Grants of Plan-Based 

Awards Table, discussed below in Section II.C.2., 

which combines into a single table the disclosure 

of the proposed Grants of Performance-Based 

Awards Table and the proposed Grants of All Other 

Equity Awards Table. The accompanying narrative 

disclosure requirement is discussed below in 

Section II.C.3.a. 

119Under the disclosure rules as adopted, these 

interests will be disclosed as current compensation 

for those prior years. 

120 Information regarding holdings of such equitybased interests that relate to compensation will be 

disclosed in the Outstanding Equity Awards at 

Fiscal Year-End Table, discussed below in Section 

II.C.4.a. Information regarding realization on 

holdings of equity-based interests will be required 

in the Option Exercises and Stock Vested Table 

discussed below in Section II.C.4.b. 

121 Disclosure regarding retirement and postemployment compensation is required in the 

Pension Benefits Table, discussed below in Section 

II.C.5.a., the Nonqualified Deferred Compensation 

Table, discussed below in Section II.C.5.b., and the 

narrative disclosure requirement for other potential 

post-employment payments discussed below in 

Section II.C.5.c. 

122See, e.g., letters from CFA Centre 1; jointly, 

Jennifer Clowes, Lindsey Erskine, Kendra Freeck 

and Kapri Malesich; F&P Pension Board; IAM; 

IBEW PBF; Plumbers & Pipefitters National Pension 

Fund; and Standard Life. 

123Prior to today’s amendments, an instruction to 

Item 402(b) permitted the exclusion of information 

for fiscal years prior to the last completed fiscal 

year if the company was not a reporting company 

pursuant to Exchange Act Section 13(a) or 15(d) at 

any time during that year, unless the company 

previously was required to provide information for 

any such year in response to a Commission filing 

requirement. This instruction has been retained and 

redesignated as Instruction 1 to Item 402(c) in the 

amended rule. 

retained, the Performance Graph will 

continue to be ‘‘furnished’’ rather than 

‘‘filed.’’ The Performance Graph will be 

required only in the company’s 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

C. Compensation Tables 

To enhance the benefits of the tabular 

approach to eliciting compensation 

disclosure,117 we proposed to reorganize 

and streamline the tables to provide a 

clearer and more logical picture of total 

compensation and its elements for 

named executive officers. We are 

adopting reorganized compensation 

tables and related narrative disclosure 

that cover three broad categories: 

1. Compensation with respect to the 

last fiscal year (and the two preceding 

fiscal years), as reflected in a revised 

Summary Compensation Table that 

presents compensation paid currently or 

deferred (including options, restricted 

stock and similar grants) and 

compensation consisting of current 

earnings or awards that are part of a 

plan, and as supplemented by one table 

providing back-up information for 

certain data in the Summary 

Compensation Table; 118

2. Holdings of equity-based interests 

that relate to compensation or are 

potential sources of future 

compensation, focusing on 

compensation-related equity-based 

interests that were awarded in prior 

years 119 and are ‘‘at risk,’’ as well as 

recent realization on these interests, 

such as through vesting of restricted 

stock or the exercise of options and 

similar instruments; 120 and 

3. Retirement and other postemployment compensation, including 

retirement and deferred compensation 

plans, other retirement benefits and 

other post-employment benefits, such as 

those payable in the event of a change 

in control.121

Reorganizing the tables along these 

themes should help investors 

understand how compensation 

components relate to each other. At the 

same time, we are retaining the ability 

for investors to use the tables to 

compare compensation from year to 

year and from company to company. 

As we noted in the Proposing Release, 

by more clearly organizing the 

compensation tables to explain how the 

elements relate to each other, we may in 

some situations be requiring disclosure 

of both amounts earned (or potentially 

earned) and amounts subsequently paid 

out. This approach raises the possible 

perception of ‘‘double counting’’ some 

elements of compensation in multiple 

tables. However, a particular item of 

compensation only appears once in the 

Summary Compensation Table. In order 

to explain the item of compensation, it 

may also appear in one or more of the 

other tables. We believe the possible 

perception of double disclosure is 

outweighed by the clearer and more 

complete picture the disclosure in the 

additional tables will provide to 

investors. We strongly encourage 

companies to use the narrative 

following the tables (and where 

appropriate the Compensation 

Discussion and Analysis) to explain 

how disclosures relate to each other in 

their particular circumstances. 

Commenters stated their general 

support for the format and presentation 

of the proposed tables.122 We are 

adopting the tables substantially as 

proposed with some revisions, as noted 

below, in response to comments. 

1. Compensation to Named Executive 

Officers in the Last Three Completed 

Fiscal Years—The Summary 

Compensation Table and Related 

Disclosure 

Under today’s amendments, the 

Summary Compensation Table 

continues to serve as the principal 

disclosure vehicle regarding executive 

compensation. This table, as amended, 

shows the named executive officers’

compensation for each of the last three 

years, whether or not actually paid out. 

Consistent with the requirements prior 

to today’s amendments, the amended 

Summary Compensation Table 

continues to require disclosure of 

compensation for each of the company’s 

last three completed fiscal years.123

As we proposed, the amendments add 

disclosure of a figure representing total 

compensation, as reflected in other 

columns of the Summary Compensation 

Table, and simplify the presentation 

from that of the table prior to these 

amendments. As described in greater 

detail below, the amendments also 

provide for a supplemental table 

disclosing additional information about 

grants of plan-based awards. Narrative 

disclosure will follow the two tables, 

providing disclosure of material 

information necessary to an 

understanding of the information 

disclosed in the tables. 


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124 ‘‘PEO’’ refers to principal executive officer. 

See Section II.C.6.a. below for a description of the 

proposed named executive officers for whom 

compensation disclosure is required. 

125 ‘‘PFO’’ refers to principal financial officer. 

126 Instruction 2 to Item 402(c) (requiring all 

compensation values in the Summary 

Compensation Table to be reported in dollars and 

rounded to the nearest dollar). Prior to today’s 

amendments, some stock-based compensation was 

disclosed in per share increments rather than in 

dollar amounts. Instruction 2 to Item 402(c) further 

requires, where compensation was paid or received 

in a different currency, footnote disclosure 

identifying that currency and describing the rate 

and methodology used for conversion to dollars. 

127See, e.g., letters from CFA Centre 1; CII; 

Frederic W. Cook & Co.; ISS; Standard Life; and 

Walden. In addition, over 20,000 form letters from 

individuals specifically supported this proposal. 

See Letter Type A, available at www.sec.gov/rules/ 

proposed/s70306.shtml. 

128See, e.g., letters from Fenwick & West LLP 

(‘‘Fenwick’’); Chamber of Commerce; and Hodak 

Value Advisors, LLC (‘‘Hodak Value Advisors’’). 

129See, e.g., letters from Caterpillar Inc. and 

Corporate Library. 

130See, e.g., letters from Business Roundtable 

(‘‘BRT’’) and Mercer. 

131See, e.g., letters from Eli Lilly and Company 

(‘‘Eli Lilly’’); Hewitt; Society of Corporate 

Secretaries & Governance Professionals (‘‘SCSGP’’); 

Towers Perrin, dated April 10, 2006 (‘‘Towers 

Perrin’’); and Watson Wyatt Worldwide (‘‘Watson 

Wyatt’’). 132Compensation is generally calculated in a 

manner that reflects the cost of the compensation 

to the company and its shareholders. 133See, e.g., letter from ABA (noting that option 

grants made early in the year may be viewed by the 

compensation committee primarily as an award for 

the prior year’s performance or as an incentive for 

future performance). 134The approach as to the timing of disclosure 

that we proposed and that we adopt today is the 

same approach that has been used in the Summary 

Compensation Table since it was first proposed in 

1992. See Executive Compensation Disclosure, 

Release No. 33–6940 (June 23, 1992) [57 FR 29582] 

(noting that the Summary Compensation Table will 

‘‘provide shareholders a concise, comprehensive 

overview of compensation awarded, earned or paid 

in the reporting period’’). 

SUMMARY COMPENSATION TABLE

Name and principal position Year Salary 

($) 

Bonus 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-equity incentive 

plan compensation 

($) 

Change 

in pension value 

and nonqualified 

deferred 

compensation 

earnings 

($) 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

PEO 124

PFO 125

A 

B 

C 

a. Total Compensation Column 

We are modifying the Summary 

Compensation Table to provide a clearer 

picture of total compensation. As we 

proposed, we are requiring that all 

compensation be disclosed in dollars 

and that a total of all compensation be 

provided.126 The new ‘‘Total’’ column 

aggregates the total dollar value of each 

form of compensation quantified in the 

other columns (revised columns (c) 

through (i)). This column responds to 

concerns that investors, analysts and 

other users of Item 402 disclosure have 

not been able to compute aggregate 

amounts of compensation using the 

disclosure in the table as specified prior 

to these amendments in a manner that 

was accurate or comparable across years 

or companies. Many commenters 

expressed their support for the proposal 

to include a Total column.127

Other commenters expressed 

concerns that, as proposed, the total 

number was an amalgam of dissimilar 

types of compensation.128 These 

concerns centered on the mix of 

compensation elements reported in the 

Summary Compensation Table being 

measured at different times and having 

different valuation methods, so that a 

Total column in effect would combine 

‘‘apples’’ with ‘‘oranges.’’ 129 To address 

this issue, some commenters suggested 

dividing the Total column into two 

separate columns reporting Total Earned 

Compensation and Total Contingent 

Compensation.130 Others recommended 

two separate Summary Compensation 

Tables—one for compensation that had 

been earned or realized and another for 

compensation that remained contingent 

or an opportunity.131

As we noted in the Proposing Release, 

the Summary Compensation Table is 

designed to disclose all compensation. 

Each element of compensation is only 

disclosed once in the Summary 

Compensation Table, although it may 

also be disclosed in some of the other 

tables. We realize that the timing of 

when particular items of compensation 

are disclosed in the Summary 

Compensation Table varies depending 

on the form of the compensation.132

Given the various forms and 

complexities of compensation and the 

different periods they may be designed 

to relate to,133 it is unavoidable that the 

timing of disclosure may vary from 

element to element in this table.134


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135See, e.g., letters from ACC; Amalgamated; BDO 

Seidman, LLP (‘‘BDO Seidman’’); CII; IUE–CWA; 

and Mercer. 

136See, e.g., letters from CII; IUE–CWA; and 

CRPTF. Information about the amounts that could 

be earned under non-equity incentive plans is 

required to be disclosed in the Grants of Plan-Based 

Awards Table when such awards are granted. 

137See Section II.C.1.d.i. below, which describes 

a modification of the proposed Summary 

Compensation Table disclosure of nonqualified 

deferred compensation earnings to present only the 

above-market or preferential portion in this table. 

138See Section II.C.6.b. below describing how in 

response to commenters this column is excluded 

from total compensation for the purpose of 

identifying named executive officers. 

139Columns (a) and (b) specify the executive 

officer and the year in question. 

140See,e.g., letters from Buck Consultants; 

Frederic W. Cook & Co.; and SCSGP. 

141 Instruction 4 to Item 402(c). 

142Prior to the amendments, this requirement was 

triggered only if the officer elected the deferral. We 

are amending this requirement as we proposed to 

cover all deferrals, no matter who has initiated the 

deferrals. 

143See Section II.C.5.b., describing the 

Nonqualified Deferred Compensation Table. 

Disclosure of these amounts as contributions will 

now be required for nonqualified deferred 

compensation plans. This disclosure will not be 

required for qualified plans. Nonqualified deferred 

compensation plans and arrangements provide for 

the deferral of compensation that does not satisfy 

the minimum coverage, nondiscrimination and 

other rules that ‘‘qualify’’ broad-based plans for 

favorable tax treatment under the Internal Revenue 

Code. 

144See, e.g., letter from WorldatWork. As 

described in Section II.C.5.b. below, however, we 

have adopted the corresponding footnote proposed 

for the Nonqualified Deferred Compensation Table. 

145New Item 5.02(f) of Form 8–K and Instruction 

1 to Item 402(c)(2)(iii) and (iv). Prior to these 

amendments, in the event that such amounts were 

not determinable at the most recent practicable 

date, they were generally reported in the annual 

report on Form 10–K or proxy statement for the 

following fiscal year. We believe providing the 

information more quickly is appropriate and are 

therefore adopting the use of a current report on 

Form 8–K. Instruction 1 to Item 402(c)(2) (iii) and 

(iv) requires that the company disclose in a footnote 

that the salary or bonus is not calculable through 

the latest practicable date and the date that the 

salary or bonus is expected to be determined. We 

proposed to include this requirement in an 

instruction to proposed paragraph (e) of Item 5.02 

of Form 8–K. We are adopting it as a separate 

paragraph of Item 5.02 in order to make it clearer 

that it is a separate triggering event. 

146 Generally speaking, a restricted stock award is 

an award of stock subject to vesting conditions, 

such as performance-based conditions or conditions 

based on continued employment for a specified 

period of time. This type of award is referred to as 

‘‘nonvested equity shares’’ in FAS 123R. Phantom 

stock, phantom stock units, common stock 

equivalent units and other similar awards are 

typically awards where an executive obtains a right 

to receive payment in the future of an amount based 

on the value of a hypothetical, or notional, amount 

of shares of common equity (or in some cases stock 

based on that value). To the extent that the terms 

of phantom stock, phantom stock units, common 

stock equivalents or other similar awards include 

option-like features, the awards will be required to 

Continued 

We note that some commenters were 

particularly concerned that non-equity 

incentive plan awards are reported 

when earned, while equity incentive 

plan awards are reported based on grant 

date value when awarded.135 No single 

accepted standard for measuring nonequity incentive plan awards at grant 

date currently exists. Some commenters 

nonetheless suggested that we require 

grant date fair value estimates of nonequity incentive plan awards in the 

Summary Compensation Table.136 We 

do not believe it is appropriate at this 

time for us to develop such a standard 

expressly for compensation disclosure 

purposes. Nevertheless, we believe that 

the Summary Compensation Table that 

we adopt today, including a total of all 

of the various elements presented, 

provides meaningful disclosure to 

investors and allows for comparability 

between companies and within a 

company. 

However, in response to comments, 

we have created a separate column for 

the annual change in actuarial value of 

defined benefit plans and earnings on 

nonqualified deferred compensation.137

As proposed, these compensation 

elements would have been included in 

the aggregate amount reported in the All 

Other Compensation column. We 

believe that presenting these items in a 

separate column will permit investors 

and other users of the Summary 

Compensation Table to readily identify 

elements included in the Total column 

that may relate principally to longevity 

of service. These items will not be used 

to determine the officers included in the 

table.138

We proposed that the new column 

disclosing total compensation would 

appear as the first column providing 

compensation information.139 Some 

commenters suggested moving this 

column to the right of the table, so that 

it would follow—rather than precede—

the relevant component numbers.140 In 

response to these comments, we have 

moved the Total column to the final 

column in the table. 

b. Salary and Bonus Columns 

The first columns providing 

compensation information that we are 

requiring are the salary and bonus 

columns (columns (c) and (d), 

respectively), which are retained 

substantially in their previous form. 

However, we are adopting some 

changes, as proposed, that will give an 

investor a clearer picture of the total 

amount earned. 

As we proposed, compensation that is 

earned, but for which payment will be 

deferred, must be included in the salary, 

bonus or other column, as appropriate. 

A new instruction, applicable to the 

entire Summary Compensation Table, 

provides that if receipt of any amount of 

compensation is currently payable but 

has been deferred for any reason, the 

amount so deferred must be included in 

the appropriate column.141 This 

treatment is no longer limited to salary 

and bonus, as it was prior to these 

amendments, and under the amended 

rules this treatment applies regardless of 

the reason for the deferral.142

We also proposed that the amount so 

deferred must be disclosed in a footnote 

to the applicable column. As described 

below, the amount deferred will also 

generally be reflected as a contribution 

in the deferred compensation 

presentation.143 The proposed footnote 

disclosure was intended to clarify the 

extent to which amounts disclosed in 

the Nonqualified Deferred 

Compensation Table described below 

represent compensation already 

reported, rather than additional 

compensation. Because commenters 

thought it could lead to potential double 

counting, we have not adopted this 

proposed footnote requirement.144

As proposed, we have eliminated the 

delay that existed under the former 

rules where salary or bonus for the most 

recent fiscal year is determined 

following compliance with Item 402 

disclosure. Under our new rules, where 

salary or bonus cannot be calculated as 

of the most recent practicable date, a 

current report under Item 5.02 of Form 

8–K will be triggered by a payment, 

decision or other occurrence as a result 

of which either of such amounts become 

calculable in whole or part.145 The Form 

8–K will include disclosure of the salary 

or bonus amount and a new total 

compensation figure including that 

salary or bonus amount. 

c. Plan-Based Awards 

As we proposed, the next three 

columns—Stock Awards, Option 

Awards and Non-Equity Incentive Plan 

Compensation—cover plan-based 

awards. 

i. Stock Awards and Option Awards 

Columns 

As proposed and adopted, the Stock 

Awards column (column (e)) discloses 

stock-related awards that derive their 

value from the company’s equity 

securities or permit settlement by 

issuance of the company’s equity 

securities and, as we have clarified, are 

thus within the scope of FAS 123R for 

financial reporting, such as restricted 

stock, restricted stock units, phantom 

stock, phantom stock units, common 

stock equivalent units or other similar 

instruments that do not have option-like 

features.146 Valuation is based on the 


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be included in the Option Awards column. Prior to 

these amendments, restricted stock awards were 

valued in the Summary Compensation Table by 

multiplying the closing market price of the 

company’s unrestricted stock on the date of grant 

by the number of shares awarded. 

147Prior to these amendments, these 

performance-based stock awards could be reported 

at the company’s election as incentive plan awards 

under what was then specified in Instruction 1 to 

Item 402(b)(2)(iv). Our amendments today eliminate 

this alternative. 

148A stock appreciation right usually gives the 

executive the right to receive the value of the 

increase in the price of a specified number of shares 

over a specified period of time. These awards may 

be settled in cash or in shares. 

149As proposed, we are eliminating the 

requirement that had been specified in Options/ 

SAR Grants in Last Fiscal Year Table under Item 

402(c)(2)(vi) to report the potential realizable value 

of each option grant under 5% or 10% increases in 

value or the present value of each grant (computed 

under any option pricing model). These alternative 

disclosures are no longer necessary insofar as the 

grant date fair value of equity-based awards is 

included in the Summary Compensation Table. 

150Under FAS 123R, the classification of an 

award as an equity or liability award is an 

important aspect of the accounting because the 

classification will affect the measurement of 

compensation cost. Awards with cash-based 

settlement, repurchase features, or other features 

that do not result in an employee bearing the risks 

and rewards normally associated with share 

ownership for a specified period of time would be 

classified as liability awards under FAS 123R. For 

an award classified as an equity award under FAS 

123R, the compensation cost recognized is fixed for 

a particular award, and absent modification, is not 

revised with subsequent changes in market prices 

or other assumptions used for purposes of the 

valuation. In contrast, liability awards are initially 

measured at fair value on the grant date, but for 

purposes of recognition in financial statement 

reporting are then re-measured at each reporting 

date through the settlement date under FAS 123R. 

These re-measurements would not be the basis for 

executive compensation disclosure under our 

amended rules, unless the award has been 

modified, as described later in this release. 

151See, e.g., letters from the SEC Regulations 

Committee of the American Institute of Certified 

Public Accountants (‘‘AICPA’’); Baker, Donelson, 

Bearman, Caldwell & Berkowitz, P.C.; Chamber of 

Commerce; Computer Sciences Corporation 

(‘‘Computer Sciences’’); Deloitte & Touche LLP; 

Ernst & Young LLP (‘‘E&Y’’); Fenwick; Foley; HR 

Policy Association (‘‘HRPA’’); American Bar 

Association, Joint Committee on Employee Benefits 

(‘‘ABA–JCEB’’); and KPMG LLP (‘‘KPMG’’). 

152See, e.g., letters from CalPERS; CFA Centre 1; 

CRPTF; L. Burns; Governance for Owners; Laborers 

International Union of North America; Nancy Lucke 

Ludgus (‘‘N. Ludgus’’); Institutional Investors 

Group; State Board of Administration (SBA) of 

Florida (‘‘SBAF’’); Teamsters Local 671; Teamsters 

PA/MD; United Church Foundation, Inc. (‘‘UCF’’); 

Washington State Investment Board (‘‘WSIB’’); and 

Western PA Teamsters Fund. 

153 Item 402(c)(2)(v) and (vi). 

154FAS 123R requires a company to aggregate 

individuals receiving awards into relatively 

homogenous groups with respect to exercise and 

post-vesting employment termination behaviors for 

the purpose of determining expected term, for 

example executives and non-executives. The rules 

we adopt today are not intended to change the 

method used to value employee stock options for 

purposes of FAS 123R or to affect the judgments as 

to reasonable groupings for purposes of determining 

the expected term assumption required by FAS 

123R. Under the rules we adopt today, where a 

company uses more than one group, the 

measurement of grant date fair value for purposes 

of Item 402 would be derived using the expected 

term assumption for the group that includes the 

named executive officers (or the group that includes 

directors for purposes of Item 402(k)). 

155See Section II.C.2., discussing the Grants of 

Plan-Based Awards Table required by Item 402(d). 

156 Instruction 1 to Item 402(c)(2)(v) and (vi). 

grant date fair value of the award 

determined pursuant to FAS 123R for 

financial reporting purposes. Stock 

awards granted pursuant to an equity 

incentive plan are also included in this 

column to ensure consistent reporting of 

stock awards and to ensure their 

inclusion in the revised Summary 

Compensation Table.147

Awards of options, stock appreciation 

rights, and similar equity-based 

compensation instruments that have 

option-like features that, as we have 

clarified, are within the scope of FAS 

123R, must be disclosed in the Option 

Awards column (column (f)) in a 

manner similar to the treatment of stock 

and other equity-based awards under 

the amendments.148 Instead of the 

disclosure of the number of securities 

underlying the awards as was the case 

prior to today’s amendments, this 

column requires disclosure of the grant 

date fair value of the award as 

determined pursuant to FAS 123R. In 

order to calculate a total dollar amount 

of compensation, the value rather than 

the number of securities underlying an 

award must be used. The FAS 123R 

valuation must be used whether the 

award itself is in the form of stock, 

options or similar instruments or the 

award is settled in cash but the amount 

of payment is tied to performance of the 

company’s stock.149

Under FAS 123R, the compensation 

cost is initially measured based on the 

grant date fair value of an award,150 and 

generally recognized for financial 

reporting purposes over the period in 

which the employee is required to 

provide service in exchange for the 

award (generally the vesting period). 

Some commenters suggested that rather 

than requiring disclosure of the grant 

date fair value of equity awards, we 

should require a company to disclose 

just the portion of the award expensed 

in the company’s financial 

statements.151 These commenters 

expressed concerns that disclosing the 

full grant date fair value would be 

inconsistent with the company’s 

financial statements, would overstate 

compensation earned related to service 

rendered for the year, and would be 

inconsistent with the presentation of 

non-equity incentive plan 

compensation. Other commenters 

expressed support for requiring 

companies to report the full grant date 

fair value in the year of the award 

because it would provide a more 

complete representation of 

compensation.152

We are adopting these columns 

substantially as proposed.153 Under our 

amendments, the compensation cost 

calculated as the grant date fair value 

will be shown as compensation in the 

year in which the grant is made.154 As 

we stated in the Proposing Release, we 

believe that this approach is more 

consistent with the purpose of executive 

compensation disclosure. We are 

adopting an approach that subscribes to 

the measurement method of FAS 123R 

based on grant date fair value, but also 

provides for immediate disclosure of 

compensation. This timing of disclosure 

of option awards remains the same as it 

has been since 1992. The only change is 

that the awards are now disclosed in 

dollars rather than numbers of units or 

shares. Disclosing these awards as they 

are expensed for financial statement 

reporting purposes would not mirror the 

timing of disclosure of non-equity 

incentive plan compensation. While we 

have imported a financial statement 

reporting principle to enable disclosure 

of compensation costs, executive 

compensation disclosure must continue 

to inform investors of current actions 

regarding plan awards—a function that 

would not be fulfilled applying 

financial reporting recognition timing. If 

a company does not believe that the full 

grant date fair value reflects 

compensation earned, awarded or paid 

during a fiscal year, it can provide 

appropriate explanatory disclosure in 

the accompanying narrative section. 

Furthermore, disclosing grant date fair 

value will give investors a clearer 

picture of the value of any in-the-money 

awards. As we proposed, the number of 

shares underlying an award and other 

details regarding the award must be 

disclosed in a separate table covering 

grants of plan-based awards 

supplementing the Summary 

Compensation Table.155 This 

supplemental table, which combines the 

disclosure that would have been 

required by the proposed Grants of 

Performance-Based Awards Table and 

Grants of All Other Equity Awards 

Table, discloses equity awards granted 

pursuant to incentive plans separately 

from other equity awards. 

We are adopting as proposed an 

instruction that requires a footnote 

referencing the discussion of the 

relevant assumptions in the notes to the 

company’s financial statements or the 

discussion of relevant assumptions in 

the MD&A.156 The same instruction also 


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157See Exchange Act Rule 14a–3 [17 CFR 

240.14a–3]. 

158 In addition, in December 2005, we proposed 

rules that would allow companies and other 

persons to use the Internet to satisfy proxy material 

delivery requirements. Internet Availability of Proxy 

Materials, Release No. 34–52926 (Dec. 8, 2005) [70 

FR 74597]. 

159See, e.g., letters from Buck Consultants; CII; 

Frederic W. Cook & Co.; and IUE–CWA. 

160See, e.g., letters from AICPA; Cleary Gottlieb 

Steen & Hamilton LLP (‘‘Cleary’’); Compass 

Bancshares; Cravath, Swaine & Moore LLP 

(‘‘Cravath’’); Hewitt; KPMG; Leggett & Platt, 

Incorporated (‘‘Leggett & Platt’’); SCSGP; and 

Sullivan. 

161 Instruction 2 to Item 402(c)(2)(v) and (vi). 

162 Generally speaking, reload or restorative 

options are grants of new options that are granted 

automatically when an executive exercises the old 

option. Reload or restorative options are treated as 

new grants under FAS 123R. 

163See, e.g., letters from Cleary; Emerson Electric 

Co. (‘‘Emerson’’); Foley; Hewitt; SCSGP; and 

Towers Perrin. 

164 Item 402(c)(2)(ix)(G). 

165 Item 402(e)(1)(iii), discussed in Section 

II.C.3.a. below. 

166See, e.g., letter from ABA. 

167 Item 402(a)(6)(iii). An equity incentive plan 

includes plans that have a performance or market 

condition. As defined in Appendix E of FAS 123R, 

a performance condition is ‘‘a condition affecting 

the vesting, exercisability, exercise price or other 

pertinent factors used in determining the fair value 

of an award that relates to both (a) an employee’s 

rendering service for a specified (either explicitly or 

implicitly) period of time and (b) achieving a 

specified performance target that is defined solely 

by reference to the employer’s own operations (or 

activities). Attaining a specified growth rate in 

return on assets, obtaining regulatory approval to 

market a specified product, selling shares in an 

initial public offering or other financing event, and 

a change in control are examples of performance 

conditions for purposes of this Statement. A 

performance target also may be defined by reference 

to the same performance measure of another entity 

or group of entities. For example, attaining a growth 

rate in earnings per share that exceeds the average 

growth rate in earnings per share of other entities 

in the same industry is a performance condition for 

purposes of this Statement. A performance target 

might pertain either to the performance of the 

enterprise as a whole or to some part of the 

enterprise, such as a division or an individual 

employee.’’ An award also would be considered to 

have a performance condition if it is subject to a 

market condition, which is ‘‘a condition affecting 

the exercise price, exercisability, or other pertinent 

factors used in determining the fair value of an 

award under a share-based payment arrangement 

that relates to the achievement of (a) a specified 

price of the issuer’s shares or a specified amount 

of intrinsic value indexed solely to the issuer’s 

shares or (b) a specified price of the issuer’s shares 

in terms of a similar (or index of similar) equity 

security (securities).’’ An award that vests on an 

accelerated basis upon the occurrence of a change 

in control is not considered an award under an 

equity incentive plan if (a) the award contains no 

other performance or market conditions and (b) the 

award would otherwise vest based on the 

completion of a specified employee service period. 

168 Item 402(a)(6)(iii). See also discussion of the 

definition of ‘‘incentive plan’’ at Section II.C.1.f. 

below. 

169 Item 402(c)(2)(vii). An incentive plan 

generally provides for compensation intended to 

serve as an incentive for performance to occur over 

a specified period, whether such performance is 

measured by reference to financial performance of 

the company or an affiliate, the company’s stock 

price, or any other performance measure. See Item 

402(a)(6)(iii) for the definition of ‘‘incentive plan.’’

170Awards disclosed in this column, column (g), 

are not covered by FAS 123R for financial reporting 

purposes because they do not involve share-based 

payment arrangements. Awards that involve sharebased payment arrangements should be disclosed in 

the Stock Awards or Option Awards columns, as 

appropriate. 

provides that the referenced sections 

will be deemed to be part of the 

disclosure provided pursuant to Item 

402. The referenced sections containing 

this disclosure are required in the 

company’s annual report to 

shareholders that must precede or 

accompany the company’s proxy 

statement.157 In the case of Internet 

disclosure of proxy materials, 

companies could provide hyperlinks 

from the proxy statement to the 

referenced sections contained in the 

annual report.158 While some 

commenters recommended requiring 

these valuation assumptions to be 

presented in the proxy statement,159 we 

believe that investors will be able to 

easily access this information without 

requiring it to be repeated from other 

documents. 

We proposed that previously awarded 

options or freestanding stock 

appreciation awards that the company 

repriced or otherwise materially 

modified during the last fiscal year be 

disclosed in the Summary 

Compensation Table based on the total 

fair value of the award as so modified. 

Under FAS 123R, only the incremental 

fair value, computed as of the repricing 

or modification date, is recognized for 

such an award. Several commenters 

recommended conforming Summary 

Compensation Table reporting to the 

incremental fair value recognition 

approach of FAS 123R, objecting that 

the proposed total fair value approach 

would inappropriately double count the 

fair value of many modified awards.160

As adopted, the new rules reflect this 

recommendation.161 Grants of reload or 

restorative options, however, are 

reportable based on total grant date fair 

value because they are new awards that 

do not replace previously cancelled 

awards.162

We proposed that all earnings, such as 

dividends, be included in the Stock 

Awards and Option Awards columns 

when paid. Several commenters noted 

that the value of the right to receive 

dividends is factored into the grant date 

fair value computed under FAS 123R.163

If the stock award or option award 

entitles the holder to receive dividends, 

then such ‘‘dividend protection’’ is 

included in the grant date fair value 

computed under FAS 123R. We are 

persuaded by the commenters that 

subsequent disclosure of the value of 

dividends in these circumstances, as 

they are received, would repeat in the 

same table compensation that was 

previously disclosed. Therefore, we 

have revised the requirement. However, 

we note that if the stock award or option 

award does not entitle the holder to 

receive dividends, then ‘‘dividend 

protection’’ is not included in the grant 

date fair value computed under FAS 

123R. Accordingly, the value of any 

dividends received would not have been 

previously disclosed in the Summary 

Compensation Table as part of the grant 

date fair value of the award. In order to 

appropriately capture the compensation 

in these latter circumstances, we are 

adopting a requirement to disclose any 

earnings on stock awards or option 

awards that are not included in the 

grant date fair value computation for 

those awards in the All Other 

Compensation column of the Summary 

Compensation Table when the 

dividends or other earnings are paid.164

In addition, the material terms of any 

equity award (including whether 

dividends will be paid, the applicable 

dividend rate and whether that rate is 

preferential) may be factors to be 

discussed in the related narrative 

section.165

We had proposed a definition of 

‘‘non-stock incentive plan’’ that some 

commenters stated would result in 

confusing and potentially anomalous 

treatment of some awards.166 To clarify 

the reporting treatment of different 

types of awards, we have: 

• Adopted a separate definition of 

‘‘equity incentive plan’’ as ‘‘an incentive 

plan or portion of an incentive plan 

under which awards are granted that fall 

within the scope of FAS 123R’’; 167 and 

• Defined ‘‘non-equity incentive 

plan’’ as ‘‘an incentive plan or portion 

of an incentive plan that is not an equity 

incentive plan.’’ 168

ii. Non-Equity Incentive Plan 

Compensation Column 

The Non-Equity Incentive Plan 

Compensation column (column (g)) will 

report, as proposed, the dollar value of 

all amounts earned during the fiscal 

year pursuant to non-equity incentive 

plans.169 This column includes all other 

incentive plan awards not included in 

the stock awards and option awards 

columns.170 Compensation awarded 

under an incentive plan that is not 

within the scope of FAS 123R will be 

disclosed in the Summary 

Compensation Table in the year when 

the relevant specified performance 

criteria under the plan are satisfied and 

the compensation earned, whether or 


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171See Section II.C.2., discussing the Grants of 

Plan-Based Awards Table. 

172See, e.g., letters from Amalgamated; 

Anonymous Compensation Consultant; BDO 

Seidman; CII; CRPTF; Mercer; and Teamsters Local 

671. See discussion at Section II.C.1.a. above. 

173Prior to these amendments, Items 

402(b)(2)(iv)(C) and 402(e) required disclosure of 

long-term incentive plan payouts when earned. 

174See, e.g., letters from Mercer; Watson Wyatt; 

and Richard E. Wood. 

175Commenters’ issues concerning the scope of 

awards reportable in this column, in particular as 

compared to compensation reportable in the bonus 

column, are discussed in Section II.C.1.f. below. 

176 Item 402(c)(2)(vii). These earnings were 

reportable prior to today’s amendments in the Other 

Annual Compensation or All Other Compensation 

columns of the Summary Compensation Table 

under Items 402(b)(2)(iii)(C)(3) and 402(b)(2)(v)(C), 

respectively. 

177See the discussion of the Total column in 

Section II.C.1.a. above and the discussion of 

determination of named executive officers in 

Section II.C.6. below. 

178 Instruction 3 to Item 402(c)(2)(viii). In 

contrast, as proposed to be disclosed in the All 

Other Compensation Column, separate 

identification and quantification of each element 

would have been required only if the element 

exceeded $10,000, although the amounts would 

have been included in that column without regard 

to size. 

179 Instruction 3 to Item 402(c)(2)(viii). 

180Nonqualified defined contribution and other 

nonqualified deferred compensation plans are plans 

providing for deferral of compensation that do not 

satisfy the minimum coverage, nondiscrimination 

and other rules that ‘‘qualify’’ broad-based plans for 

favorable tax treatment under the Internal Revenue 

Code. A typical 401(k) plan, by contrast, is a 

qualified deferred compensation plan. 

181See, e.g., letters from CFA Centre 1 and jointly, 

Lucian A. Bebchuk, Jesse M. Fried and Robert J. 

Jackson, Jr. (‘‘Professor Bebchuk, et al.’’). 

182See, e.g., letters from American Academy of 

Actuaries’ Pension Committee (‘‘Academy of 

Actuaries’’); BRT; Frederic W. Cook & Co.; 

Computer Sciences; Kimball International, Inc.; 

NAM; and Sullivan. 

183 Item 402(c)(2)(viii)(B). 

184 Instruction 2 to Item 402(c)(2)(viii), which is 

based on the language which had appeared in 

Instructions 3 and 4 to Item 402(b)(2)(iii)(C) prior 

to these amendments. 

not payment is actually made to the 

named executive officer in that year. 

The grant of an award under a nonequity incentive plan will be disclosed 

in the supplemental Grants of PlanBased Awards Table in the year of grant, 

which may be some year prior to the 

year in which compensation under the 

non-equity incentive plan is reported in 

the Summary Compensation Table.171

As noted above, several commenters 

recommended Summary Compensation 

Table reporting of non-equity incentive 

plan awards on a grant date fair value 

basis, consistent with the reporting of 

equity incentive plans.172 However, 

because there is not one clearly required 

or accepted standard for measuring the 

value at grant date of these non-equity 

incentive plan awards that reflects the 

applicable performance contingencies, 

as there is for equity-based awards with 

FAS 123R, we are not including such a 

value in the Summary Compensation 

Table. Instead, we continue the 

disclosure approach of reflecting these 

items of compensation when earned.173

Once the disclosure has been 

provided in the Summary 

Compensation Table when the specified 

performance criteria have been satisfied 

and the compensation earned, and the 

grant of the award has been disclosed in 

the Grants of Plan-Based Awards Table, 

no further disclosure will be specifically 

required when payment is actually 

made to the named executive officer. 

Some commenters objected to Summary 

Compensation Table reporting of awards 

for which the relevant performance 

condition has been satisfied that remain 

subject to forfeiture conditions (such as 

conditions requiring continued service 

or conditions that provide for forfeiture 

based on future company 

performance).174 We continue to believe 

that satisfaction of the relevant 

performance condition (including an 

interim performance condition in a long 

term plan) is the event that is material 

to investors for Summary Compensation 

Table reporting purposes. We encourage 

companies to use the related narrative 

section to disclose material features that 

are not reflected in the tabular 

disclosure including, for example, 

subsequent forfeitures of amounts 

reported in the table with respect to 

previous fiscal years.175

As proposed and adopted, earnings on 

outstanding non-equity incentive plan 

awards are also included in the NonEquity Incentive Plan Compensation 

column and identified and quantified in 

a footnote to the table.176

d. Change in Pension Value and 

Nonqualified Deferred Compensation 

Earnings Column 

As we proposed, we are expanding 

the Summary Compensation Table to 

include information regarding the 

aggregate increase in actuarial value to 

the named executive officer of all 

defined benefit and actuarial plans 

(including supplemental plans) accrued 

during the year and earnings on 

nonqualified deferred compensation. 

However, as mentioned above, we have 

decided to present this information in a 

separate column rather than include it 

in the All Other Compensation column 

as proposed.177 Footnote identification 

and quantification of the full amount of 

each element is required.178 Any 

amount attributable to the defined 

benefit and actuarial plans that is a 

negative number should be disclosed by 

footnote, but should not be reflected in 

the amount reported in the column.179

i. Earnings on Deferred Compensation 

We proposed to require disclosure of 

all earnings on compensation that is 

deferred on a basis that is not taxqualified, including non-tax qualified 

defined contribution retirement 

plans.180 Prior to our amendments, 

these earnings were required to be 

disclosed only to the extent of any 

portion that was ‘‘above-market or 

preferential.’’ This limitation generated 

criticism that the rule prior to today’s 

amendments permitted companies to 

avoid disclosure of substantial 

compensation. 

Some commenters supported this 

proposal.181 However, many 

commenters asserted that the Summary 

Compensation Table should continue to 

require disclosure only of earnings at 

above-market or preferential rates.182

Commenters stated that differences in 

earnings on nonqualified deferred 

compensation among executives may 

result entirely from the executives’

investment acumen and decisions as to 

amounts to defer. Commenters further 

claimed that deferred amounts invested 

at market rates are conceptually no 

different from amounts invested directly 

by an executive. Absent providing an 

above-market return, contributing 

additional amounts or guaranteeing 

investment returns, commenters 

asserted that the company has no role in 

the annual growth of the account. 

We are persuaded that Summary 

Compensation Table disclosure of 

nonqualified deferred compensation 

earnings should continue to be limited 

to the above-market or preferential 

portion.183 As under the rule prior to 

these amendments, the above-market or 

preferential portion is determined for 

interest by reference to 120% of the 

applicable federal long-term rate and for 

dividends by reference to the dividend 

rate on the company’s common stock.184

Footnote or narrative disclosure of the 

company’s criteria for determining any 

portion considered to be above-market 

may be provided. The above-market or 

preferential earnings in this column 

would always be positive, as it would 

not be possible for above-market or 

preferential losses to occur. 

However, we do not overlook the fact 

that the company is obligated to pay the 

executive the entire amount of the 

nonqualified deferred compensation 

account, which represents a claim on 

company assets and is part of a plan that 

provides the executive with tax 


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185Nonqualified defined contribution and other 

nonqualified deferred compensation plans are 

generally unfunded, and their taxation is governed 

by Section 409A of the Internal Revenue Code [26 

U.S.C. 409A]. 

186This separate table is discussed in Section 

II.C.5.b. below. 

187See Section II.C.3.a. below. 

188A typical defined contribution plan is a 

retirement plan in which the company and/or the 

executive makes contributions of a specified 

amount, and the amount that is paid out to the 

executive depends on the return on investments 

from the contributed amounts. A typical defined 

benefit plan is a retirement plan in which the 

company pays the executive specified amounts at 

retirement which are not tied to investment 

performance of the contributions that fund the plan. 

189 Item 402(c)(2)(viii)(A). 

190 Instruction 1 to Item 402(c)(2)(viii). Defined 

benefit plans include, for example, cash balance 

plans in which the retiree’s benefit may be 

determined by the amount represented in an 

account rather than based on a formula referencing 

salary while still employed. 

191See Section II.C.5.a., discussing the Pension 

Benefits Table. 

192See, e.g., letters from Academy of Actuaries; 

Frederick W. Cook & Co.; ABA–JCEB; and Mercer. 

193 Item 402(h), discussed in Section III.C.5.a. 

below. 

194 Instruction 1 to Item 402(c)(2)(viii) and 

Instruction 2 to Item (h)(2). Regarding such key 

assumptions as itnerest rate, form of benefit, 

number of years of service, level of compensation 

used to determine the benefit and mortality tables, 

a company must use the same assumptions as it 

applies pursuant to Financial Accounting Standards 

Board Statement of Financial Accounting Standards 

No. 87, Employers’ Accounting for Pensions (FAS 

87) both for this Summary Compensation Table 

column and the separate Pension Benefits Table. 

195See, e.g., letters from Eli Lilly and SCSGP. 

196See Section II.C.6. below. 

197 Item 402(c)(2)(ix). 

198The only exception, as discussed below, is for 

perquisites and personal benefits if they aggregate 

less than $10,00 for a named executive officer. The 

1992 Release, at Section II.A.4., also noted ‘‘the 

revised item includes an express statement that it 

requires disclosure of all compensation to the 

named executive officers and directors for services 

rendered in all capacities to the registrant and its 

subsidiaries.’’ See also Item 402(a)(2) as stated prior 

to these amendments. Further, as described above, 

Summary Compensation Table disclosure of 

nonqualified deferred compensation earnings is 

limited to the above-market or preferential portion 

of earnings. As was previously the case before these 

amendments, companies may omit information 

regarding group life, health, hospitalization and 

medical reimbursement plans that do not 

discriminate in scope, terms or operation in favor 

of executive officers or directors of the company 

and that are available generally to all salaried 

employees. See Item 402(a)(6)(ii). 

benefits.185 To reflect this obligation, we 

have decided to require disclosure of all 

earnings on nonqualified deferred 

compensation in the separate 

Nonqualified Deferred Compensation 

Table, as we proposed.186 The 

disclosure required by that table 

discloses the rate at which the 

company’s obligation grows on an 

annual basis. 

Further, the method of calculating 

earnings on deferred compensation 

plans is an example of a factor that may 

be material and therefore described in 

the narrative disclosure to the Summary 

Compensation Table and the Grants of 

Plan-Based Awards Table.187

ii. Increase in Pension Value 

We proposed to require Summary 

Compensation Table disclosure of the 

aggregate increase in actuarial value to 

the executive officer of defined benefit 

and actuarial plans (including 

supplemental plans) accrued during the 

year. 

In contrast to defined contribution 

plans, for which the Summary 

Compensation Table requires disclosure 

of company contributions, the rules 

prior to our amendments did not require 

disclosure of the annual change in value 

of defined benefit plans, such as 

pension plans, in which the named 

executive officers participated.188 The 

annual increase in actuarial value of 

these plans may be a significant element 

of compensation that is earned on an 

annual basis, thus we proposed to 

include it in the computation of total 

compensation. 

Such disclosure is necessary to permit 

the Summary Compensation Table to 

reflect total compensation for the year. 

Such disclosure also permits a full 

understanding of the company’s 

compensation obligations to named 

executive officers, given that defined 

benefit plans guarantee what can be a 

lifetime stream of payments and allocate 

risk of investment performance to the 

company and its shareholders. In 

addition commentators have noted that 

the absence of such a disclosure 

requirement creates an incentive to shift 

compensation to pensions, results in the 

understatement of non-performancebased compensation, and distorts pay 

comparisons between executives and 

between companies. 

We are adopting the requirement 

substantially as proposed.189 As 

proposed and adopted, an instruction 

specifies that this disclosure applies to 

each plan that provides for the payment 

of retirement benefits, or benefits that 

will be paid primarily following 

retirement, including but not limited to 

tax-qualified defined benefit plans and 

supplemental executive retirement 

plans, but excluding defined 

contribution plans.190 The retirement 

section, discussed below, provides more 

information regarding these covered 

plans.191

Some commenters raised issues 

regarding computation of the amount to 

be disclosed.192 In response to these 

comments, we have revised the 

language of the requirement as adopted 

to clarify that the disclosure applies to 

the change, from the pension plan 

measurement date used for the 

company’s audited financial statements 

for the prior completed fiscal year to the 

pension plan measurement date used for 

the company’s audited financial 

statements for the covered fiscal year, in 

the actuarial present value of the named 

executive officer’s accumulated benefit 

under all defined benefit and actuarial 

pension plans (including supplemental 

plans). The disclosure therefore 

includes both: 

• The increase in value due to an 

additional year of service, compensation 

increases, and plan amendments (if 

any); and 

• The increase (or decrease) in value 

attributable to interest. 

As discussed below, this disclosure 

relates to the disclosure provided in the 

Pension Benefits Table 193 and promotes 

company-to-company comparability. In 

computing the amount to be disclosed, 

the company must use the assumptions 

it uses for financial reporting purposes 

under generally accepted accounting 

principles.194

Other commenters objected to this 

item’s potential to ‘‘distort’’ the Total 

column and the determination of named 

executive officers.195 As described 

above, we continue to believe that 

inclusion of this element in the table is 

necessary to permit the Summary 

Compensation Table to reflect total 

compensation. However, we have 

addressed commenters’ concerns by 

segregating this item and above-market 

or preferential earnings on nonqualified 

deferred compensation from the All 

Other Compensation column, presenting 

their sum in a separate column so that 

it will be deducted from the total for 

purposes of determining the named 

executive officers.196

e. All Other Compensation Column 

The next column in the Summary 

Compensation Table discloses all other 

compensation not required to be 

included in any other column.197 This 

approach allows the capture of all 

compensation in the Summary 

Compensation Table and also allows a 

total compensation calculation. We 

confirm that disclosure of all 

compensation is clearly required under 

the rules.198

As proposed, we are clarifying the 

disclosure required in the All Other 

Compensation column (revised column 

(i)) in two principal respects: 

• Consistent with the requirement 

that the Summary Compensation Table 


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199Prior to today’s amendments, Item 

402(b)(2)(iii)(c) had required the separate column 

entitled ‘‘Other Annual Compensation.’’

200See Section II.C.1.e.i. regarding separate 

standards for identification of perquisites and other 

personal benefits. 

201See, e.g., letters from Association of BellTel 

Retirees (‘‘ABTR’’); AFL–CIO; Amalgamated; 

Association of US West Retirees (‘‘AUSWR’’); 

Corporate Library; ISS; UCF; and Walden. 

202See e.g., letters from Buck Consultants; 

Chamber of Commerce; Compass Bancshares; 

Computer Sciences; Eli Lilly; Emerson; Hodak 

Value Advisors; C. Kollar; NAM; and SCSGP. 

203The requirement had been set forth in 

Instruction 1 to Item 402(b)(2)(iii)(C) prior to these 

amendments. 

204 Instruction 4 to Item 402(c)(2)(ix). 

205See letter from Chamber of Commerce. 

206See, e.g., letter from SCSGP. 

207For directors, the disclosure will be required 

in the Director Compensation Table discussed 

below in Section II.C.9. 

208 Item 402(j), discussed in Section II.C.5.c. 

below. 

disclose all compensation, we state 

explicitly that compensation not 

properly reportable in the other 

columns reporting specified forms of 

compensation must be reported in this 

column; and 

• To simplify the Summary 

Compensation Table and eliminate 

confusing distinctions between items 

currently reported as ‘‘Annual’’ and 

‘‘Long Term’’ compensation, we have 

moved into this column all items 

formerly reportable as ‘‘Other Annual 

Compensation.’’ 199

We also are requiring that each item 

of compensation included in the All 

Other Compensation column that 

exceeds $10,000 be separately identified 

and quantified in a footnote. We believe 

that the $10,000 threshold balances our 

desire to avoid disclosure of clearly de 

minimis matters against the interests of 

investors in the nature of items 

comprising compensation. Each item of 

compensation less than that amount 

will be included in the column (other 

than aggregate perquisites and other 

personal benefits less than $10,000 as 

discussed below), but is not required to 

be identified by type and amount.200

Items to be disclosed in the All Other 

Compensation column include, but are 

not limited to, the items discussed 

below. 

i. Perquisites and Other Personal 

Benefits 

Perquisites and other personal 

benefits are included in the All Other 

Compensation column. As we proposed, 

we are adopting changes to the 

disclosure of perquisites and other 

personal benefits to improve disclosure 

and facilitate computing a total amount 

of compensation. Our amendments 

require the disclosure of perquisites and 

other personal benefits unless the 

aggregate amount of such compensation 

is less than $10,000. Some commenters 

thought this threshold was too high; 201

while other commenters thought it was 

too low.202 While we realize that this 

threshold may result in the total amount 

of compensation reportable in the 

Summary Compensation Table being 

slightly less than a complete total 

amount of compensation, we believe 

$10,000 is a reasonable balance between 

investors’ need for disclosure of total 

compensation and the burden on a 

company to track every benefit, no 

matter how small. Prior to today’s 

amendments, the rule permitted 

omission of perquisites and other 

personal benefits if the aggregate 

amount of such compensation was the 

lesser of either $50,000 or 10% of the 

total of annual salary and bonus, 

allowing omission of too much 

information that investors may consider 

material. 

The amendments we adopt today 

require, as proposed, footnote disclosure 

that identifies perquisites and other 

personal benefits. Prior to these 

amendments, the rule required 

identification and quantification only of 

perquisites and other personal benefits 

that were 25% of the total amount for 

each named executive officer.203 We 

have modified this requirement so that, 

unless the aggregate value of perquisites 

and personal benefits is less than 

$10,000, any perquisite or other 

personal benefit must be identified and, 

if it is valued at the greater of $25,000 

or ten percent of total perquisites and 

other personal benefits, its value must 

be disclosed.204 Consistent with our 

objective to streamline the Summary 

Compensation Table, the revised 

threshold is intended to avoid requiring 

separate quantification of perquisites 

having de minimis value. Where 

perquisites are subject to identification, 

they must be described in a manner that 

identifies the particular nature of the 

benefit received. For example, it is not 

sufficient to characterize generally as 

‘‘travel and entertainment’’ different 

company-financed benefits, such as 

clothing, jewelry, artwork, theater 

tickets and housekeeping services. 

As was formerly the case, tax ‘‘grossups’’ or other reimbursement of taxes 

owed with respect to any compensation, 

including but not limited to perquisites 

and other personal benefits, must be 

separately quantified and identified in 

the tax reimbursement category 

described below, even if the associated 

perquisites or other personal benefits 

are eligible for exclusion or would not 

require identification or footnote 

quantification under the rule. 

In the Proposing Release, we provided 

interpretive guidance about factors to be 

considered in determining whether an 

item is a perquisite or other personal 

benefit. One commenter suggested that 

the Commission engage in a separate 

rulemaking to adopt a definition of 

perquisites in Regulation S–K.205 As we 

noted in the Proposing Release, for 

decades questions have arisen as to 

what is a perquisite or other personal 

benefit required to be disclosed. We 

continue to believe that it is not 

appropriate for Item 402 to define 

perquisites or personal benefits, given 

that different forms of these items 

continue to develop, and thus a 

definition would become outdated. As 

stated in the Proposing Release, we are 

concerned that sole reliance on a bright 

line definition in our rules might 

provide an incentive to characterize 

perquisites or personal benefits in ways 

that would attempt to circumvent the 

bright lines. Many commenters sought 

additional or modified interpretive 

guidance, including guidance with 

respect to an item that is integrally and 

directly related to the performance of 

the executive’s duties but has a personal 

benefit aspect as well.206 Accordingly, 

we are providing additional explanation 

regarding how to apply this guidance. 

The amendments we adopt today 

require perquisites and personal 

benefits to be disclosed for both named 

executive officers and directors.207

Further, the disclosure requirements we 

adopt regarding potential payments 

upon termination or change-in-control 

include disclosure of perquisites.208

Accordingly, this discussion also 

applies in the context of each of these 

disclosure requirements. 

Among the factors to be considered in 

determining whether an item is a 

perquisite or other personal benefit are 

the following: 

• An item is not a perquisite or 

personal benefit if it is integrally and 

directly related to the performance of 

the executive’s duties. 

• Otherwise, an item is a perquisite or 

personal benefit if it confers a direct or 

indirect benefit that has a personal 

aspect, without regard to whether it may 

be provided for some business reason or 

for the convenience of the company, 

unless it is generally available on a nondiscriminatory basis to all employees. 

We believe the way to approach this 

is by initially evaluating the first prong 

of the analysis. If an item is integrally 

and directly related to the performance 

of the executive’s duties, that is the end 

of the analysis—the item is not a 

perquisite or personal benefit and no 


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209See, e.g., letters from NACCO Industries, Inc. 

(‘‘NACCO Industries’’) and NAM. 

210 ‘‘Accredited investor’’ is defined in Securities 

Act Rule 501(a)[17 CFR 230.501(a)] for purposes of 

Regulation D [17 CFR 230.501–508]. 

211The Commission has taken action in 

circumstances where perquisites were not properly 

disclosed. See SEC v. Greg A. Gadel and Daniel J. 

Skrypek, Litigation Release No. 19720 (June 7, 2006) 

and In the Matter of Tyson Foods, Inc. and Donald 

Tyson, Litigation Release No. 19208 (Apr. 28, 2005). 

212 Instruction 4 to Item 402(c)(2)(is). 

213See e.g., letters from ABTR; AUSWR; CH; 

Computer Sciences; Pearl Meyer & Partners; and 

Institutional Investors Group. As we stated in the 

Proposing Release, the amount attributed to 

perquisites and other personal benefits for federal 

income tax purposes is not the incremental cost for 

purposes of our disclosure rules unless, 

independently of the tax characterization, it 

constitutes such incremental cost. Therefore, for 

example, the cost of aircraft travel attributed to an 

executive for federal income tax purposes is not 

generally the incremental cost of such a perquisite 

or personal benefit for purposes of our disclosure 

rules. See IRS Regulation § 1.61–21(g) [26 CFR 

Continued 

compensation disclosure is required. 

Moreover, if an item is integrally and 

directly related to the performance of an 

executive’s duties under this analysis, 

there is no requirement to disclose any 

incremental cost over a less expensive 

alternative. For example, with respect to 

business travel, it is not necessary to 

disclose the cost differential between 

renting a mid-sized car over a compact 

car. 

Because of the integral and direct 

connection to job performance, the 

elements of the second part of the 

analysis (e.g., whether there is also a 

personal benefit or whether the item is 

generally available to other employees) 

are irrelevant. An example of such an 

item could be a ‘‘Blackberry’’ or a laptop 

computer if the company believes it is 

an integral part of the executive’s duties 

to be accessible by e-mail to the 

executive’s colleagues and clients when 

out of the office. Just as these devices 

represent advances over earlier 

technology (such as voicemail), we 

expect that as new technology facilitates 

the extent to which work is conducted 

outside the office, additional devices 

may be developed that will fall into this 

category. 

The concept of a benefit that is 

‘‘integrally and directly related’’ to job 

performance is a narrow one. The 

analysis draws a critical distinction 

between an item that a company 

provides because the executive needs it 

to do the job, making it integrally and 

directly related to the performance of 

duties, and an item provided for some 

other reason, even where that other 

reason can involve both company 

benefit and personal benefit. Some 

commenters objected that ‘‘integrally 

and directly related’’ is too narrow a 

standard, suggesting that other business 

reasons for providing an item should 

not be disregarded in determining 

whether an item is a perquisite.209 We 

do not adopt this suggested approach. 

As we stated in the Proposing Release, 

the fact that the company has 

determined that an expense is an 

‘‘ordinary’’ or ‘‘necessary’’ business 

expense for tax or other purposes or that 

an expense is for the benefit or 

convenience of the company is not 

responsive to the inquiry as to whether 

the expense provides a perquisite or 

other personal benefit for disclosure 

purposes. Whether the company should 

pay for an expense or it is deductible for 

tax purposes relates principally to 

questions of state law regarding use of 

corporate assets and of tax law; our 

disclosure requirements are triggered by 

different and broader concepts. 

As we noted in the Proposing Release, 

business purpose or convenience does 

not affect the characterization of an item 

as a perquisite or personal benefit where 

it is not integrally and directly related 

to the performance by the executive of 

his or her job. Therefore, for example, a 

company’s decision to provide an item 

of personal benefit for security purposes 

does not affect its characterization as a 

perquisite or personal benefit. A 

company policy that for security 

purposes an executive (or an executive 

and his or her family) must use 

company aircraft or other company 

means of travel for personal travel, or 

must use company or companyprovided property for vacations, does 

not affect the conclusion that the item 

provided is a perquisite or personal 

benefit. 

If an item is not integrally and 

directly related to the performance of 

the executive’s duties, the second step 

of the analysis comes into play. Does the 

item confer a direct or indirect benefit 

that has a personal aspect (without 

regard to whether it may be provided for 

some business reason or for the 

convenience of the company)? If so, is 

it generally available on a nondiscriminatory basis to all employees? 

For example, a company’s provision of 

helicopter service for an executive to 

commute to work from home is not 

integrally and directly related to job 

performance (although it would benefit 

the company by getting the executive to 

work faster), clearly bestows a benefit 

that has a personal aspect, and is not 

generally available to all employees on 

a non-discriminatory basis. As we have 

noted, business purpose or convenience 

does not affect the characterization of an 

item as a perquisite or personal benefit 

where it is not integrally and directly 

related to the performance by the 

executive of his or her job. 

A company may reasonably conclude 

that an item is generally available to all 

employees on a non-discriminatory 

basis if it is available to those employees 

to whom it lawfully may be provided. 

For this purpose, a company may 

recognize jurisdictionally based legal 

restrictions (such as for foreign 

employees) or the employees’

‘‘accredited investor’’ 210 status. In 

contrast, merely providing a benefit 

consistent with its availability to 

employees in the same job category or 

at the same pay scale does not establish 

that it is generally available on a nondiscriminatory basis to all employees. 

Applying the concepts that we outline 

above, examples of items requiring 

disclosure as perquisites or personal 

benefits under Item 402 include, but are 

not limited to: club memberships not 

used exclusively for business 

entertainment purposes, personal 

financial or tax advice, personal travel 

using vehicles owned or leased by the 

company, personal travel otherwise 

financed by the company, personal use 

of other property owned or leased by the 

company, housing and other living 

expenses (including but not limited to 

relocation assistance and payments for 

the executive or director to stay at his 

or her personal residence), security 

provided at a personal residence or 

during personal travel, commuting 

expenses (whether or not for the 

company’s convenience or benefit), and 

discounts on the company’s products or 

services not generally available to 

employees on a non-discriminatory 

basis. 

Beyond the examples provided, we 

assume that companies and their 

advisors, who are more familiar with the 

detailed facts of a particular situation 

and who are responsible for providing 

materially accurate and complete 

disclosure satisfying our requirements, 

can apply the two-step analysis to assess 

whether particular arrangements require 

disclosure as perquisites or personal 

benefits. In light of the importance of 

the subject to many investors, all 

participants should approach the 

subject of perquisites and personal 

benefits thoughtfully.211

The amendments we adopt today, as 

proposed, call for aggregate incremental 

cost to the company as the proper 

measure of value of perquisites and 

other personal benefits.212 Some 

commenters instead recommended 

valuing perquisites based on current 

market values.213 Consistent with our 


jlentini on PROD1PC65 with RULES2
53178 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

1.61–21(g)] regarding Internal Revenue Service 

guidelines for imputing taxable personal income to 

an employee who travels for personal reasons on 

corporate aircraft. These complex regulations are 

known as the Standard Industry Fare Level or SIFL 

rules. 

214See, e.g., letter from Mercer. 

215 Instruction 4 to Item 402(c)(2)(ix). 

216All of these items were required to be 

disclosed either under All Other Compensation or 

under Other Annual Compensation proir to these 

amendments. 

217Unlike the text of Item 402(b)(2)(v)(A) prior to 

these amendments, Item 402(c)(2)(ix)(D) as 

amended does not refer to amounts payable under 

post-employment benefits. Instruction 5 to Item 

402(c)(2)(ix) provides that an accrued amount is an 

amount for which payment has become due, such 

as a severance payment currently owed by the 

company to an executive officer. These items, as 

well as amounts that are payable in the future, are 

also the subject of disclosure as post-termination 

compenstaion, as described in Section II.C.5.c. 

below. For any compensation as a result of a 

business combination, other than pursuant to a plan 

or arrangement in connection with any termination 

of employment or change-in-control, such as a 

retention bonus, acceleration of option or stock 

vesting period, or performance-based compensation 

intended to serve as an incentive for named 

executive officers to acquire other companies or 

enter into a merger agreement, disclosure will now 

be requlired in the appropriate Summary 

Compensation Table column and in the other tables 

or narrative disclosure where the particular element 

of compensation is required to be disclosed. 

218 Item 402(c)(2)(ix)(E). 

219 Item 402(c)(2)(ix)(F). Because the amendments 

call for disclosure of the dollar value of any life 

insurance premiums, rather than only premiums 

with respect to term life insurance (as was required 

prior to these amendments), the requirement that 

had been previously specified in Item 

402(b)(2)(v)(E)(1) and (2) to disclose the value of 

any remaining premiums with respect to 

circumstances where the named executive officer 

has an interest in the policy’s cash surrender value 

is not retained in the amended rule. 

220 Item 402(c)(2)(ix)(B). 

221 Item 402(c)(2)(ix)(C). This requirement as 

adopted has been revised from the proposal to 

clarify that no amount of compensation is required 

to be disclosed if there is no compensation cost 

computed for the discounted securities purchase in 

accordance with FAS 123R. For example, under 

FAS 123R, if the discount is five percent or less, 

all qualified employees can participate in the offer 

and there are no option features, then there is no 

compensation cost to recognize for financial 

reporting purposes and thus no compensation is 

reported for this item in the All Other 

Compensation column. 

222 Item 402(c)(2)(ix)(G). 

223See, e.g., letter from Cravath. 

224We have moved this disclosure requirement to 

the Pension Benefits Table, described in Section 

II.C.5.a. below. 

225 Instruction 2 to Item 402(c)(2)(ix). 

226 Item 402(a)(6)(iii). 

227 Id. 

228See, e.g., letters from Hewitt; Mercer; NACCO 

Industries; and SCSGP. 

229This table is described in Section II.C.2. 

immediately below. Further, no longer reporting 

compensation pursuant to these awards as ‘‘bonus’’

in the Summary Compensation Table does not 

affect the determination of named executive officers 

because, as described in Section II.C.6.b. below, that 

approach of disclosing a company’s 

compensation costs, we remain of the 

view that perquisites should be valued 

based on aggregate incremental cost. 

Finally, commenters observed that 

investors cannot fully understand 

disclosed perquisite amounts without 

disclosure of the methodology used to 

compute them.214 We agree that this 

disclosure will improve investors’

ability to compare the cost of perquisites 

from company to company. The rule as 

adopted requires footnote disclosure of 

the methodology for computing the 

aggregate incremental cost for the 

perquisites.215

ii. Additional All Other Compensation 

Column Items 

We are adopting as proposed a 

requirement that items to be disclosed 

in the All Other Compensation column 

include, but are not limited to, the 

following items: 216

• Amounts paid or accrued pursuant 

to a plan or arrangement in connection 

with any termination (or constructive 

termination) of employment or a change 

in control; 217

• Annual company contributions or 

other allocations to vested and unvested 

defined contribution plans; 218

• The dollar value of any insurance 

premiums paid by the company with 

respect to life insurance for the benefit 

of a named executive officer; 219

• ‘‘Gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 220 and 

• For any security of the company or 

its subsidiaries purchased from the 

company or its subsidiaries (through 

deferral of salary or bonus) at a discount 

from the market price of such security 

at the date of purchase, unless that 

discount is available generally either to 

all security holders or to all salaried 

employees of the company, the 

compensation cost, if any, computed in 

accordance with FAS 123R.221

An additional requirement to include 

the dollar value of any dividends or 

other earnings paid on stock or option 

awards when the dividends or earnings 

were not factored into the grant date fair 

value has been adopted for this column 

as discussed above.222

In response to commenters’ concerns 

about double counting pension 

benefits,223 we have not retained the 

aspect of proposed Instruction 2 to this 

column that would have required 

disclosure of pension benefits paid to 

the named executive officer during the 

period covered by the table.224 As 

adopted, an instruction provides that 

benefits paid pursuant to defined 

benefit and actuarial plans are not 

reportable as All Other Compensation 

unless accelerated pursuant to a change 

in control.225 Similarly, distributions of 

nonqualified deferred compensation are 

not reportable as All Other 

Compensation. 

f. Captions and Table Layout 

Before today’s amendments, a portion 

of the table was labeled as ‘‘annual 

compensation’’ and another portion as 

‘‘long term compensation.’’ These 

captions created distinctions that may 

have been confusing to both users and 

preparers of the Summary 

Compensation Table. As proposed, the 

amendments we adopt today do not 

separately identify some columns as 

‘‘annual’’ and other columns as ‘‘long 

term’’ compensation. Consistent with 

this change, as described above, we are 

merging the current Other Annual 

Compensation column into the new All 

Other Compensation column, and 

include current earnings information 

regarding non-equity incentive plan 

compensation in the column for that 

form of award. 

In eliminating this distinction, we 

also revise the former definition of 

‘‘long term incentive plan’’ to eliminate 

any distinction between a ‘‘long term’’

plan and one that may provide for 

periods shorter than one year. Like the 

captions, the former approach created 

distinctions that may have been 

confusing to users and preparers. As 

proposed and adopted, the amendments 

define an ‘‘incentive plan’’ as any plan 

providing compensation intended to 

serve as incentive for performance to 

occur over a specified period.226 The 

related definition of ‘‘incentive plan 

award’’ as an award provided under an 

incentive plan is also adopted as 

proposed.227

Noting that companies formerly 

reported as ‘‘bonuses’’ awards that 

would be short-term incentive plan 

awards under this definition, 

commenters requested guidance as to 

what distinguishes items reportable as 

non-equity incentive plan compensation 

from those reportable as bonuses under 

the amended rules.228 An award would 

be considered ‘‘intended to serve as an 

incentive for performance to occur over 

a specified period’’ if the outcome with 

respect to the relevant performance 

target is substantially uncertain at the 

time the performance target is 

established and the target is 

communicated to the executive. 

Compensation pursuant to such a nonequity award would be reported in the 

Summary Compensation Table as nonequity incentive plan compensation and 

the grant of the award would be 

reported as a non-equity incentive plan 

award in the Grants of Plan-Based 

Awards Table.229 In contrast, a cash 


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determination is not limited to consideration of 

salary and bonus. 

230Proposed Item 402(d). 

231Proposed Item 402(e), containing much of the 

information that was required prior to these 

amendments by the Option/SAR Grants Table 

(formerly specified in Item 402(c)). 

232See letter from Hewitt. 

233 Instruction 1 to Item 402(d). 

234 Item 402(e)(1)(iii), described in Section 

II.C.3.a. immediately below. 

235See letter from ABA. 

236See Section II.C.4.a. below. 

237Proposed Item 402(d)(2)(v). See, e.g., letters 

from Frederic W. Cook & Co. and SCSGP. 

238 Instruction 5 to Item 402(d). 

239 Instruction 2 to Item 402(d). 

award based on satisfaction of a 

performance target that was not preestablished and communicated, or the 

outcome of which is not substantially 

uncertain, would be reportable in the 

Summary Compensation Table as a 

bonus. 

2. Supplemental Grants of Plan-Based 

Awards Table 

Following the Summary 

Compensation Table, we proposed two 

supplemental tables to explain 

information in the Summary 

Compensation Table. The proposed 

tables were derived from two tables 

required under the rules prior to these 

amendments. 

The first table we proposed to 

supplement the Summary 

Compensation Table would have 

included information regarding nonstock grants of incentive plan awards, 

stock-based incentive plan awards and 

awards of options, restricted stock and 

similar instruments under plans that are 

performance-based (and thus provide 

the opportunity for future compensation 

if conditions are satisfied).230 The 

second table we proposed to 

supplement the Summary 

Compensation Table would have shown 

the equity-based compensation awards 

granted in the last fiscal year that are 

not performance-based, such as stock, 

options or similar instruments where 

the payout or future value is tied to the 

company’s stock price, and not to other 

performance criteria.231

Because much of the information for 

each proposed table is consistent, we 

have followed the recommendation of a 

commenter to simplify the disclosure 

format by combining the proposed 

disclosure in a single table.232

GRANTS OF PLAN-BASED AWARDS

Name Grant 

date 

Estimated future payouts under 

non-equity incentive plan awards 

Estimated future payouts under 

equity incentive plan awards All other 

stock 

awards: 

Number 

of shares 

of stock 

or units 

(#) 

All other 

option 

awards: 

Number 

of securities underlying 

options 

(#) 

Exercise 

or base 

price of 

option 

awards 

($/Sh) 

Threshold 

($) 

Target 

($) 

Maximum 

($) 

Threshold 

(#) 

Target 

(#) 

Maximum 

(#) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) 

PEO 

PFO 

A 

B 

C 

Disclosure in this table complements 

Summary Compensation Table 

disclosure of grant date fair value of 

stock awards and option awards by 

disclosing the number of shares of stock 

or units comprising or underlying the 

award. This supplemental table shows 

the terms of grants made during the 

current year, including estimated future 

payouts for both equity incentive plans 

and non-equity incentive plans, with 

separate disclosure for each grant.233

To simplify the presentation further, 

we have eliminated some of the 

proposed columns. Because the 

narrative section identifies the material 

terms of an award reported in this table 

as an example of a material factor to be 

described,234 and thus will cover the 

same information, we have eliminated 

the proposed columns reporting vesting 

date, or performance or other period 

until vesting or payout. As a commenter 

noted, vesting information typically 

cannot be reported easily in a single line 

in a table.235 Similarly, because the 

modifications we are making to the 

Outstanding Equity Awards at Fiscal 

Year-End Table require that table to 

report the expiration dates of options 

and similar awards,236 we are 

eliminating the proposed expiration 

date column. Finally, the proposed 

column reporting the dollar amount of 

consideration paid for the award, if any, 

is not adopted, reflecting comments that 

this column would be used only 

rarely.237 Instead, in those rare instances 

where consideration is paid for an 

award, this disclosure will be provided 

in a footnote to the appropriate 

column.238

As proposed, the Grants of All Other 

Equity Awards Table would have 

permitted aggregation of option grants 

with the same exercise or base price. We 

have not adopted such an instruction for 

this table, based on our belief that grantby-grant disclosure is the most 

appropriate approach, particularly given 

our particular disclosure concerns 

regarding option grants. For incentive 

plan awards, threshold, target and 

maximum payout information should be 

provided, but if the award provides only 

for a single estimated payout, that 

amount should be reported as the 

target.239 Where there is a tandem grant 

of two instruments, only one of which 

is granted under an incentive plan, only 


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53180 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

240 Instruction 4 to Item 402(d). 241See discussion at Section II.C.1.c.i. above. 242 Item 402(d)(2)(vii). 243See, e.g., letters from Cravath; Eli Lilly; and 

Sidley Austin LLP (‘‘Sidley Austin’’). 244This requirement had been set forth in 

Instruction 6 to Item 402(c) prior to today’s 

amendments. 245See the discussion of options disclosure in 

Section II.A., above. 246See, e.g., letter from CFA Centre for Financial 

Market Integrity, dated May 30, 2006 (‘‘CFA Centre 

2’’). 

247Because the concept of closing market price is 

used in a number of provisions of Item 402, we are 

adopting a definition of the term closing market 

price in Item 402(a)(6)(v). A foreign company 

complying with this requirement may instead look 

to the principal foreign market in which the 

underlying securities trade. 

248 Instruction 3 to Item 402(d). 

249See, e.g., letter from CFA Centre 2. 

250 Item 402(d)(2)(ii). 

251 Item 402(a)(6)(iv). 

252 Instruction 6 to Item 402(d). 

253 Item 402(e)(1). The standard of materiality that 

applies in Item 402(e) is that of Basic v. Levinson, 

485 U.S. 224 (1988) and TSC Industries v. 

Northway, 426 U.S. 438 (1976). 

254 Item 402(e)(1)(i). 

255 Item 402(j), described in Section II.C.5.c. 

256 Item 402(e)(1)(ii). 

257The ten-year option repricing table had been 

required by Item 402(i) prior to its elimination with 

these amendments. We believe that the narrative 

disclosure requirement will provide investors with 

material information regarding repricings and 

modifications and eliminate the arguably dated 

information contained in the former ten-year option 

repricing table. 

the instrument that is not granted under 

an incentive plan is reported in the 

table, with the tandem feature noted.240

Because the rules as adopted require 

Summary Compensation Table 

disclosure of the incremental fair value, 

computed in accordance with FAS 

123R, of options, stock appreciation 

rights and similar option-like 

instruments granted in connection with 

a repricing transaction, rather than the 

total fair value as we had proposed, 

grants of these instruments are not 

reported in this table.241 Disclosure 

should be provided in the 

Compensation Discussion and Analysis 

and the narrative disclosures for the 

Summary Compensation Table and 

Grants of Plan-Based Awards, as 

appropriate, regarding awards granted 

in connection with repricing 

transactions. 

As proposed and adopted, if the pershare exercise or base price of options, 

stock appreciation rights and similar 

option-like instruments is less than the 

market price of the underlying security 

on the grant date, a separate column 

must be added showing market price on 

the grant date.242 Some commenters 

objected to our proposal to calculate 

grant date market price for this purpose 

using the closing price per share of the 

underlying security on that date. These 

commenters stated that plans requiring 

awards to be granted with an exercise 

price equal to the underlying security’s 

grant date fair market value may define 

‘‘fair market value’’ based on a formula 

related to the average market price on 

the grant date or a range of days either 

before or after the grant date.243 Our 

proposed departure from the rule prior 

to these amendments, which permitted 

use of such formulas even for securities 

traded on an established market,244 was 

considered, and along with the 

requirement to disclose the grant date, 

reflects the significance of issues in 

awards of option grants.245 Moreover, 

commenters expressed concern 

regarding the manipulation of option 

grant dates to achieve below-market 

exercise prices.246 The rule as adopted 

uses the measure for grant date market 

price of the underlying security that we 

proposed, modified to specify that the 

grant date closing market price per share 

is the last sale price on the principal 

United States market for the security on 

the specified date.247 Moreover, if the 

exercise or base price is not the grant 

date closing market price per share, we 

require a description of the 

methodology for determining the 

exercise or base price either by footnote 

to the table or in the accompanying 

narrative section.248 Further reflecting 

the significance of grant date issues in 

awards of option grants and in response 

to comments,249 we are also providing 

that if the date on which the 

compensation committee (or a 

committee of the board of directors 

performing a similar function or the full 

board of directors) takes action or is 

deemed to take action to grant equitybased awards is different from the date 

of grant, a column must be added to 

disclose the date of action.250 For these 

purposes, the ‘‘date of grant’’ or ‘‘grant 

date’’ is the grant date determined for 

financial statement reporting purposes 

pursuant to FAS 123R.251 Finally, in 

combining the proposed tables, we have 

adopted an instruction specifying that if 

a non-equity incentive plan award is 

denominated in units or other rights, 

then a separate, adjoining column 

would be required to disclose the units 

or other rights awarded.252

3. Narrative Disclosure to Summary 

Compensation Table and Grants of PlanBased Awards Table 

a. Narrative Description of Additional 

Material Factors 

As we proposed, we are requiring 

narrative disclosure following the 

Summary Compensation Table and the 

Grants of Plan-Based Awards Table in 

order to give context to the tabular 

disclosure. A company will be required 

to provide a narrative description of any 

additional material factors necessary to 

an understanding of the information 

disclosed in the tables.253 Unlike the 

Compensation Discussion and Analysis, 

which focuses on broader topics 

regarding the objectives and 

implementation of executive 

compensation policies, the narrative 

disclosures following the Summary 

Compensation Table and other tables 

focus on and provide specific context to 

the quantitative disclosure in the tables. 

For example, narrative disclosure 

following a table might explain material 

aspects of a plan that are not evident 

from the quantitative tabular disclosure 

and are not addressed in the 

Compensation Discussion and Analysis. 

The material factors that require 

disclosure will vary depending on the 

facts and circumstances. As one 

example, such material factors might 

include descriptions of the material 

terms in the named executive officers’

employment agreements as those 

descriptions might provide material 

information necessary to an 

understanding of the tabular disclosure. 

The narrative disclosure covers written 

or unwritten agreements or 

arrangements.254 Requiring this 

disclosure in proximity to the Summary 

Compensation Table is intended to 

make the tabular disclosure more 

meaningful. Mere filing of employment 

agreements (or summaries of oral 

agreements) may not be adequate to 

disclose material factors depending on 

the circumstances. As stated in the 

Proposing Release, provisions regarding 

post-termination compensation need to 

be addressed in the narrative section 

only to the extent disclosure of such 

compensation is required in the 

Summary Compensation Table; 

otherwise these provisions will be 

disclosable as post-termination 

compensation.255

The factors that could be material 

include each repricing or other material 

modification of any outstanding option 

or other equity-based award during the 

last fiscal year. This disclosure 

addresses not only option repricings, 

but also other significant changes to the 

terms of equity-based awards.256 As 

proposed, we are eliminating the former 

ten-year option repricing table.257 In its 

place, the narrative disclosure following 

the Summary Compensation Table will 

describe, to the extent material and 

necessary to an understanding of the 

tabular disclosure, repricing, extension 

of exercise periods, change of vesting or 

forfeiture conditions, change or 


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258As described in Section II.C.1.c.i. above, the 

tabular disclosure will report the incremental fair 

value of the modification for financial reporting 

purposes. However, narrative disclosure will not 

apply to any repricing that occurs through a preexisting formula or mechanism in the plan or award 

that results in the periodic adjustment of the option 

or stock appreciation right exercise or base price, 

an antidilution provision, or a recapitalization or 

similar transaction equally affecting all holders of 

the class of securities underlying the options or 

stock appreciation rights. Instruction 1 to Item 

402(e). 

259 Item 402(e)(1)(iii), which combines some 

information that had been required by Instruction 

2 to Item 402(b)(2)(iv) with information that had 

been required by Instruction 1 to Item 402(e) as they 

were stated in the rule before these amendments. 

260We have adopted Instruction 2 to Item 

402(e)(1), which specifically applies to the narrative 

disclosure of Item 402(e)(1) the same standard 

applicable to Compensation Discussion and 

Analysis for determining whether disclosure would 

result in competitive harm for the company. See 

Section II.B.2., above, for a discussion of this 

standard. 

261See Section II.C.5.a. below. 

262See Section II.C.1.a. above and Section 

II.C.6.b. below. 

263 Item 402(e)(1)(iv). 

264Proposed Item 402(f)(2). 

265See, e.g., letters from Corporate Library; The 

Greenlining Institute; Institutional Investor Group; 

and SBAF. 

266See, e.g., letters from ABA; Chamber of 

Commerce; Eli Lilly; Leggett & Platt; N. Ludgus; and 

Mercer. 

267See, e.g., letters from ABA-JCEB; BRT; jointly, 

CBS Corporation, The Walt Disney Company, NBC 

Universal, News Corporation, and Viacom, Inc. 

(‘‘Entertainment Industry Group’’); Committee on 

Corporate Finance of Financial Executives 

International (‘‘FEI’’); Chamber of Commerce; 

Cleary; CNET Networks, Inc. (‘‘CNET Networks’’); 

Compass Bancshares; Compensia; Cravath; 

DreamWorks Animation SKG (‘‘DreamWorks’’); Eli 

Lilly; Emerson; Fenwick; The Financial Services 

Roundtable (‘‘FSR’’); Professor Joseph A. Grundfest, 

dated April 10, 2006 (‘‘Grundfest’’); ICI; Intel 

Corporation (‘‘Intel’’); Kellogg Company 

(‘‘Kellogg’’); Kennedy & Baris, LLP (‘‘Kennedy’’); 

Mercer; Peabody Energy; Pearl Meyer & Partners; 

Securities Industry Association (‘‘SIA’’); Sullivan; 

SCSGP; and WorldatWork. 

268See, e.g., letters from CalSTRS; Cleary; CNET 

Networks; Compass Bancshares; DreamWorks; 

Entertainment Industry Group; Fried, Frank, Harris, 

Shriver & Jacobson LLP (‘‘Fried Frank’’); FSR; 

Hewitt; ICI; Intel; Kellogg; Kennedy; Leggett & Platt; 

Peabody Energy; Pearl Meyer & Partners; SCSGP; 

SIA; Stradling Yocca Carlson & Rauth (‘‘Stradling 

Yocca’’); Top Five Data Services, Inc. (‘‘Top Five 

Data’’); Towers Perrin; and Walden. 

269The Commission expressed similar concerns 

in 1978, when it stated ‘‘a key employee or director 

of a subsidiary might be the highest-paid person in 

the entire corporate structure and have managerial 

responsibility for major aspects of the registrant’s 

overall operations.’’ 1978 Release. See n. 327 for a 

discussion of the term ‘‘executive officer.’’ In light 

of some of the comments that we received, we have 

clarified that the definition of ‘‘executive officer’’

includes all individuals in a registrant policymaking role. See, e.g., letters from SCSGP and 

Cravath. 

elimination of applicable performance 

criteria, change of the bases upon which 

returns are determined, or any other 

material modification.258

Narrative text accompanying the 

tables will also describe, to the extent 

material and necessary to an 

understanding of the tabular disclosure, 

award terms relating to disclosure 

provided in the Grants of Plan-Based 

Awards Table. This could include, for 

example, a general description of the 

formula or criteria to be applied in 

determining the amounts payable, the 

vesting schedule, a description of the 

performance-based conditions and any 

other material conditions applicable to 

the award, whether dividends or other 

amounts would be paid, the applicable 

rate and whether that rate is 

preferential.259 As noted above and 

consistent with current disclosure 

requirements, however, companies will 

not be required to disclose any factor, 

criteria, or performance-related or other 

condition to payout or vesting of a 

particular award that involves 

confidential trade secrets or confidential 

commercial or financial information, 

disclosure of which would result in 

competitive harm to the company.260

We proposed that this example also 

include material assumptions 

underlying the determination of the 

amount of increase in the actuarial 

value of defined benefit and actuarial 

plans. However, in light of the 

modifications we are adopting, we have 

concluded that the better place to 

discuss these assumptions is in the 

narrative section accompanying the 

Pension Benefits Table.261

Further, in response to commenters’

concerns regarding the computation of 

total compensation and the expanded 

basis for determining the most highly 

compensated officers,262 we specify as 

an additional example an explanation of 

the level of salary and bonus in 

proportion to total compensation.263

b. Request for Additional Comment on 

Compensation Disclosure for up to 

Three Additional Employees 

As part of this narrative disclosure 

requirement, we had proposed an 

additional item that would have 

required disclosure for up to three 

employees who were not executive 

officers during the last completed fiscal 

year and whose total compensation for 

the last completed fiscal year was 

greater than that of any of the named 

executive officers.264 We received 

extensive comment on this proposal. 

Some commenters supported the 

proposal or suggested that it should go 

further.265 Many commenters expressed 

concern that the benefits of this 

disclosure to investors would be 

negligible, yet compliance might require 

the outlay of considerable company 

resources.266 Some commenters 

expressed concern that the proposed 

disclosure would raise privacy issues or 

negatively impact competition for 

employees.267 While we continue to 

consider whether to adopt such a 

requirement as part of the executive 

compensation disclosure rules, in 

Release No. 33–8735 we are requesting 

additional comment as to whether 

potential modifications would address 

the concerns that commenters have 

raised. 

We note in particular that some 

commenters questioned the materiality 

of the information that would have been 

required by the proposal, given that the 

covered employees would not be in 

policy-making positions as executive 

officers.268 After considering the issues 

raised by these commenters, we remain 

concerned about disclosure with respect 

to employees, particularly within very 

large companies, whether or not they 

are executive officers, whose total 

compensation for the last completed 

fiscal year was greater than that of one 

or more of the named executive officers. 

If any of these employees exert 

significant policy influence at the 

company, at a significant subsidiary of 

the company or at a principal business 

unit, division, or function of the 

company, then investors seeking a fuller 

understanding of a company’s 

compensation program may believe that 

disclosure of these employees’ total 

compensation is important 

information.269 Knowing the 

compensation, and job positions within 

the organization, of these highly 

compensated policy-makers whose total 

compensation for the last fiscal year was 

greater than that of a named executive 

officer, should assist in placing in 

context and permit a better 

understanding of the compensation 

structure of the named executive 

officers and directors. 

Our intention is to provide investors 

with information regarding the most 

highly compensated employees who 

exert significant policy influence by 

having responsibility for significant 

policy decisions. Responsibility for 

significant policy decisions could 

consist of, for example, the exercise of 

strategic, technical, editorial, creative, 

managerial, or similar responsibilities. 

Examples of employees who might not 

be executive officers but who might 

have responsibility for significant policy 

decisions could include the director of 

the news division of a major network; 

the principal creative leader of the 

entertainment function of a media 

conglomerate; or the head of a principal 

business unit developing a significant 

technological innovation. By contrast, 

we are convinced by commenters that a 


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53182 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

270See, e.g., letter from Entertainment Industry 

Group. In addition, we note our intention is not to 

suggest that these additional employees, whether or 

not they are executive officers, are individuals 

whose compensation is required to be reported 

under the Exchange Act ‘‘by reason of such 

employee being among the 4 highest compensated 

officers for the taxable year,’’ as stated in Internal 

Revenue Code Section 162(m)(3)(B) [26 U.S.C. 

162(m)(3)(B)]. See letter from Cleary (expressing 

concern that the additional individuals not fall 

within the purview of Section 162(m) of the 

Internal Revenue Code). 

271The term large accelerated filer is defined in 

Exchange Act Rule 12b–2 [17 CFR 240.12b–2]. 

salesperson, entertainment personality, 

actor, singer, or professional athlete who 

is highly compensated but who does not 

have responsibility for significant policy 

decisions would not be the type of 

employee about whom we would seek 

disclosure. Nor, as a general matter, 

would investment professionals (such as 

a trader, or a portfolio manager for an 

investment adviser who is responsible 

for one or more mutual funds or other 

clients) be deemed to have 

responsibility for significant policy 

decisions at the company, at a 

significant subsidiary or at a principal 

business unit, division or function 

simply as a result of performing the 

duties associated with those positions. 

On the other hand, an investment 

professional, such as a trader or 

portfolio manager, who does have 

broader duties within a firm (such as, 

for example, oversight of all equity 

funds for an investment adviser) may be 

considered to have responsibility for 

significant policy decisions. 

We continue to consider whether it is 

appropriate to require some level of 

narrative disclosure so that shareholders 

will have information about these most 

highly compensated employees. This 

consideration includes the appropriate 

level of information about these 

employees and their compensation in 

light of their roles. 

As to issues regarding privacy and 

competition for employees, to the extent 

that commenters objected that the 

disclosure could result in a competitor 

stealing a company’s top ‘‘talent,’’ 270 we 

have tried to address these concerns by 

focusing the disclosure on persons who 

exert significant policy influence within 

the company or significant parts of the 

company. 

Request for Comment 

We request additional comment on 

the proposal to require compensation 

disclosure for up to three additional 

employees. In addition to general 

comment, we encourage commenters to 

address the following specific questions: 

• Would the rule more appropriately 

require disclosure of the employees 

described above if it were structured in 

the following or similar manner: 

For each of the company’s three most 

highly compensated employees, 

whether or not they were executive 

officers during the last completed fiscal 

year, whose total compensation for the 

last completed fiscal year was greater 

than that of any of the named executive 

officers, disclose each such employee’s 

total compensation for that year and 

describe the employee’s job position, 

without naming the employee; 

provided, however, that employees with 

no responsibility for significant policy 

decisions within the company, a 

significant subsidiary of the company, 

or a principal business unit, division, or 

function of the company are not 

included when determining who are 

each of the three most highly 

compensated employees for the 

purposes of this requirement, and 

therefore no disclosure is required 

under this requirement for any 

employee with no responsibility for 

significant policy decisions within the 

company, a significant subsidiary of the 

company, or a principal business unit, 

division, or function of the company? 

• Would it be appropriate to 

determine the highest paid employees 

in the same manner that named 

executive officers are determined, by 

calculating total compensation but 

excluding pension plan benefits and 

above-market or preferential earnings on 

nonqualified deferred compensation 

plans, and by comparing that amount to 

the same amount earned by the named 

executive officers (excluding the 

amount required to be disclosed for 

those named executive officers pursuant 

to paragraph (c)(2)(viii) of Item 402)? If 

so, should the total amount disclosed 

include these amounts as it does for 

named executive officers? Should the 

pension benefit and above-market 

earnings be separately disclosed in a 

footnote so investors can calculate the 

amounts used in determining highest 

paid employees? 

• Would modifying the proposed rule 

to apply only to large accelerated 

filers271 properly focus this disclosure 

obligation on companies that are more 

likely to have these additional highly 

compensated employees? Would that 

modification address concerns that the 

proposed rule would impose 

disproportionate compliance burdens by 

limiting the disclosure obligation to 

companies that are presumptively better 

able to track the covered employees? 

Would a different limitation as to 

applicability be appropriate? 

• Is information regarding highly 

compensated employees, including 

those who are not executive officers, 

material to investors? In answering this 

question, commenters are encouraged to 

address the following additional 

questions: 

Æ Would modifications limiting the 

disclosure to employees who make 

significant policy decisions within the 

company, a significant subsidiary of the 

company, or a principal business unit, 

division, or function of the company 

appropriately focus the disclosure on 

employees for whom compensation 

information is material to investors? 

Æ Would the approach that we are 

considering provide investors with 

material information about how policymaking responsibilities are allocated 

within a company? Are the examples 

describing responsibility for significant 

policy decisions too broad or too 

narrow? 

Æ Would the proposed rule, with the 

modifications described above, provide 

investors with material information 

necessary to understand the company’s 

compensation policies and structure? 

How should we address those concerns? 

Æ What is typically the role of the 

compensation committee in determining 

or approving the compensation of the 

additional employees if they are not 

executive officers? If the compensation 

committee does not oversee their 

compensation, is the additional 

employee compensation information 

material to investors? What types of 

decisions would investors make based 

on this information? 

• Would the proposed rule, with the 

modifications described above, raise 

privacy issues or negatively impact 

competition for employees in a manner 

that would outweigh the materiality of 

the disclosure to investors? 

• Should we require that the three 

additional employees be named? If not, 

what additional information should be 

required? Should more information be 

required regarding the employee’s 

compensation or job position? 

• Should we define ‘‘responsibility 

for significant policy decisions’’? 

Should we use another test to describe 

those employees who exert a significant 

policy influence on the company? Do 

the examples provided above help 

identify and delimit the number of 

employees whose compensation would 

be subject to disclosure under this 

provision? What would help companies 

identify these employees? 

• What additional work and costs are 

involved in collecting the information 

necessary to identify the three 

additional employees? What are the 

types of costs, and in what amounts? In 

what way can the proposal be further 

modified to mitigate the costs? 


jlentini on PROD1PC65 with RULES2
Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53183 

272We estimate there are approximately 1,700 

companies that are large accelerated filers. See 

Revisions to Accelerated Filer Definition and 

Accelerated Deadlines for Reporting Periodic 

Reports, Release No. 33–8644 (Dec. 21, 2005) [70 FR 

76626], at Section V.A.2. 

273Some of this information had been required in 

the Aggregated Option/SAR Exercises in Last Fiscal 

Year and Fiscal Year-End Option/SAR Value Table, 

which was required under Item 402(d) prior to 

adoption of these amendments. 

274 Item 402(f). Under the rules prior to today’s 

amendments, such disclosure was provided only for 

holdings of outstanding stock options and stock 

appreciation rights. 

• In connection with the original 

proposal, we solicited comment on all 

aspects of the proposal, including this 

one. No commenter supplied cost 

estimates. We are now considering 

whether to limit this provision to only 

large accelerated filers. For some large 

accelerated filers, the number of 

employees potentially subject to this 

requirement may already be known or 

easy to identify. Other, more complex 

companies may need to establish 

systems to identify such employees. 

Every large accelerated filer would need 

to evaluate whether any employees 

exerted significant policy influence at 

the company, at a significant subsidiary 

or at a principal business unit, division 

or function and would have to track 

their compensation in order to comply 

with the proposed requirement. These 

monitoring costs may be new to some 

companies. We believe the cost of 

actually disclosing the compensation 

would be incremental and minimal. The 

monitoring and information collection 

costs are likely to be greatest in the first 

year and significantly less in later years. 

We also assume that costs would largely 

be borne internally, although some 

companies may seek the advice of 

outside counsel in determining which 

employees meet the standard for 

disclosure. In that event, for purposes of 

seeking comment, we estimate that 

1,700 272 companies will on average 

retain outside counsel for 8 hours in the 

first year and 2 hours in each of two 

succeeding years, at $400 per hour, for 

a total estimated average annual cost of 

approximately $3 million. Assuming all 

large accelerated filers spend 60 hours 

in the first year and 10 hours in each of 

the two succeeding years, with an 

average internal cost of $175 per hour, 

the total average annual burden of 

collecting and monitoring employee 

compensation would be approximately 

45,000 hours, or approximately $8 

million. The total average annual cost is 

therefore estimated to be $11 million. 

We invite comment on this estimate and 

its assumptions. 

4. Exercises and Holdings of Previously 

Awarded Equity 

The next section of the revised 

executive compensation disclosure 

provides investors with an 

understanding of the compensation in 

the form of equity that has previously 

been awarded and remains outstanding, 

and is unexercised or unvested. As 

proposed, this section also discloses 

amounts realized on this type of 

compensation during the most recent 

fiscal year when, for example, a named 

executive officer exercises an option or 

his or her stock award vests. We are 

adopting substantially as proposed two 

tables: one table shows the amounts of 

awards outstanding at fiscal year-end, 

and the other shows the exercise or 

vesting of equity awards during the 

fiscal year.273 In response to comment, 

we are requiring additional information 

regarding out-of-the-money awards. 

a. Outstanding Equity Awards at Fiscal 

Year-End Table 

As we noted in the Proposing Release, 

outstanding awards that have been 

granted but the ultimate outcomes of 

which have not yet been realized in 

effect represent potential amounts that 

the named executive officer might or 

might not realize, depending on the 

outcome for the measure or measures 

(for example, stock price or performance 

benchmarks) to which the award relates. 

We are adopting a table that will 

disclose information regarding 

outstanding awards, for example, under 

stock option (or stock appreciation 

rights) plans, restricted stock plans, 

incentive plans and similar plans and 

disclose the market-based values of the 

rights, shares or units in question as of 

the company’s most recent fiscal year 

end.274

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name 

Option awards Stock awards 

Number of 

securities 

underlying 

unexercised 

options 

(#) 

Exercisable 

Number of 

securities underlying 

unexercised 

options 

(#) 

Unexercisable 

Equity incentive plan 

awards: 

Number of 

securities 

underlying 

unexercised 

unearned 

options 

(#) 

Option 

exercise 

price 

($) 

Option 

expiration 

date 

Number 

of shares 

or units of 

stock that 

have not 

vested 

(#) 

Market 

value of 

shares or 

units of 

stock that 

have not 

vested 

($) 

Equity incentive 

plan 

awards: 

Number 

of unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

(#) 

Equity incentive 

plan 

awards: 

Market or 

payout 

value of 

unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

PEO 

PFO 

A 


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53184 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

275Proposed Item 402(g)(2)(iii). 

276See, e.g., letters from Frederic W. Cook & Co.; 

N. Ludgus; and SCSGP. 

277See, e.g., letters from Amalgamated; Brian 

Foley & Company, Inc. (‘‘Brian Foley & Co.’’); Buck 

Consultants; CII; Hodak Value Advisors; IUE–CWA; 

and SBAF. 

278See, e.g., letters from Leggett & Platt; SCSGP; 

and Sidley Austin. 

279Multiple awards may be aggregated where the 

expiration date and the exercise and/or base price 

of the instruments is identical. A single award 

consisting of a combination of options, SARs and/ 

or similar option-like instruments must be reported 

as separate awards with respect to each tranche 

with a different exercise and/or base price or 

expiration date. Instruction 4 to Item 402(f)(2). We 

have not adopted the proposed requirements to 

disclose whether an option that expired after fiscal 

year-end had been exercised, in response to 

comment that this would unnecessarily deviate 

from the standard of reporting last fiscal year 

information. See letter from ABA. 280 Instruction 1 to Item 402(f)(2). See letter from 

ABA. 

281See Registration of Securities on Form S–8, 

Release No. 33–7646 (Feb. 25, 1999) [64 FR 11103], 

at Section III.D. 282 Item 402(g), described in Section II.C.4.b. 

immediately below. 283 Item 402(f)(2)(iv). 284See letter from Sullivan. 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END—Continued 

Name 

Option awards Stock awards 

Number of 

securities 

underlying 

unexercised 

options 

(#) 

Exercisable 

Number of 

securities underlying 

unexercised 

options 

(#) 

Unexercisable 

Equity incentive plan 

awards: 

Number of 

securities 

underlying 

unexercised 

unearned 

options 

(#) 

Option 

exercise 

price 

($) 

Option 

expiration 

date 

Number 

of shares 

or units of 

stock that 

have not 

vested 

(#) 

Market 

value of 

shares or 

units of 

stock that 

have not 

vested 

($) 

Equity incentive 

plan 

awards: 

Number 

of unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

(#) 

Equity incentive 

plan 

awards: 

Market or 

payout 

value of 

unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

B 

C 

As proposed, the table included a 

column reporting aggregate dollar 

amounts of in-the-money unexercised 

options.275 Some commenters believed 

that this table should not include 

information on out-of-the-money 

options because they believed that these 

awards have no value to executives at 

the point they are out-of-the-money.276

Several other commenters 

recommended disclosure of the number 

and key terms of out-of-the-money 

instruments, so investors can 

understand the potential compensation 

opportunity of these awards if the 

market price of the underlying shares 

increases.277 We proposed to require 

expiration date information in footnote 

disclosure. We note that some 

commenters expressed concern that 

disclosure of expiration and vesting 

dates of the instruments would be 

lengthy.278 However, because we agree 

with other commenters that information 

regarding out-of-the-money options is 

material to investors, we have revised 

the columns applicable to unexercised 

options, stock appreciation rights and 

similar instruments with option-like 

features to require disclosure of: 

• The number of securities 

underlying unexercised instruments 

that are exercisable; 

• The number of securities 

underlying unexercised instruments 

that are unexercisable; 

• The exercise or base price; and 

• The expiration date. 

After evaluating the comments 

received, we believe disclosure of 

individual exercise prices and 

expiration dates is required to provide 

a full understanding of the potential 

compensation opportunity. In 

particular, with respect to out-of-themoney awards, this allows investors to 

see the amount the stock price must rise 

and the amount of time remaining for it 

to happen. Consequently, this 

disclosure is required for each 

instrument, rather than on the aggregate 

basis that was proposed.279

As suggested by another commenter, 

we also modify the table to clarify that 

these columns apply to options and 

similar awards that have been 

transferred other than for value.280 The 

proposal reflected interpretations of the 

former rule that the transfer of an option 

or similar award by an executive does 

not negate the award’s status as 

compensation that should be 

reported.281 Because an award that a 

named executive officer transferred for 

value is not an award for which the 

outcome remains to be realized, the 

rules adopted today instead require 

disclosure in the Option Exercises and 

Stock Vested Table of the amounts 

realized upon transfer for value.282

In view of our approach in the Grants 

of Plan-Based Awards Table as adopted 

and the purposes of this table in 

showing all outstanding equity awards, 

we are adopting a column (column (d)) 

for reporting the number of securities 

underlying unexercised options 

awarded under equity incentive 

plans.283 We have also revised the 

format of the table to more clearly 

delineate between the information 

regarding option awards and the 

information regarding stock awards. The remaining disclosure, relating to 

numbers and market values of 

nonvested stock and equity incentive 

plan awards, is adopted on an aggregate 

basis, substantially as proposed. One 

commenter expressed the view that the 

table should not include unearned 

performance-based awards because it 

would be difficult to disclose a 

meaningful value before the 

performance conditions are satisfied.284

Another commenter requested 

clarification of valuation of awards that 

are performance-based and nonvested, 

specifically whether value should be 

based on actual performance to date or 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53185 

285See, e.g., letter from Hewitt. 286 Instruction 3 to Item 402(f). 287 Instruction 5 to Item 402(f). 288This table is similar to a portion of the 

Aggregate Options/SAR Exercises in Last Fiscal 

Year and FY-End Options/SAR Values Table that 

was required prior to these amendments, except 

unlike that table it also includes the vesting of 

restricted stock and similar instruments. 

Commentators have noted a need for comparable 

disclosure of restricted stock vesting. 

289See, e.g., letters from Foley; SCSGP; and 

Stradling Yocca. 

290 Item 402(g)(2)(iii) and (v). 

on achieving target performance 

goals.285 As adopted, an instruction 

provides that the number of shares 

reported in the appropriate columns for 

equity incentive plan awards (columns 

(d) and (i)) or the payout value reported 

in column (j) is based on achieving 

threshold performance goals, except that 

if the previous fiscal year’s performance 

has exceeded the threshold, the 

disclosure shall be based on the next 

higher performance measure (target or 

maximum) that exceeds the previous 

fiscal year’s performance. If the award 

provides only for a single estimated 

payout, that amount should be reported. 

If the target amount is not determinable, 

registrants must provide a 

representative amount based on the 

previous fiscal year’s performance.286

We have also adopted an instruction 

clarifying that stock or options under 

equity incentive plans are reported in 

columns (d) or (i) and (j), as appropriate, 

until the relevant performance 

condition has been satisfied. Once the 

relevant performance condition has 

been satisfied, if stock remains unvested 

or the option unexercised, the stock or 

options are reported in columns (b) or 

(c), or (g) and (h), as appropriate.287

b. Option Exercises and Stock Vested 

Table 

We are adopting substantially as 

proposed a table that will show the 

amounts received upon exercise of 

options or similar instruments or the 

vesting of stock or similar instruments 

during the most recent fiscal year. This 

table will allow investors to have a 

picture of the amounts that a named 

executive officer realizes on equity 

compensation through its final stage.288

OPTION EXERCISES AND STOCK VESTED

Name 

Option awards Stock awards 

Number of 

shares 

acquired on 

exercise 

(#) 

Value 

realized on 

exercise 

($) 

Number of 

shares 

acquired on 

vesting 

(#) 

Value 

realized on 

vesting 

($) 

(a) (b) (c) (d) (e) 

PEO 

PFO 

A 

B 

C 

We proposed that this table include 

the grant date fair value of these 

instruments that would have been 

disclosed in the Summary 

Compensation Table for the year in 

which they were awarded. We proposed 

this column to eliminate the possible 

impact of double disclosure by showing 

amounts previously disclosed. We have 

adopted the table without the grant date 

fair value column in response to 

commenters’ concerns that this column 

would confuse investors and increase 

the potential for double counting.289 As 

described in the preceding section, in 

response to comment that transfers of 

awards for value also are realization 

events, amounts realized upon such 

transfers must be included in columns 

(c) and (e) of this table.290 Finally, we 

have reformatted the columns to make 

the presentation of stock and option 

awards consistent with the presentation 

in other tables. 

5. Post-Employment Compensation 

As we proposed, we are making 

significant revisions to the disclosure 

requirements regarding postemployment compensation to provide a 

clearer picture of this potential future 

compensation. As we noted in the 

Proposing Release, executive retirement 

packages and other post-termination 

compensation may represent a 

significant commitment of corporate 

resources and a significant portion of 

overall compensation. First, we are 

replacing the former pension plan table, 

alternative plan disclosure and some of 

the other narrative descriptions with a 

table regarding defined benefit pension 

plans and enhanced narrative 

disclosure. We have revised the table 

from the table proposed. Second, we are 

adding a table and narrative disclosure 

that will disclose information regarding 

nonqualified defined contribution plans 

and other deferred compensation. We 

have adopted this table substantially as 

proposed. Finally, we are adopting 

revised requirements substantially as 

proposed regarding disclosure of 

compensation arrangements triggered 

upon termination and on changes in 

control. 

a. Pension Benefits Table 

We proposed significant revisions to 

the rules disclosing retirement benefits 

to require disclosure of the estimate of 

retirement benefits to be payable at 

normal retirement age and, if available, 

early retirement. Disclosure under the 

rules prior to today’s amendments 

frequently did not provide investors 


jlentini on PROD1PC65 with RULES2
53186 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

291The rules prior to today’s amendments 

provided that, for defined benefit or actuarial plans, 

disclosure was required under Item 402(f) by way 

of a general table showing estimated annual benefits 

under the plan payable upon retirement (including 

amounts attributable to supplementary or excess 

pension award plans) for specified compensation 

levels and years of service. This table did not 

provide disclosure for any specific named executive 

officer. This requirement applied to plans under 

which benefits were determined primarily by final 

compensation (or average final compensation) and 

years of service, and included narrative disclosure. 

If named executive officers were subject to other 

plans under which benefits were not determined 

primarily by final compensation (or average final 

compensation), narrative disclosure had been 

required prior to these amendments of the benefit 

formula and estimated annual benefits payable to 

the officers upon retirement at normal retirement 

age. 292See, e.g., letters from BRT; Chadbourne & 

Parke LLP (‘‘Chadbourne’’); Cleary; and ABA–JCEB. 293See, e.g., letters from ABA and NACCO 

Industries. 294See, e.g., letters from Buck Consultants; 

Frederic W. Cook & Co.; Professor Bebchuk, et al.; 

and SBAF. 295 Item 402(h)(2)(iv). If the number of years of 

credited service for a plan differs from the named 

executive officer’s number of actual years of service 

with the company, footnote quantification of the 

difference and any resulting benefit augmentation is 

required. Instruction 4 to Item 402(h)(2). 296Further, basing pension plan disclosure on the 

accumulated benefit is consistent with nonqualified 

deferred compensation plan disclosure, which, as 

described in Section II.C.5.b. immediately below, 

reports an aggregate account balance. 

297 Instruction 2 to Item 402(h)(2). Of course, the 

benefits included in the plan document or the 

executive’s contract itself is not an assumption. 

298 Item 402(h)(3) and Instruction 2 to Item 

402(h)(2). This requirement could be satisfied by 

reference to a discussion of those assumptions in 

the company’s financial statements, footnotes to the 

financial statements, or Management’s Discussion 

and Analysis. The sections so referenced would be 

deemed a part of the disclosure provided by this 

Item. 

299 Instruction 1 to Item 402(h)(2). 

300 Instruction 3 to Item 402(h). 

301See letter from ABA. 

useful information regarding specific 

potential pension benefits relating to a 

particular named executive officer.291 In 

particular, it may have been difficult to 

understand which amounts related to 

any particular named executive officer, 

obscuring the value of a significant 

component of compensation. 

We therefore proposed a new table 

that would have required disclosure of 

the estimated retirement benefits 

payable at normal retirement age and, if 

available, early retirement, under 

defined benefit plans. Under the 

proposal, benefits would have been 

quantified based on the form of benefit 

currently elected by the named 

executive officer, such as joint and 

survivor annuity or single life annuity. 

Some commenters objected that the 

proposed revisions would result in 

disclosure that would not be 

comparable and could be 

manipulated.292 In particular, the 

calculation of benefits would depend on 

such factors as the form of benefit 

payment, the named executive officer’s 

marital status, and the actuarial 

assumptions applied, which would vary 

from company to company and plan to 

plan. Explanations of the complicated 

methodologies involved could hinder 

transparency. 

Some commenters suggested that the 

Commission prescribe standard 

assumptions for calculating annual 

benefits for disclosure purposes, such as 

a single life annuity and retirement at 

age 65, in order to facilitate 

comparability.293 Other commenters 

suggested disclosure of the present 

value of the current accrued benefit 

computed as of the end of the 

company’s last completed fiscal year,294

achieving comparability by reporting 

the economic value of the benefit that 

the executive has accumulated through 

the plan. 

Because the latter approach achieves 

comparability and transparency by 

disclosing a benefit that already has 

accrued, we view it as preferable to an 

approach that would ‘‘normalize’’

disclosure based on hypothetical annual 

benefit assumptions prescribed by the 

Commission that might bear no 

relationship to the assumptions that the 

company actually applies with respect 

to the plan. Furthermore, this approach 

will make clearer the relationship of this 

table to the Summary Compensation 

Table disclosure of increase in pension 

value. This approach will also lessen 

the burden on companies, since they are 

required to calculate the present value 

for the Summary Compensation Table. 

Accordingly, the table we adopt today 

requires disclosure of the actuarial 

present value of the named executive 

officer’s accumulated benefit under the 

plan and the number of years of service 

credited to the named executive officer 

under the plan reported in the table, 

each computed as of the same pension 

plan measurement date for financial 

statement reporting purposes with 

respect to the audited financial 

statements for the company’s last 

completed fiscal year.295 This disclosure 

applies without regard to the particular 

form(s) of benefit payment available 

under the plan. 

Whether or not the plan allows for a 

lump-sum payment, presentation of the 

present value of the accrued plan 

benefit provides investors an 

understanding of the cost of promised 

future benefits in present value 

terms.296 Companies must use the same 

assumptions, such as interest rate 

assumptions, that they use to derive the 

amounts disclosed in conformity with 

generally accepted accounting 

principles, but would assume that 

retirement age is normal retirement age 

as defined in the plan, or if not so 

defined, the earliest time at which a 

participant may retire under the plan 

without any benefit reduction due to 

age.297 The estimates are to be based on 

current compensation, and as such, 

future levels of compensation need not 

be estimated for purposes of the 

calculation. The valuation method and 

all material assumptions applied will be 

described in the narrative section 

accompanying this table.298 A separate 

row will be provided for each plan in 

which a named executive officer 

participates.299 For purposes of 

allocating the current accrued benefit 

between tax qualified defined benefit 

plans and related supplemental plans, a 

company will apply the applicable 

Internal Revenue Code limitations in 

effect as of the pension plan 

measurement date.300 At the suggestion 

of a commenter, we have simplified the 

name of the table.301

PENSION BENEFITS

Name Plan name 

Number of 

years credited service 

(#) 

Present 

value of 

accumulated 

benefit 

($) 

Payments 

during last 

fiscal year 

($) 

(a) (b) (c) (d) (e) 

PEO 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53187 

302 Item 402(h)(2)(v). See also Instruction 1 to 

Item 402(c)(2)(viii). We have included these 

amounts in this table rather than the Summary 

Compensation Table since the increase in the value 

of the pension benefit would have been previously 

disclosed in the Summary Compensation Table. 303 Item 402(a)(5) as amended provides that a 

column may be omitted if there is no compensation 

required to be reported in that column in any fiscal 

year covered by that table. 304For this purpose, ‘‘normal retirement age’’

means the normal retirement age defined in the 

plan, or if not so defined, the earliest time at which 

a participant may retire under the plan without any 

benefit reduction due to age. ‘‘Early retirement age’’

means early retirement age as defined in the plan, 

or otherwise available to the executive under the 

plan. Item 402(h)(3)(i) and (ii). 

305See Section II.C.1.d.i. above. 

306See Lucian A. Bebchuk and Jesse M. Fried, 

Stealth Compensation via Retirement Benefits, 1 

Berkeley Bus. L.J. 291, 314–316 (2004). 

307 Item 402(i). 

PENSION BENEFITS—Continued 

Name Plan name 

Number of 

years credited service 

(#) 

Present 

value of 

accumulated 

benefit 

($) 

Payments 

during last 

fiscal year 

($) 

(a) (b) (c) (d) (e) 

PFO 

A 

B 

C 

We have moved the disclosure 

proposed to be included in the 

Summary Compensation Table of 

pension benefits paid to a named 

executive officer during the last 

completed fiscal year to the Pension 

Benefits Table so that pension benefits 

are disclosed only once in the Summary 

Compensation Table.302 We remain of 

the view that disclosure of these 

payments would be material to 

investors, particularly where the named 

executive officer receives them while 

still employed by the company.303

The table will be followed by a 

narrative description of material factors 

necessary to an understanding of each 

plan disclosed in the table. Examples of 

such factors may include, in given 

cases, among other things: 

• The material terms and conditions 

of benefits available under the plan, 

including the plan’s retirement benefit 

formula and eligibility standards, and 

early retirement arrangements;304

• The specific elements of 

compensation, such as salary and 

various forms of bonus, included in 

applying the benefit formula, 

identifying each such element; • Regarding participation in multiple 

plans, the different purposes for each 

plan; and • Company policies with regard to 

such matters as granting extra years of 

credited service. 

b. Nonqualified Deferred Compensation 

Table 

In order to provide a more complete 

picture of potential post-employment 

compensation, we are adopting 

substantially as proposed a new table to 

disclose contributions, earnings and 

balances under each defined 

contribution or other plan that provides 

for the deferral of compensation on a 

basis that is not tax-qualified. These 

plans may be a significant element of 

retirement and post-termination 

compensation. Prior to these 

amendments, the rules had elicited 

disclosure of the compensation when 

earned and only the above-market or 

preferential earnings on nonqualified 

deferred compensation.305 The full 

value of those earnings and the accounts 

on which they are payable was not 

subject to disclosure, nor were investors 

informed regarding the rate at which 

these amounts, and the corresponding 

cost to the company, grow.306

As noted above, we are requiring 

disclosure in the Summary 

Compensation Table only of the abovemarket or preferential portion of 

earnings on compensation that is 

deferred on a basis that is not taxqualified. To provide investors with 

disclosure of the full amount of 

nonqualified deferred compensation 

accounts that the company is obligated 

to pay named executive officers, 

including the full amount of earnings 

for the last fiscal year, we are also 

requiring new tabular and narrative 

disclosure of nonqualified deferred 

compensation, as we proposed.307

NONQUALIFIED DEFERRED COMPENSATION

Name 

Executive 

contributions 

in last FY 

($) 

Registrant 

contributions 

in last FY 

($) 

Aggregate 

earnings in 

last FY 

($) 

Aggregate 

withdrawals/ 

distributions 

($) 

Aggregate 

balance at 

last FYE 

($) 

(a) (b) (c) (d) (e) (f) 

PEO 

PFO 


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308See letter from Foley. 

309 Instruction to Item 402(i)(2). 

310As described in Section II.C.1.b. above, the 

rules as adopted do not include the corresponding 

footnote that was proposed for the Summary 

Compensation Table. 

311 Item 402(i)(3). 312 1983 Release, at Section III.E. 

313We confirm that this aspect of the disclosure 

requirement is not limited to a change in 

responsibilities in connection with a change in 

control. 

314 Item 402(j). 

315We have eliminated the $100,000 disclosure 

threshold that was specified in the rule prior to 

today’s amendments. For post-termination 

perquisites, however, the same disclosure and 

itemization thresholds used for the amended 

Summary Compensation Table apply. See Section 

II.C.1.e.i. above. We have modified Item 402(j)(2) 

from the proposal in response to comments to 

clarify that the required description covers both 

annual and lump sum payments. See letter from 

ABA. 

316We have modified Item 402(j)(3) from the 

proposal to clarify the scope of the required 

disclosure. The proposal would have required the 

company to describe and explain the specific 

factors used to determine the appropriate payment 

and benefit levels under the various triggering 

circumstances. A commenter suggested that the 

proposed language was overly broad and ambiguous 

and could result in mere repetition of the pension 

payout formula and actuarial assumptions. See 

letter from ABA. 

NONQUALIFIED DEFERRED COMPENSATION—Continued 

Name 

Executive 

contributions 

in last FY 

($) 

Registrant 

contributions 

in last FY 

($) 

Aggregate 

earnings in 

last FY 

($) 

Aggregate 

withdrawals/ 

distributions 

($) 

Aggregate 

balance at 

last FYE 

($) 

(a) (b) (c) (d) (e) (f) 

A 

B 

C 

One commenter noted that the title 

proposed—Nonqualified Defined 

Contribution and Other Deferred 

Compensation Plans—suggested that tax 

qualified plans that provide for deferral 

of compensation, such as Section 401(k) 

plans, would be covered.308 We have 

adopted the commenter’s 

recommendation to modify the title to 

clarify that the table covers only 

deferred compensation that is not taxqualified, and we have also shortened 

the title consistent with our 

amendments regarding the Pension 

Benefits Table. 

As proposed and adopted, an 

instruction requires footnote 

quantification of the extent to which 

amounts in the contributions and 

earnings columns are reported as 

compensation in the year in question 

and other amounts reported in the table 

in the aggregate balance column were 

reported previously in the Summary 

Compensation Table for prior years.309

This footnote provides information so 

that investors can avoid ‘‘double 

counting’’ of deferred amounts by 

clarifying the extent to which amounts 

payable as deferred compensation 

represent compensation previously 

reported, rather than additional 

currently earned compensation.310

The table will be followed by a 

narrative description of material factors 

necessary to an understanding of the 

disclosure in the table.311 Examples of 

such factors may include, in given 

cases, among other things: 

• The type(s) of compensation 

permitted to be deferred, and any 

limitations (by percentage of 

compensation or otherwise) on the 

extent to which deferral is permitted; 

• The measures of calculating interest 

or other plan earnings (including 

whether such measure(s) are selected by 

the named executive officer or the 

company and the frequency and manner 

in which such selections may be 

changed), quantifying interest rates and 

other earnings measures applicable 

during the company’s last fiscal year; 

and 

• material terms with respect to 

payouts, withdrawals and other 

distributions. 

Where plan earnings are calculated by 

reference to actual earnings of mutual 

funds or other securities, such as 

company stock, it is sufficient to 

identify the reference security and 

quantify its return. This disclosure may 

be aggregated to the extent the same 

measure applies to more than one 

named executive officer. 

c. Other Potential Post-Employment 

Payments 

We are adopting the significant 

revisions that we proposed to our 

requirements to describe termination or 

change in control provisions. The 

Commission has long recognized that 

‘‘termination provisions are distinct 

from other plans in both intent and 

scope and, moreover, are of particular 

interest to shareholders.’’ 312 Prior to 

today’s amendments, disclosure did not 

in many cases capture material 

information regarding these plans and 

potential payments under them. We 

therefore proposed and are adopting 

disclosure of specific aspects of written 

or unwritten arrangements that provide 

for payments at, following, or in 

connection with the resignation, 

severance, retirement or other 

termination (including constructive 

termination) of a named executive 

officer, a change in his or her 

responsibilities,313 or a change in 

control of the company. 

Our amendments call for narrative 

disclosure of the following information 

regarding termination and change in 

control provisions: 314

• the specific circumstances that 

would trigger payment(s) or the 

provision of other benefits (references to 

benefits include perquisites and health 

care benefits); 

• the estimated payments and 

benefits that would be provided in each 

covered circumstance, and whether they 

would or could be lump sum or annual, 

disclosing the duration and by whom 

they would be provided; 315

• how the appropriate payment and 

benefit levels are determined under the 

various circumstances that would 

trigger payments or provision of 

benefits; 316

• any material conditions or 

obligations applicable to the receipt of 

payments or benefits, including but not 

limited to non-compete, nonsolicitation, non-disparagement or 

confidentiality covenants; and 


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317This would include, for example, disclosure of 

whether an executive simultaneously receives both 

severance and retirement benefits, a practice 

commonly known as a ‘‘double dip.’’ See letter from 

WorldatWork. 

318See, e.g., Securities Act Section 27A and 

Exchange Act Section 21E. 

319See, e.g., letters from Cleary; Foley; HRPA; and 

Top Five Data. 

320 Instruction 1 to Item 402(j). See, e.g., letters 

from Emerson; Foley; and Frederic W. Cook & Co. 

321 Instruction 4 to Item 402(j). See letter from 

ABA. 

322 Item 402(j)(1) and Instruction 2 to Item 402(j). 

These would be the assumptions applied under 

Financial Accounting Standards Board Statement of 

Financial Accounting Standards No. 106, 

Employer’s Accounting for Postretirement Benefits 

Other Than Pensions (FAS 106). See, e.g., letters 

from Peabody Energy and WorldatWork. 

323See letter from Academy of Actuaries. 

324 Instruction 3 to Item 402(j). 

325 Instruction 5 to Item 402(j). 

326We are adopting the nomenclature used in 

Item 5.02 of Form 8–K, which refers to ‘‘principal 

executive officer’’ and ‘‘principal financial officer.’’

327 Item 402(a)(3). As defined in Securities Act 

Rule 405 [17 CFR 230.405] and Exchange Act Rule 

3b–7 [17 CFR 240.3b–7], ‘‘the term ’executive 

officer,’ when used with reference to a registrant, 

means its president, any vice president of the 

registrant in charge of a principal business unit, 

division or function (such as sales, administration 

or finance), any other officer who performs a policymaking function or any other person who performs 

similar policy-making functions for the registrant. 

Executive officers of subsidiaries may be deemed 

executive officers of the registrant if they perform 

such policy-making functions for the registrant.’’

Therefore, as was formerly the case, a named 

executive officer may be an executive officer of a 

subsidiary or an employee of a subsidiary who 

performs such policy-making functions for the 

registrant. We have clarified this point in the 

provision describing the determination of named 

executive officer. Instruction 2 to Item 402(a)(3). 

328Exchange Act Rules 13a–14 and 15d–14. 

329Paragraphs (a)(3)(i) and (a)(3)(ii) of Item 402 

provide that all individuals who served as a 

principal executive officer and principal financial 

officer or in similar capacities during the last 

completed fiscal year must be considered named 

executive officers. Item 402(a)(4) specifies that if the 

principal executive officer or principal financial 

officer served in that capacity for only part of a 

fiscal year, information must be provided as to all 

of the individual’s compensation for the full fiscal 

year. Item 402(a)(4) also specifies that if a named 

executive officer (other than the principal executive 

officer or principal financial officer) served as an 

executive officer of the company (whether or not in 

the same position) during any part of the fiscal year, 

then information is required as to all compensation 

of that individual for the full fiscal year. 

330These are the registrant’s principal executive 

officer, president, principal financial officer, 

principal accounting officer, principal operating 

officer or any person performing similar functions. 

As described in Section III.A. below, the rules we 

adopt today also amend Item 5.02 of Form 8–K. 

• any other material factors regarding 

each such contract, agreement, plan or 

arrangement.317

The item contemplates disclosure of 

the duration of non-compete and similar 

agreements, and provisions regarding 

waiver of breach of these agreements, 

and disclosure of tax gross-up 

payments. 

A company will be required to 

provide quantitative disclosure under 

these requirements even where 

uncertainties exist as to amounts 

payable under these plans and 

arrangements. We clarify that in the 

event uncertainties exist as to the 

provision of payments and benefits or 

the amounts involved, the company is 

required to make a reasonable estimate 

(or a reasonable estimated range of 

amounts), and disclose material 

assumptions underlying such estimates 

or estimated ranges in its disclosure. In 

such event, the disclosure will be 

considered forward-looking information 

as appropriate that falls within the safe 

harbors for disclosure of such 

information.318

We have modified the requirement 

somewhat in response to comments that 

compliance with the proposal would 

involve multiple complex calculations 

and projections based on circumstantial 

and variable assumptions.319 We adopt 

commenters’ suggestions that the 

quantitative disclosure required be 

calculated applying the assumptions 

that: 

• the triggering event took place on 

the last business day of the company’s 

last completed fiscal year; and 

• the price per share of the company’s 

securities is the closing market price as 

of that date.320

We have also revised the rule to 

provide that if a triggering event has 

occurred for a named executive officer 

who was not serving as a named 

executive officer at the end of the last 

completed fiscal year, disclosure under 

this provision is required for that named 

executive officer only with respect to 

the actual triggering event that 

occurred.321 These modifications will 

both facilitate company compliance and 

provide investors with disclosure that is 

more meaningful. We further clarify that 

health care benefits are included in this 

requirement, and quantifiable based on 

the assumptions used for financial 

reporting purposes under generally 

accepted accounting principles.322

We further clarify in response to 

comments that to the extent that the 

form and amount of any payment or 

benefit that would be provided in 

connection with any triggering event is 

fully disclosed in the Pension Benefits 

Table or the Nonqualified Deferred 

Compensation Table and the narrative 

disclosure related to those tables, 

reference may be made to that 

disclosure.323 However, to the extent 

that the form or amount of any such 

payment or benefit would be increased, 

or its vesting or other provisions 

accelerated upon any triggering event, 

such increase or acceleration must be 

specifically disclosed in this section.324

In addition, we have added an 

instruction that companies need not 

disclose payments or benefits under this 

requirement to the extent such 

payments or benefits do not 

discriminate in scope, terms or 

operation, in favor of a company’s 

executive officers and are available 

generally to all salaried employees.325

6. Officers Covered 

a. Named Executive Officers 

As proposed, we are amending the 

disclosure rules so that the principal 

executive officer, the principal financial 

officer 326 and the three most highly 

compensated executive officers other 

than the principal executive officer and 

principal financial officer comprise the 

named executive officers.327 In addition, 

as was the case prior to these 

amendments, up to two additional 

individuals for whom disclosure would 

have been required but for the fact that 

they were no longer serving as executive 

officers at the end of the last completed 

fiscal year shall be included. 

As we noted in the Proposing Release, 

we believe that compensation of the 

principal financial officer is important 

to shareholders because, along with the 

principal executive officer, the principal 

financial officer provides the 

certifications required with the 

company’s periodic reports and has 

important responsibility for the fair 

presentation of the company’s financial 

statements and other financial 

information.328 Like the principal 

executive officer, disclosure about the 

principal financial officer will be 

required even if he or she was no longer 

serving in that capacity at the end of the 

last completed fiscal year.329 As was the 

case for the chief executive officer prior 

to today’s amendments, all persons who 

served as the company’s principal 

executive officer or principal financial 

officer during the last completed fiscal 

year are named executive officers. 

We are not requiring compensation 

disclosure for all of the officers listed in 

Items 5.02(b) and (c) of Form 8–K.330

Those Form 8–K Items were adopted to 

provide current disclosure in the event 

of an appointment, resignation, 

retirement or termination of the 

specified officers, based on the principle 

that changes in employment status of 

these particular officers are 

unquestionably or presumptively 

material. At the time when a decision is 

made regarding the employment status 

of a particular officer, it will not always 

be clear who will be the named 

executive officers for the current year. 


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331See, e.g., letters from ACC; Emerson; Leggett 

& Platt; SCSGP; and Unitrin. 

332See, e.g., letters from Frederic W. Cook & Co. 

and Intel. 

333See, e.g., letter from Intel. 

334See Section II.C.1.f. above, discussing the 

effect of this change on compensation formerly 

reported as ‘‘bonus.’’

335 Instruction 1 to Item 402(a)(3). 

336This exclusion had been set forth in 

Instruction 3 to Item 402(a)(3) prior to these 

amendments. 

337 Instruction 3 to Item 402(a)(3). 

338These relevant provisions were set forth in 

paragraphs (a)(2) and (a)(5) of Item 402 before 

today’s amendments. Because paragraph (a)(5) of 

Item 402 as it had been stated prior to these 

amendments was otherwise redundant with 

paragraph (a)(2) of Item 402 as that provision had 

been stated, we are eliminating the language that 

had been set forth in paragraph (a)(5) in its entirety 

and making a conforming amendment to paragraph 

(a)(2) of Item 402. 

339See Instruction 5 to Item 404(a), discussed in 

Section V.A.3., below. 

340This language appeared in Item 402(a)(7)(ii) 

prior to today’s amendments, which generally 

defined the term ‘‘plan.’’

341Amendment to Instruction 2 to Item 15(b) of 

Form N–1A; amendment to Instruction 2 to Item 

21.2 of Form N–2; amendment to Instruction 2 to 

Item 22(b) of Form N–3. 

342 Item 402(a)(6)(ii). 

Given these factors, it is reasonable for 

the two groups not to be identical. 

b. Identification of Most Highly 

Compensated Executive Officers; Dollar 

Threshold for Disclosure 

In the rule prior to today’s 

amendments, the determination of the 

most highly compensated executive 

officers was based solely on total annual 

salary and bonus for the last fiscal year, 

subject to a $100,000 disclosure 

threshold. We proposed to revise the 

dollar threshold for disclosure of named 

executive officers other than the 

principal executive officer and the 

principal financial officer to $100,000 of 

total compensation for the last fiscal 

year. Given the proliferation of various 

forms of compensation other than salary 

and bonus, we believe that total 

compensation would more accurately 

identify those officers who are, in fact, 

the most highly compensated. 

Several commenters objected to using 

total compensation to identify named 

executive officers.331 In particular, 

commenters stated that this measure 

would minimize the importance of the 

compensation committee’s 

compensation decisions for the most 

recent year and include significant 

elements beyond the committee’s 

control, such as the increase in pension 

value and earnings on nonqualified 

deferred compensation. Some 

commenters recommended continuing 

to rely solely on salary and bonus, 

stating that these measures more 

accurately reflect the executives who are 

most highly valued in the company and 

permit greater year-to-year 

consistency.332 Other commenters 

expressed concern that including 

episodic option awards would result in 

more frequent changes to the named 

executive officer roster.333

We are persuaded that it is 

appropriate to exclude from the named 

executive officer determination 

compensation elements that principally 

reflect executives’ decisions to defer 

compensation and wealth accumulation 

in pension plans, or are unduly 

influenced by age or years of service. 

However, as we stated in the Proposing 

Release, basing identification of named 

executive officers solely on the 

compensation reportable in the salary 

and bonus categories may provide an 

incentive to re-characterize 

compensation. Further, limiting the 

determination to salary and bonus is not 

consistent with our decision to 

eliminate the distinction between 

‘‘annual’’ and ‘‘long-term’’

compensation in the Summary 

Compensation Table.334 We realize that 

this may result in more frequent 

changes to the officers designated as 

named executive officers, but believe 

that it will provide a clearer picture of 

compensation at a company. 

Accordingly, we require the most highly 

compensated executive officers to be 

determined based on total 

compensation, reduced by the sum of 

the increase in pension values and 

nonqualified deferred compensation 

above-market or preferential earnings 

reported in column (h) of the Summary 

Compensation.335

Prior to these amendments, 

companies were permitted to exclude an 

executive officer (other than the chief 

executive officer) due to either an 

unusually large amount of cash 

compensation that was not part of a 

recurring arrangement and was unlikely 

to continue, or cash compensation 

relating to overseas assignments 

attributed predominantly to such 

assignments.336 Because payments 

attributed to overseas assignments have 

the potential to skew the application of 

Item 402 disclosure away from 

executives whose compensation 

otherwise properly would be disclosed, 

we are retaining this basis for exclusion, 

as we proposed. However, we believe 

that other compensation that is ‘‘not 

recurring and unlikely to continue’’

should be considered compensation for 

disclosure purposes. There has been 

inconsistent interpretation of the ‘‘not 

recurring and unlikely to continue’’

standard, and it is susceptible to 

manipulation. We therefore are 

eliminating this basis for exclusion, as 

we proposed.337

7. Interplay of Items 402 and 404 

We are amending Item 402 so that it 

requires disclosure of all transactions 

between the company and a third party 

where the primary purpose of the 

transaction is to furnish compensation 

to a named executive officer as 

proposed. Also as proposed, amended 

Item 402 will no longer exclude from its 

disclosure requirements information 

about compensatory transaction that 

had been disclosed under the related 

person transaction disclosure 

requirements of Item 404.338 Further, 

instructions to amended Item 404 clarify 

what compensatory transactions with 

executive officers and directors need not 

be disclosed under Item 404.339

As noted in the Proposing Release, the 

result of these amendments may be that 

in some cases compensation 

information will be required to be 

disclosed under Item 402, while the 

related person transaction giving rise to 

that compensation is also disclosed 

under Item 404. We believe that the 

possibility of additional disclosure in 

the context of each of these respective 

items is preferable to the possibility that 

compensation is not properly and fully 

disclosed under Item 402. 

8. Other Changes 

Before today’s amendments, a 

company was permitted to omit from 

Item 402 disclosure of ‘‘information 

regarding group life, health, 

hospitalization, medical reimbursement 

or relocation plans that do not 

discriminate in scope, terms or 

operation, in favor of executive officers 

or directors of the registrant and that are 

available generally to all salaried 

employees.’’ 340 Because relocation 

plans, even when available generally to 

all salaried employees, are susceptible 

to operation in a discriminatory manner 

that favors executive officers, this 

exclusion may have deprived investors 

of disclosure of significant 

compensatory benefits. For this reason, 

we are deleting relocation plans from 

this exclusion, as we proposed. For the 

same reason, as we proposed, we are 

also deleting relocation plans from the 

exclusion from portfolio manager 

compensation in forms used by 

management investment companies to 

register under the Investment Company 

Act and offer securities under the 

Securities Act.341 We also are revising 

the definition of ‘‘plan’’ so that it is 

more principles-based, as we 

proposed.342 Finally, in order to 


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343 Item 402(a)(6)(i). 

344See, e.g., National Association of Corporate 

Directors and Pearl Meyer & Partners, 2003–2004 

Director Compensation Survey (2004); National 

Association of Corporate Directors, Report of the 

NACD Blue Ribbon Commission On Director 

Compensation (2001); and Dennis C. Carey, et al, 

How Should Corporate Directors Be Compensated?, 

Investment Dealers’ Digest Inc.—Special Issue: 

Boards and Directors (Jan. 1996). 

345 1995 Release. The 1995 proposed amendment 

was coupled with a proposed amendment to permit 

companies to reduce the detailed executive 

compensation information provided in the proxy 

statement by instead furnishing that information in 

the Form 10–K. We did not act upon these proposed 

amendments. 

346As noted in n. 303 above, Item 402(a)(5) 

provides that a column may be omitted if there is 

no compensation required to be reported in that 

column. 

347Under director legacy programs, also known as 

charitable award programs, registrants typically 

agree to make a future donation to one or more 

charitable institutions in the director’s name, 

payable by the company upon a designated event 

such as death or retirement. The amount to be 

disclosed in the table shall be the annual cost of 

such promises and payments, with footnote 

disclosure of the total dollar amount and other 

material terms of each such program. Instruction 1 

to Item 402(k)(2)(vii). 

simplify the language of the individual 

requirements, we have consolidated into 

one provision the definitions for the 

terms stock, option and equity as used 

in Item 402.343

9. Compensation of Directors 

Director compensation has continued 

to evolve from simple compensation 

packages mostly involving cash 

compensation and attendance fees to 

more complex packages, which can also 

include equity-based compensation, 

incentive plans and other forms of 

compensation.344 In light of this 

complexity, we proposed to require 

formatted tabular disclosure for director 

compensation, accompanied by 

narrative disclosure of additional 

material information. In doing so, we 

revisited an approach that the 

Commission proposed in 1995 but did 

not adopt at that time.345

Director compensation has continued 

to evolve since 1995 so that we are 

today adopting a Director Compensation 

Table, which resembles the revised 

Summary Compensation Table, but 

presents information only with respect 

to the company’s last completed fiscal 

year. Consistent with the modifications 

to the Summary Compensation Table, 

this table moves pension and 

nonqualified deferred compensation 

plan disclosure from All Other 

Compensation to a separate column.346

Because the same instructions as 

provided in the Summary 

Compensation Table govern analogous 

matters in the Director Compensation 

Table, our modifications to those 

instructions also apply to this table. 

DIRECTOR COMPENSATION

Name 

Fees earned 

or paid in 

cash 

($) 

Stock awards 

($) 

Option 

awards 

($) 

Non-equity 

incentive 

plan compensation 

($) 

Change in 

pension 

value and 

nonqualified 

deferred 

compensation earnings 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) 

A 

B 

C 

D 

E 

As proposed and adopted, director 

fees earned or paid in cash would be 

reported separately from fees paid in 

stock. The All Other Compensation 

column of the Director Compensation 

Table includes, but is not limited to: 

• All perquisites and other personal 

benefits if the total is $10,000 or greater; 

• All tax reimbursements; 

• For any security of the company or 

its subsidiaries purchased from the 

company or its subsidiaries (through 

deferral of fees or otherwise) at a 

discount from the market price of such 

security at the date of purchase, unless 

the discount is generally available to all 

security holders or to all salaried 

employees of the company, the 

compensation cost, if any, computed in 

accordance with FAS 123R; 

• Amounts paid or accrued to any 

director pursuant to a plan or 

arrangement in connection with the 

resignation, retirement or any other 

termination of such director or a change 

in control of the company; 

• Annual company contributions to 

vested and unvested defined 

contribution plans; 

• All consulting fees; 

• Awards under director legacy or 

charitable awards programs; 347 and 

• The dollar value of any insurance 

premiums paid by, or on behalf of, the 

company for life insurance for the 

director’s benefit. 

An additional requirement to include 

the dollar value of any dividends or 

other earnings paid in stock or option 

awards when the dividend or earnings 

were not factored into the grant date fair 

value has been adopted for this column 

as discussed above. 

In addition to the disclosure specified 

in the columns of the table, we 

proposed to require, by footnote to the 

appropriate column, disclosure for each 

director of the outstanding equity 

awards at fiscal year end as would be 

required if the Outstanding Equity 

Awards at Fiscal Year-End table for 

named executive officers were required 

for directors. In response to a comment 

that this disclosure would be provided 


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348 Instruction to Item 402(k)(2)(iii) and (iv). See 

letter from ABA. 

349The only exception is if all perquisites 

received by the director total less than $10,000, they 

do not need to be disclosed. Further, as described 

above for the Summary Compensation Table, 

disclosure of nonqualified deferred compensation 

earnings is limited to the above-market or 

preferential portion. 

350 Instruction 3 to Item 402(c). 

351 Instruction to Item 402(k)(2). 

352 Item 402(k)(3). 

353These amendments apply only to small 

business issuers, as defined by Item 10(a)(1) of 

Regulation S–B. The Commission’s Advisory 

Committee on Smaller Public Companies has 

recommended that the Commission incorporate the 

scaled disclosure accommodations currently 

available to small business issuers under Regulation 

S–B into Regulation S–K and make them available 

to all microcap companies. Final Report of the 

Advisory Committee on Smaller Public Companies 

to the United States Securities and Exchange 

Commission (Apr. 23, 2006). Any future 

consideration of this recommendation would be the 

subject of a separate rulemaking. 

354Prior to today’s amendments, under both Item 

402 of Regulation S7–B and Item 402 of Regulation 

S–K, a small business issuer was not required to 

provide the Compensation Committee Report, the 

Performance Graph, the Compensation Committee 

Interlocks disclosure, the Ten-Year Option/SAR 

Repricings Table, and the Option Grant Table 

columns disclosing potential realizable value or 

grant date value. The rules prior to today’s 

amendments also permitted small business issuers 

to exclude the Pension Plan Table. 

355See, e.g., letters from CII; CRPTF; IUE–CWA; 

SBAF; and WSIB. 

356See, e.g., letters from ISS and Institutional 

Investors Group. 

357See letters from America’s Community 

Bankers (‘‘ACB’’); Independent Community Bankers 

of America (‘‘ICBA’’); and SCSGP. 

358 Items 402(b) and 402(c) of Regulation S–B. 

Consistent with the instructions to the narrative 

disclosure required by Item 402(e) of Regulation S–

K, we have added an instruction to Item 402(c) of 

Regulation S–B so that disclosure is not required 

regarding any repricing that occurs through 

specified provisions. Instruction to Item 402(c) of 

Regulation S–B. 

359 Item 402(d) of Regulation S–B. 

360 Item 402(f) of Regulation S–B. 

361 Item 402(a) of Regulation S–B. Item 402(c)(7) 

of Regulation S–B requires an identification to the 

extent material of any item included under All 

Other Compensation in the Summary 

Compensation Table. However, identification of an 

item will not be considered material if it does not 

exceed the greater of $25,000 or 10% of all items 

included in the specified category. All items of 

compensation are required to be included in the 

Summary Compensation Table without regard to 

whether such items are required to be identified. 

362See letter from ABA. 

363 Items 402(c) and 402(e) of Regulation S–B. 

in the narrative accompanying the table, 

we have simplified the relevant 

instruction to require footnote 

disclosure only of the aggregate 

numbers of stock awards and option 

awards outstanding at fiscal year end.348

As with the Summary Compensation 

Table, the new rules make clear that all 

compensation must be included in the 

table.349 As is the case with the current 

director disclosure requirement, 

companies will not be required to 

include in the director disclosure any 

amounts of compensation paid to a 

named executive officer and disclosed 

in the Summary Compensation Table 

with footnote disclosure indicating what 

amounts reflected in that table are 

compensation for services as a 

director.350 An instruction to the 

Director Compensation Table permits 

the grouping of multiple directors in a 

single row of the table if all of their 

elements and amounts of compensation 

are identical.351

Following the table, narrative 

disclosure will describe any material 

factors necessary to an understanding of 

the table. Such factors may include, for 

example, a breakdown of types of 

fees.352 In addition, as noted in Section 

II.A., disclosure regarding option timing 

or dating practices may be necessary 

under this narrative disclosure 

requirement when the recipients of the 

stock option grants are directors of the 

company. As we proposed, we are not 

requiring a supplemental Grants of PlanBased Awards Table for directors. 

D. Treatment of Specific Types of 

Issuers 

1. Small Business Issuers 

The Item 402 amendments continue 

to differentiate between small business 

issuers and other issuers, as we 

proposed. In adopting the amendments, 

we recognize that the executive 

compensation arrangements of small 

business issuers typically are less 

complex than those of other public 

companies.353 We also recognize that 

satisfying disclosure requirements 

designed to capture more complicated 

compensation arrangements may 

impose new, unwarranted burdens on 

small business issuers.354

Some commenters addressing the 

proposed amendments to Item 402 of 

Regulation S–B expressed the view that 

all companies whose shares are publicly 

traded should have to meet the same 

reporting and disclosure standards, 

regardless of their size, or urged that 

exemptions for smaller public 

companies be limited,355 suggesting that 

they be required to file some form of a 

basic Compensation Discussion and 

Analysis.356 We are not following these 

recommendations, because the 

executive compensation arrangements 

of small business issuers generally are 

so much less complex than those of 

other public companies that they do not 

warrant the more extensive disclosure 

requirements imposed on companies 

that are not small business issuers and 

related regulatory burdens that could be 

disproportionate for small business 

issuers. 

Other commenters who supported the 

Commission’s proposal to require less 

extensive disclosure for companies 

subject to Regulation S–B suggested that 

the Commission amend the definition of 

small business issuer to encompass a 

larger group of smaller public 

companies, such as by adopting the 

definition of ‘‘smaller public company’’

recommended by the Advisory 

Committee on Smaller Public 

Companies, and scale back the 

disclosure thresholds for all such 

smaller companies.357 We are not 

following this recommendation at this 

time, but would instead defer 

consideration until we can fully 

consider all recommendations of the 

Advisory Committee. 

As proposed and adopted, small 

business issuers will be required to 

provide, along with related narrative 

disclosure: 

• The Summary Compensation 

Table; 358

• The Outstanding Equity Awards at 

Fiscal Year-End Table; 359 and 

• The Director Compensation 

Table.360

Small business issuers will be 

required to provide information in the 

Summary Compensation Table only for 

the last two fiscal years. In addition, 

small business issuers will be required 

to provide information for fewer named 

executive officers, namely the principal 

executive officer and the two most 

highly compensated officers other than 

the principal executive officer.361 In 

light of our decision to link the 

Summary Compensation Table pension 

plan disclosure to the disclosure in the 

Pension Benefits Table, which is not 

required for small business issuers, and 

in response to comment,362 we have 

decided not to require that small 

business issuers include pension plan 

disclosure in the Summary 

Compensation Table. Narrative 

discussion of a number of items to the 

extent material replaces tabular or 

footnote disclosure, for example 

identification of other items in the All 

Other Compensation column and a 

description of post-employment 

payments and other benefits.363 In light 

of our request in Release No. 33–8735 

for further comment on the proposed 

additional narrative disclosure 

requirement regarding up to three 

highly compensated employees so that 

it might apply only to large accelerated 

filers, we have not adopted this 

proposal for Item 402 of Regulation S–

B. Small business issuers are not 

required to provide a Compensation 


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364We are also eliminating a provision of Item 

402 of Regulation S–K that allows small business 

issuers using forms that call for Regulation S–K 

disclosure to exclude the disclosure required by 

certain paragraphs of that Item. This provision had 

been set forth in Item 402(a)(1)(i) of Regulation S–

K prior to today’s amendments. 365See, e.g., letters from Federation of German 

Industries; DaimlerChrysler AG; and jointly, Allianz 

AG, Deutsche Bank AG and Siemens AG. 366 Item 402(a)(1). 367Business development companies are a 

category of closed-end investment companies that 

are not required to register under the Investment 

Company Act [15 U.S.C. 80a–2(a)(48)]. 368New Item 18.14 of Form N–2. Under the 

amendments, business development companies will 

no longer be required to respond to Item 18.13 of 

Form N–2, and Item 18.13(c) of Form N–2 is being 

deleted. Items 18.14 and 18.15 of Form N–2 are 

being redesignated as Items 18.15 and 18.16, 

respectively. As a result of the redesignation of Item 

18.15 of Form N–2, a change to the cross reference 

to this Item in Instruction 8(a) of Item 24 of the form 

is also being made. 

369Amendment to Item 8 of Schedule 14A. Under 

the amendments, business development companies 

will no longer be required to respond to Item 

22(b)(13) of Schedule 14A, and Item 22(b)(13)(iii) of 

Schedule 14A is being deleted. Amendments to 

Item 22(b)(13) of Schedule 14A. 

370 Item 11 of Form 10–K. 

371See Section II.C.6., above. 

372See instructions 4 and 6 to Item 22(b)(13)(i) of 

Schedule 14A; and instructions 4 and 6 to Item 

18.13(a) of Form N–2 (prior to today’s amendments 

requiring certain entries in the compensation table 

in the proxy and information statements and 

registration statements of business development 

companies to include compensation from the fund 

complex). 

373Amendments to: Instruction 2 to paragraph (d) 

of Item 201 of Regulation S–B; Instruction 2 to 

paragraph (d) of Item 201 of Regulation S–K; 

Exchange Act Rules 14a–6(a)(4) and 14c–5(a)(4); 

and Instruction 1 to Item 10 of Schedule 14A. 

374Amendment to Item 601(b)(10)(iii)(C)(5). 

375Amendments to Item 10(b)(1)(ii) and 

Instruction to Item 10(b)(1)(ii) of Schedule 14A. 

376We stated in Section I of Additional Form 8–

K Disclosure Requirements and Acceleration of 

Filing Date, Release No 33–8400 (Mar. 16, 2004) [69 

FR 15594] (the ‘‘Form 8–K Adopting Release’’): 

‘‘The revisions that we adopt today will benefit 

markets by increasing the number of 

unquestionably or presumptively material events 

that must be disclosed currently.’’

Discussion and Analysis or the related 

Compensation Committee Report.364

2. Foreign Private Issuers 

Prior to today’s amendments, a 

foreign private issuer was deemed to 

comply with Item 402 of Regulation S–

K if it provided the information required 

by Items 6.B. and 6.E.2. of Form 20–F, 

with more detailed information 

provided if otherwise made publicly 

available. We proposed to continue this 

treatment of these issuers and clarify 

that the treatment of foreign private 

issuers under Item 402 parallels that 

under Form 20–F. Commenters 

supported this approach, stating that it 

showed appropriate deference to a 

foreign private issuer’s home country 

requirements.365 We are adopting these 

requirements as proposed.366

3. Business Development Companies 

As proposed, we are applying the 

same executive compensation 

disclosure requirements to business 

development companies that we are 

adopting for operating companies.367

We received no comments on this 

proposal. Our amendments eliminate 

the inconsistency between Form 10–K, 

on the one hand, which requires 

business development companies to 

furnish all of the information required 

by Item 402 of Regulation S–K, and the 

proxy rules and Form N–2, on the other, 

which require business development 

companies to provide some of the 

information from Item 402 and other 

information that applies to registered 

investment companies. 

Under the amendments, the 

registration statements of business 

development companies will be 

required to include all of the disclosures 

required by Item 402 of Regulation S–

K for all of the persons covered by Item 

402.368 This disclosure will also be 

required in the proxy and information 

statements of business development 

companies if action is to be taken with 

respect to the election of directors or 

with respect to the compensation 

arrangements and other matters 

enumerated in Items 8(b) through (d) of 

Schedule 14A.369 Business development 

companies will also be required to make 

these disclosures in their annual reports 

on Form 10–K.370

As a result of these amendments, the 

persons covered by the compensation 

disclosure requirements will be 

changed. The compensation disclosure 

in the proxy and information statements 

and registration statements of business 

development companies will be 

required to cover the same officers as for 

operating companies, including the 

principal executive officer and principal 

financial officer, as well as the three 

most highly compensated executive 

officers that have total compensation 

exceeding $100,000,371 instead of each 

of the three highest paid officers of the 

company that have aggregate 

compensation from the company for the 

most recently completed fiscal year in 

excess of $60,000. In addition, the 

registration statements of business 

development companies will no longer 

be required to disclose compensation of 

members of the advisory board or 

certain affiliated persons of the 

company. 

Finally, under the amendments, the 

proxy and information statements and 

registration statements of business 

development companies will not be 

required to include compensation from 

the ‘‘fund complex.’’ Previously, this 

information was required in some 

circumstances.372

E. Conforming Amendments 

The Item 402 amendments necessitate 

conforming amendments to the Items of 

Regulations S–K and S–B and the proxy 

rules that cross reference amended 

paragraphs of Item 402. On this basis, 

we are amending: 

• the Item 201(d) of Regulations S–K 

and S–B and proxy rule references to 

the Item 402 definition of ‘‘plan;’’ 373

• the Item 601(b)(10) of Regulation S–

K reference to the Item 402 treatment of 

foreign private issuers; 374 and 

• the proxy rule references to Item 

402 retirement plan disclosure.375

III. Revisions to Form 8–K and the 

Periodic Report Exhibit Requirements 

As part of our broader effort to revise 

our executive and director 

compensation disclosure requirements, 

we proposed revisions to Item 1.01 of 

Form 8–K. This item requires real-time 

disclosure about an Exchange Act 

reporting company’s entry into a 

material definitive agreement outside of 

the ordinary course of the company’s 

business, as well as any material 

amendment to such an agreement. Our 

staff’s experience since Item 1.01 

became effective in 2004 suggests that 

this item has elicited executive 

compensation disclosure regarding 

types of matters that do not appear 

always to be unquestionably or 

presumptively material, which is the 

standard we set for the expanded Form 

8–K disclosure events.376 We therefore 

proposed to revise Items 1.01 and 5.02 

of Form 8–K to require real-time 

disclosure of employee compensation 

events that more clearly satisfy this 

standard. We are adopting the revisions 

substantially as proposed. 

In addition to the amendments to 

Items 1.01 and 5.02 of Form 8–K, we 

proposed to revise General Instruction D 

of Form 8–K to permit companies in 

most cases to omit the Item 1.01 heading 

if multiple items including Item 1.01 are 

applicable, so long as all of the 

substantive disclosure required by Item 

1.01 is included. We are adopting this 

provision as proposed. 

A. Items 1.01 and 5.02 of Form 8–K 

Item 1.01 of Form 8–K requires an 

Exchange Act reporting company to 

disclose, within four business days, the 

company’s entry into a material 

definitive agreement outside of its 

ordinary course of business, or any 


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377See, e.g., letters on Additional Form 8–K 

Disclosure Requirements and Acceleration of Filing 

Date, Release No. 33–8106 (June 17, 2002) [67 FR 

42914] in File No. S7–22–02 from the Committee 

on Federal Regulation of Securities, Section of 

Business Law of the American Bar Association, 

dated September 12, 2002; Cleary, Gottlieb, Steen 

& Hamilton, dated August 26, 2002; Intel 

Corporation, dated August 26, 2002; Professor 

Joseph A. Grundfest, et al. dated October 3, 2002; 

Perkins Coie LLP, dated August 26, 2002; Shearman 

& Sterling, dated August 30, 2002; and Sullivan & 

Cromwell, dated August 26, 2002. 

378See, e.g., letter in File No. S7–22–02 from the 

Section of Business Law of the American Bar 

Association. 

379 Item 601(b)(10)(iii) of Regulation S–K. We note 

the provision in Item 601(b)(10)(iii)(A) that carves 

out any plan, contract or arrangement in which 

named executive officers and directors do not 

participate that is ‘‘immaterial in amount or 

significance.’’ In 1980, the Commission adopted 

amendments to Regulation S–K that consolidated 

all of the exhibit requirements of various disclosure 

forms into a single item in Regulation S–K. 

Amendments Regarding Exhibit Requirements, 

Release No. 33–6230 (Aug. 27, 1980) [45 FR 58822], 

at Section II.B. This item was a forerunner of the 

current Item 601. As part of that 1980 adopting 

release, the definition of material contract 

contained in the new item was also revised in an 

effort to reduce the number of remunerative plans 

or arrangements that must be filed. Not long after, 

though, the staff discovered that rather than reduce 

the number of exhibits filed, the provision actually 

had the opposite effect. The staff found that the 

revised definition of material contract ‘‘has resulted 

in registrants filing a large volume of varied 

remunerative contracts involving directors and 

executive officers, contracts which are not material 

and which would not have been filed under the 

previously existing ‘material in amount or 

significance’ standard.’’ Technical Amendment 

Regarding Exhibit Requirement, Release No. 33–

6287 (Feb. 6, 1981) [46 FR 11952], at Section I. 

Therefore, in February 1981, the Commission added 

‘‘unless immaterial in amount or significance’’ to 

the definition of ‘‘material contracts’’ as applied to 

remunerative plans, contracts or arrangements 

participated in by executives who are not named 

executive officers. Id. We reiterate that this phrase 

was intended to indicate that whether plans, 

contracts or arrangements in which executive 

officers other than named executive officers 

participate are required to be disclosed under Item 

601(b)(10) must be determined on the basis of 

materiality. 

380See, e.g., letters from ABA; Chamber of 

Commerce; N. Ludgus; Committee on Securities 

Regulation of the Business Law Section of the New 

York State Bar Association; SCSGP; and Sullivan. 

amendment of such agreement that is 

material to the company. When we 

initially proposed this item, several 

commenters stated that it would be 

difficult to determine, within the 

shortened Form 8–K filing period, 

whether a particular definitive 

agreement met the materiality threshold 

of Item 1.01, and whether the agreement 

was outside of the ordinary course of 

business.377 Some of these commenters 

suggested that we apply to Item 1.01 the 

standards used in pre-existing Item 

601(b)(10) of Regulation S–K, which 

governs the filing as exhibits to 

Commission reports of material 

contracts entered into outside the 

ordinary course, because these 

standards had been in place for many 

years and were familiar to reporting 

companies.378

In response to the concerns raised by 

these comments, we adopted Item 1.01 

of Form 8–K so that it uses the 

standards of Item 601(b)(10) to 

determine the types of agreements that 

are material to a company and not in the 

ordinary course of business. Item 

601(b)(10) of Regulation S–K requires a 

company to file, as an exhibit to 

Securities Act and Exchange Act filings, 

material contracts that are not made in 

the ordinary course of business and are 

to be performed in whole or part at or 

after the filing of the registration 

statement or report, or were entered into 

not more than two years before the 

filing. Item 601(b)(10)(iii) refers 

specifically to employment 

compensation arrangements and 

established a company’s obligation to 

file the following as exhibits: 

• any management contract or any 

compensatory plan, contract or 

arrangement, including but not limited 

to plans relating to options, warrants or 

rights, pension, retirement or deferred 

compensation or bonus, incentive or 

profit sharing (or if not set forth in any 

formal document, a written description 

thereof) in which any director or any 

named executive officer (as defined by 

Item 402(a)(3) of Regulation S–K) 

participates; 

• any other management contract or 

any other compensatory plan, contract, 

or arrangement in which any other 

executive officer of the company 

participates, unless immaterial in 

amount or significance; and 

• any compensation plan, contract or 

arrangement adopted without the 

approval of security holders pursuant to 

which equity may be awarded, 

including, but not limited to, options, 

warrants or rights in which any 

employee (whether or not an executive 

officer of the company) participates 

unless immaterial in amount or 

significance.379

Therefore, entry into these types of 

contracts triggered the filing of a Form 

8–K within four business days. 

Importantly, the requirement for 

directors and named executive officers 

does not include an exception for those 

that are ‘‘immaterial in amount or 

significance.’’ The incorporation of the 

Item 601(b)(10) standards into Item 1.01 

of Form 8–K has therefore significantly 

affected executive compensation 

disclosure practices. Prior to the Form 

8–K amendments in 2004, it was 

customary for a company’s annual 

proxy statement to be the primary 

vehicle for disclosure of executive and 

director compensation information. 

However, Item 1.01 of Form 8–K as 

originally adopted has resulted in 

executive compensation disclosures that 

are much more frequent and accelerated 

than those included in a company’s 

proxy statement. In addition, 

particularly because of the terms of Item 

601(b)(10), Item 1.01 of Form 8–K 

triggered compensation disclosure of the 

types of matters that, in some cases, 

appear to have fallen short of the 

‘‘unquestionably or presumptively 

material’’ standard associated with the 

expanded Form 8–K disclosure items. 

Companies and their counsel have 

raised concerns that the expanded Form 

8–K requirements have resulted in realtime disclosure of compensation events 

that should be disclosed, if at all, in a 

company’s proxy statement for its 

annual meeting or as an exhibit to the 

company’s next periodic report, such as 

the Form 10–Q or Form 10–K. 

As we stated in the Proposing Release, 

we believe that much of the disclosure 

regarding employment compensation 

matters required in real-time under the 

Form 8–K requirements is viewed by 

investors as material. However, we also 

believe it is appropriate to restore a 

more balanced approach to this aspect 

of Form 8–K, an approach which is 

designed to elicit unquestionably or 

presumptively material information on a 

real-time basis, but seeks to limit Form 

8–K required disclosure of information 

below that threshold. 

Accordingly, we are adopting 

amendments to Form 8–K that will 

uncouple Item 601(b)(10)(iii) of 

Regulation S–K from the current 

disclosure requirements of Form 8–K. 

As proposed, we are eliminating 

employment compensation 

arrangements from the scope of Item 

1.01 altogether and expanding Item 5.02 

of Form 8–K to cover only those 

compensatory arrangements with 

executive officers and directors that we 

believe are unquestionably or 

presumptively material. Commenters 

generally supported these proposed 

amendments.380 We are adopting these 

amendments substantially as proposed. 

1. Item 1.01—Entry Into a Material 

Definitive Agreement 

Specifically, we are deleting the last 

sentence of former Instruction 1 to Item 

1.01 of Form 8–K, which references the 

portions of Item 601(b)(10) of Regulation 

S–K that specifically relate to 

management compensation and 

compensatory plans. In place of the 

deleted sentence, we are adding a 

sentence specifying that agreements 


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381 Item 1.02(b) states: ‘‘For purposes of this Item 

1.02, the term material definitive agreement shall 

have the same meaning as set forth in Item 1.01(b).’’

382 Items 5.02(a) and (b) of Form 8–K. 

383See letter from ABA. 

384 Instruction 4 to Item 5.02. 

385 Item 5.02(b) of Form 8–K will continue to 

cover the officers currently specified therein, 

whether or not named executive officers for the 

previous or current years, and all directors. 

386 Items 5.02(c)(3) and (d)(5). Plans, contracts or 

arrangements (but not material amendments or 

grants or awards or modifications thereto) may be 

denoted by reference to the description in the 

company’s most recent annual report on Form 10–

K or proxy statement. 

387 Item 5.02(e) and Instruction 2 to Item 5.02(e). 

388 Item 5.02(f). See Section II.C.1.b. above for a 

discussion of the reporting delay that exists under 

the current disclosure rules when bonus and salary 

are not determinable at the most recent practicable 

date. 

389See letter from ABA. 

involving the subject matter identified 

in Item 601(b)(10)(iii)(A) and (B) of 

Regulation S–K need not be disclosed 

under amended Item 1.01 of Form 8–K. 

This change also will apply to the 

disclosure of terminations of material 

definitive agreements under Item 1.02 of 

Form 8–K, which references the 

definition of ‘‘material definitive 

agreement’’ in Item 1.01 of Form 8–K.381

Instead of being required to be disclosed 

based on the general requirements with 

regard to material definitive agreements 

in Item 1.01 and Item 1.02 of Form 8–

K, employment compensation 

arrangements will now be covered 

under Item 5.02 of Form 8–K, as 

amended. 

2. Item 5.02—Departure of Directors or 

Certain Officers; Election of Directors; 

Appointment of Certain Officers; 

Compensatory Arrangements of Certain 

Officers 

Item 5.02 generally requires 

disclosure within four business days of 

the appointment or departure of 

directors and specified officers. In 

particular, Item 5.02(b) has required 

disclosure if a company’s principal 

executive officer, president, principal 

financial officer, principal accounting 

officer, principal operating officer, or 

any person performing similar 

functions, retires, resigns or is 

terminated from that position and Item 

5.02(c) has required disclosure if a 

company appoints a new principal 

executive officer, president, principal 

financial officer, principal accounting 

officer, principal operating officer, or 

any person performing similar 

functions. Item 5.02 has also required 

disclosure if a director retires, resigns, is 

removed, or declines to stand for reelection.382 Before adopting today’s 

amendments, the required disclosure 

under Item 5.02 included a brief 

description of the material terms of any 

employment agreement between the 

company and the officer and a 

description of disagreements, if any. 

As proposed, we are modifying Item 

5.02 to capture generally the 

information already required under that 

item, as well as additional information 

regarding material employment 

compensation arrangements involving 

named executive officers that, prior to 

today’s amendments, would be called 

for under Item 1.01. 

With respect to the additional 

disclosure that we are requiring for 

named executive officers under 

amended Item 5.02, one commenter 

noted that because the definition of 

‘‘named executive officer’’ is 

determined with reference to a 

company’s last completed fiscal year, 

greater clarity is needed to determine 

how the standard should be applied for 

current Form 8–K reporting throughout 

the year.383 The commenter suggested 

that companies might find it difficult to 

identify their named executive officers 

for purposes of real-time disclosure 

under Item 5.02 during the period 

following the completion of their last 

fiscal year but prior to preparing their 

proxy statements or Forms 10–K in the 

new fiscal year. Accordingly, we are 

including a new Instruction to Item 5.02 

that will clarify that for purposes of this 

Item the named executive officers are 

the persons for whom disclosure was 

required in the most recent filing with 

the Commission that required disclosure 

under Item 402(c) of Regulation S–K or 

Item 402(b) of Regulation S–B, as 

applicable.384

In general, our revisions to Form 8–

K will both modify the overall 

requirements for disclosure of 

employment compensation 

arrangements on Form 8–K and locate 

all such disclosure under a single item. 

We are accomplishing this by taking the 

following steps: 

• Expanding the information 

regarding retirement, resignation or 

termination to include all persons 

falling within the definition of named 

executive officers for the company’s 

previous fiscal year, whether or not 

included in the list specified in Item 

5.02 prior to these amendments; 385

• Expanding the disclosure items 

covered under Item 5.02 beyond 

employment agreements to require a 

brief description of any material plan, 

contract or arrangement to which a 

covered officer or director is a party or 

in which he or she participates that is 

entered into or materially amended in 

connection with any of the triggering 

events specified in Item 5.02(c) and (d), 

or any grant or award to any such 

covered person, or modification thereto, 

under any such plan, contract or 

arrangement in connection with any 

such event; 386

• With respect to the principal 

executive officer, the principal financial 

officer, or persons falling within the 

definition of named executive officer for 

the company’s previous fiscal year, 

expanding the disclosure items to 

include a brief description of any 

material new compensatory plan, 

contract or arrangement, or new grant or 

award thereunder (whether or not 

written), and any material amendment 

to any compensatory plan, contract or 

arrangement (or any modification to a 

grant or award thereunder), whether or 

not such occurrence is in connection 

with a triggering event specified in Item 

5.02. Grants or awards or modifications 

thereto will not be required to be 

disclosed if they are consistent with the 

terms of previously disclosed plans or 

arrangements and they are disclosed the 

next time the company is required to 

provide new disclosure under Item 402 

of Regulation S–K; 387 and 

• Adding a requirement for disclosure 

of salary or bonus for the most recent 

fiscal year that was not available at the 

latest practicable date in connection 

with disclosure under Item 402 of 

Regulation S–K.388 This disclosure will 

also require a new total compensation 

recalculation to reflect the new salary or 

bonus information. 

In the case of each of these disclosure 

items for amended Item 5.02, we 

emphasize that we are requiring that a 

brief description of the specified matter 

be included. We have observed that in 

response to the requirements to disclose 

the entry into material definitive 

agreements under Item 1.01, some 

companies have included disclosure 

that resembles an updating of the 

disclosure required under former Item 

402 of Regulation S–K. In the context of 

current disclosure under Form 8–K, we 

are seeking disclosure that informs 

investors of specified material events 

and developments. However, the 

information we are seeking does not 

require the information necessary to 

comply with Item 402. 

In response to comments received,389

we have revised Instruction 2 to new 

Item 5.02(e) from the text we proposed 

and created a new Item 5.02(f), as 

described above. The revised Instruction 

2 to Item 5.02(e) that we are adopting: 

(i) Changes or eliminates prior 

references to ‘‘original terms’’ and uses 

instead the phrase ‘‘previously 

disclosed terms,’’ in order to minimize 


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390See letter from ABA. 

391 General Instruction I.A.3 to Form S–3. 

392Form 8–K Adopting Release, at Section II.E. 

393 Id. 

394We are also making a similar revision to Item 

601(b)(10)(iii)(C)(5) of Regulation S–K. 

395New Instruction 4(c)(v) to Exhibits to Form 

20–F. 

396Many jurisdictions now require or encourage 

disclosure of executive compensation information. 

For example, enhanced disclosure of executive 

remuneration is included as part of the European 

Commission’s 2003 Company Law Action Plan. See 

Guido Ferrarini and Niamh Moloney, Executive 

Remuneration in the EU: The Context for Reform, 

European Corporate Governance Institute, Law 

Working Paper N. 32/2005 (April 2005). 

397 Item 403(a). 

ambiguity; and (ii) clarifies that, for 

purposes of the Instruction, no 

distinction should be made between 

awards granted under cash or equitybased plans. New Item 5.02(f) responds 

to comments we received that our 

proposed Instruction 3 to 5.02(e) should 

be codified as a separate item because 

it called for disclosure (determining 

salary or bonus amounts for a completed 

fiscal year) that otherwise may not be 

required under Item 5.02(e).390

B. Extension of Limited Safe Harbor 

Under Section 10(b) and Rule 10b–5 to 

Item 5.02(e) of Form 8–K and Exclusion 

of Item 5.02(e) From Form S–3 Eligibility 

Requirements 

We are extending the safe harbors 

regarding Section 10(b) and Rule 10b–5 

and Form S–3 eligibility in the event 

that a company fails to timely file 

reports required by Item 5.02(e) of Form 

8–K. 

In March 2004, we adopted a limited 

safe harbor from liability under Section 

10(b) of the Exchange Act and Rule 10b–

5 thereunder for failure to timely file 

reports required by Form 8–K Items 

1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a) 

and 6.03. Because we believed that 

these items may require management to 

make rapid materiality and similar 

judgments within the condensed 

timeframe required for filing of a Form 

8–K, we established a safe harbor that 

applies until the filing due date of the 

company’s quarterly or annual report for 

the period in question. We concluded 

that the risk of liability under these 

provisions for the failure to timely file 

was disproportionate to the benefit of 

real-time disclosure and therefore 

justified the need for a limited safe 

harbor of a fixed duration. For the same 

reasons, we believe that the safe harbor 

should also extend to Item 5.02(e) of 

Form 8–K. We therefore are amending 

Exchange Act Rules 13a–11(c) and 15d–

11(c) accordingly. 

In addition, a company forfeits its 

eligibility to use Form S–3 if it fails to 

timely file all reports required under 

Exchange Act Section 13(a) or 15(d) 

during the 12 month period prior to 

filing of the registration statement.391

For the same reasons, when adopting 

the expanded Form 8–K rules in 2004, 

we revised the Form S–3 eligibility 

requirements so that a company would 

not lose its eligibility to use Form S–3 

registration statements if it failed to 

timely file reports required by the Form 

8–K items to which the Section 10(b) 

and Rule 10b–5 safe harbor applies.392

In particular, the burden resulting from 

a company’s sudden loss of eligibility to 

use Form S–3 could be a 

disproportionately large negative 

consequence of an untimely Form 8–K 

filing under one of the specified 

items.393 We believe that this safe 

harbor should be extended to Item 

5.02(e) of Form 8–K and, therefore, we 

are amending General Instruction 

I.A.3.(b) of Form S–3, which pertains to 

the eligibility requirements for use of 

Form S–3 to reflect this position. 

C. General Instruction D to Form 8–K 

We are adopting the revision to 

General Instruction D as proposed. 

Frequently, an event may trigger a Form 

8–K filing under multiple items, 

particularly under both Item 1.01 and 

another item. General Instruction D to 

Form 8–K permits a company to file a 

single Form 8–K to satisfy one or more 

disclosure items, provided that the 

company identifies by item number and 

caption all applicable items being 

satisfied and provides all of the 

substantive disclosure required by each 

of the items. In order to promote prompt 

filings on Form 8–K and avoid potential 

non-compliance with Form 8–K due to 

inadvertent exclusions of captions, we 

are amending General Instruction D to 

permit companies to omit the Item 1.01 

heading in a Form 8–K that also 

discloses any other item, so long as the 

substantive disclosure required by Item 

1.01 is included in the Form 8–K. This 

would not extend to allowing a 

company to omit any other caption if 

the Item 1.01 caption is included. 

D. Foreign Private Issuers 

We are amending the exhibit 

instructions to Form 20–F so that 

foreign private issuers will be required 

to file an employment or compensatory 

plan with management or directors (or 

portion of such plan) only when the 

foreign private issuer either is required 

to publicly file the plan (or portion of 

it) in its home country or if the foreign 

private issuer has otherwise publicly 

disclosed the plan.394

Under Item 6.B.1 of Form 20–F, a 

foreign private issuer must disclose the 

compensation of directors and 

management on an aggregate basis and, 

additionally, on an individual basis, 

unless individual disclosure is not 

required in the issuer’s home country 

and is not otherwise publicly disclosed 

by the foreign private issuer. Under the 

exhibit instructions to Form 20–F prior 

to our amendments, management 

contracts or compensatory plans in 

which directors or members of 

management participate generally were 

required to be filed as exhibits, unless 

the foreign private issuer provided 

compensation information on an 

aggregate basis and not on an individual 

basis. Under those pre-amendment 

provisions, an issuer that provided any 

individualized compensation disclosure 

was required to file as an exhibit to 

Form 20–F management employment 

agreements that potentially relate to 

matters that have not otherwise been 

disclosed. 

Our amendment of the exhibit 

instructions to Form 20–F 395 is 

intended to be consistent with the 

existing disclosure requirements under 

Form 20–F relating to executive 

compensation matters for foreign private 

issuers. In the same way that executive 

compensation disclosure under Form 

20–F largely mirrors the disclosure that 

a foreign private issuer makes under 

home country requirements or 

voluntarily, so too the public filing of 

management employment agreements as 

an exhibit to Form 20–F under our 

amendments will mirror the public 

availability of such agreements under 

home country requirements or 

otherwise. In addition, we believe that 

the amendments may encourage foreign 

private issuers to provide more 

compensation disclosure in their filings 

with the Commission by eliminating 

privacy concerns associated with filing 

an individual’s employment agreement 

when such agreement is not required to 

be made public by a home country 

exchange or securities regulator. As 

foreign disclosure related to executive 

remuneration varies in different 

countries but continues to improve,396

the revisions recognize that trend and 

provide for greater harmonization of 

international disclosure standards with 

respect to executive compensation in a 

manner consistent with other 

requirements of Form 20–F. 

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 


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398 Item 403(b). 

399As specified in Exchange Act Rule 13d–3(d)(1) 

[17 CFR 240.13d–3(d)(1)]. 

400 Item 403(c). 

401 Item 403(b) of Regulation S–K and Item 403(b) 

of Regulation S–B are both amended in the same 

manner. 

402This 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]. 

403See, 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 WorldCom’s 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]. 

405See letter from ABA. 

406 15 U.S.C. 78p(a). 

407See Item 402(b)(2)(xiii) of Regulation S–K, 

discussed in Section II.B.1., above. 

408See the 1982 Release. For a discussion of these 

provisions, see also Disclosure of Certain 

Relationships and Transactions Involving 

Management, Release No. 33–6416 (July 9, 1982) 

[47 FR 31394], at Section II. 

409The discussion that follows focuses on 

changes to Regulation S–K, with Section V.E.1. 

explaining the modifications to Regulation S–B. 

References throughout the following discussion are 

to Items of Regulation S–K, unless otherwise 

indicated. 410Prior to adoption of these amendments, 

disclosure regarding promoters was required under 

Item 404(d). 411These matters previously were required to be 

disclosed pursuant to various provisions, including 

Item 7 of Schedule 14A and Items 306, 401(h), (i) 

and (j), 402(j) and 404(b). We are eliminating as 

proposed the requirement for disclosure regarding 

specific director and director nominee relationships 

that had been set forth in Item 404(b) prior to 

today’s amendments, in favor of the disclosures 

regarding director independence required by Item 

407(a). 

directors, director nominees and named 

executive officers.398 These disclosure 

requirements provide investors with 

information regarding concentrated 

holdings of voting securities and 

management’s 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 management’s 

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 commenter’s 

recommendation. 

V. Certain Relationships and Related 

Transactions Disclosure 

As we explained in the Proposing 

Release, we believe that, in addition to 

disclosure regarding executive 

compensation, a materially complete 

picture of financial relationships with a 

company involves disclosure regarding 

related party transactions. Therefore, we 

are also adopting significant revisions to 

Item 404 of Regulation S–K, previously 

titled ‘‘Certain Relationships and 

Related Transactions.’’ In 1982, various 

provisions that had been adopted in a 

piecemeal fashion and had been subject 

to frequent amendment were 

consolidated into Item 404 of Regulation 

S–K.408 Today we are amending Item 

404 of Regulation S–K and S–B to 

streamline and modernize this 

disclosure requirement, while making it 

more principles-based. Although the 

amendments significantly modify this 

disclosure requirement, its purpose—to 

elicit disclosure regarding transactions 

and relationships, including 

indebtedness, involving the company 

and related persons and the 

independence of directors and 

nominees for director and the interests 

of management—remains unchanged. 

As discussed in greater detail below, 

the amendments have four parts: 409

• Item 404(a) contains a general 

disclosure requirement for related 

person transactions, including those 

involving indebtedness. 

• Item 404(b) requires disclosure 

regarding the company’s policies and 

procedures for the review, approval or 

ratification of related person 

transactions. 

• Item 404(c) requires disclosure 

regarding promoters and certain control 

persons of a company.410

• Item 407 consolidates corporate 

governance disclosure requirements.411

Also, Item 407(a) requires disclosure 

regarding the independence of directors, 

including whether each director and 

nominee for director of the company is 

independent, as well as a description by 

specific category or type of any 

transactions, relationships or 

arrangements not disclosed under 

paragraph (a) of Item 404 that were 

considered when determining whether 

each director and nominee for director 

is independent. 

A. Transactions With Related Persons 

We are adopting amendments to Item 

404 to make the certain relationships 

and related transactions disclosure 

requirements clearer and easier to 

follow. The revisions retain the 

principles for disclosure of related 

person transactions that were previously 

specified in Item 404(a), but no longer 

include all of the instructions that 

served to delineate what transactions 

are reportable or excludable from 

disclosure based on bright lines that can 

depart from a more appropriate 

materiality analysis. Instead, Item 404(a) 

as amended consists of a general 

statement of the principle for disclosure, 

followed by specific disclosure 

requirements and instructions. The 

instructions to Item 404(a) explain the 

related persons covered by the Item, the 

scope of transactions covered by the 

Item, the method for computation of the 

amount involved in the transaction, 

special requirements regarding 

indebtedness, the interaction with Item 

402, the materiality of certain interests, 

and the circumstances in which 

disclosure need not be provided. 


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412Prior to today’s amendments, Instruction 1 to 

Item 404(a) had stated that ‘‘[t]he materiality of any 

interest is to be determined on the basis of the 

significance of the information to investors in light 

of all the circumstances of the particular case. The 

importance of the interest to the person having the 

interest, the relationship of the parties to the 

transaction with each other and the amount 

involved in the transactions are among the factors 

to be considered in determining the significance of 

the information to investors.’’

413See Basic v. Levinson and TSC Industries v. 

Northway. 

414Prior to today’s amendments, Instruction 9 to 

Item 404(a) had stated that ‘‘There may be 

situations where, although these instructions do not 

expressly authorize nondisclosure, the interest of a 

person specified in paragraphs (a)(1) through (4) in 

a particular transaction or series of transactions is 

not a direct or indirect material interest. In that 

case, information regarding such interest and 

transaction is not required to be disclosed in 

response to this paragraph.’’

415The ‘‘related persons’’ covered by the 

amended Item are discussed below in Section 

V.A.1.b. 

416However, if the disclosure is being 

incorporated by reference into a registration 

statement on Form S–4, the additional two years of 

disclosure will not be required, as specified in 

Instruction 1 to Item 404. 

417See letter from Sullivan. See also letter from 

SCSGP. 

418For example, disclosure would be required if 

a company benefits from a transaction with a 

related person that the company has arranged and 

in which it participates, notwithstanding the fact 

that it is not a party to a contract. 

419See, e.g., letters from BRT and Sullivan. 

420See, e.g., letters from Amalgamated and 

CalSTRS. 

421See letter from Teamsters (recommending a 

$250 disclosure threshold). 

422See, e.g., letters from CII and ISS. 

423See letter from SCSGP recommending a 

disclosure threshold for companies that are not 

small business issuers of the greater of $120,000 or 

a percentage (which it believes could be as low as 

two percent) of consolidated gross revenues of the 

recipient for certain types of transactions. 

424The disclosure threshold in amended Item 

404(a) of Regulation S–B is the lesser of $120,000 

or one percent of the average of the small business 

issuer’s total assets at year-end for the last three 

completed fiscal years because we believe that 

transactions that are below $120,000 can be 

significant for small business issuers given their 

relative size. 

Item 404(a) as adopted extends to 

disclosure of indebtedness, by 

consolidating the disclosure formerly 

required under Item 404(a) regarding 

transactions involving the company and 

related persons with the disclosure 

regarding indebtedness which had been 

separately required by Item 404(c) prior 

to these amendments. We have 

consolidated these two provisions 

substantially as proposed in order to 

eliminate confusion regarding the 

circumstances in which each item 

applied and to streamline duplicative 

portions of Item 404. 

1. Broad Principle for Disclosure 

Item 404(a) as proposed and adopted 

articulates a broad principle for 

disclosure; it states that a company must 

provide disclosure regarding: 

• Any transaction since the beginning 

of the company’s last fiscal year, or any 

currently proposed transaction; 

• In which the company was or is to 

be a participant; 

• In which the amount involved 

exceeds $120,000; and 

• In which any related person had or 

will have a direct or indirect material 

interest. 

As proposed, amended Item 404(a) no 

longer includes an instruction that is 

repetitive of the general materiality 

standard applicable to the Item.412 By 

omitting this instruction, we do not 

intend to change the materiality 

standard applicable to Item 404(a). The 

materiality standard for disclosure 

embodied in Item 404(a) prior to these 

amendments is retained; a company 

must disclose based on whether the 

related person had or will have a direct 

or indirect material interest in the 

transaction. The materiality of any 

interest will continue to be determined 

on the basis of the significance of the 

information to investors in light of all 

the circumstances.413 As was the case 

before adoption of amended Item 404(a), 

the relationship of the related persons to 

the transaction, and with each other, the 

importance of the interest to the person 

having the interest and the amount 

involved in the transaction are among 

the factors to be considered in 

determining the materiality of the 

information to investors. 

We are also eliminating as proposed 

an instruction to Item 404(a) which had 

indicated that the dollar threshold is not 

a bright line materiality standard.414 It 

remains true, however, that when the 

amount involved in a transaction 

exceeds the prescribed threshold 

($120,000 under the amended rule we 

adopt today), a company should 

evaluate whether the related person has 

a direct or indirect material interest in 

the transaction to determine if 

disclosure is required. We eliminated 

the instruction because it was repetitive 

of the general materiality standard 

applicable to the Item. We believe that 

application of the materiality principles 

under the Item are more consistent with 

a principles-based approach and will 

lead to more appropriate disclosure 

outcomes than application of the 

instruction that was eliminated. By 

deleting this instruction, we do not 

intend to change the materiality 

standard applicable to Item 404(a). As 

was the case with Item 404(a) prior to 

adoption of these amendments, there 

may be situations where, although the 

instructions to Item 404(a) do not 

expressly provide that disclosure is not 

required, the interest of a related person 

in a particular transaction is not a direct 

or indirect material interest. In that case, 

information regarding such interest and 

transaction is not required to be 

disclosed under Item 404(a). 

In addition, as proposed the 

amendments: 

• Call for disclosure if a company is 

a ‘‘participant’’ in a transaction, rather 

than if it is ‘‘a party’’ to the transaction, 

as ‘‘participant’’ more accurately 

connotes the company’s involvement; 

• Modify the $60,000 threshold for 

disclosure to $120,000 to adjust for 

inflation; 

• Include a defined term for 

‘‘transaction’’ to provide that it includes 

a series of similar transactions and to 

make clear its broad scope; and 

• Include a defined term for ‘‘related 

persons.’’ 415

As was the case before these 

amendments, disclosure is required for 

three years in registration statements 

filed pursuant to the Securities Act or 

the Exchange Act.416

One commenter questioned whether 

changing the test of company 

involvement from being a ‘‘party’’ to a 

transaction to being a ‘‘participant’’ in a 

transaction is intended to be a 

substantive change.417 The purpose of 

this change is to more accurately 

connote the company’s involvement in 

a transaction by clarifying that being a 

‘‘participant’’ encompasses situations 

where the company benefits from a 

transaction but is not technically a 

contractual ‘‘party’’ to the 

transaction.418

Commenters expressed diverse views 

on the appropriate disclosure threshold. 

While some commenters supported 

increasing the threshold for disclosure 

from $60,000 to $120,000,419 others 

recommended retaining the $60,000 

threshold,420 using a minimal dollar 

threshold,421 not including any de 

minimis dollar threshold,422 or 

increasing the threshold even further 

through use of a sliding scale.423 We 

believe that a fixed dollar amount for 

the disclosure threshold will provide 

the most certainty as to the size of 

transactions that must be tracked for 

disclosure purposes under Item 404,424

and that increasing the dollar amount of 

the threshold based on inflation is 

appropriate given the amount of time 

that has elapsed since it was last set 

nearly twenty-five years ago. 

Finally, the rule changes include as 

proposed a technical modification. Prior 

to today’s amendments, Item 404(a) 

stated that disclosure was required 


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425For the same reason, we have eliminated as 

proposed the references to ‘‘subsidiaries’’ in the 

‘‘compensation committee interlocks and insider 

participation in compensation decisions’’

disclosure requirement adopted in Item 407(e)(4). 

This revision does not change the scope of 

disclosure required under the rule. 426Codified in Section 13(k) of the Exchange Act 

[15 U.S.C. 78m(k)]. 427Prior to today’s amendments, the related 

person transaction disclosure requirement in Item 

404(a) covered significant shareholders, while the 

indebtedness disclosure requirement in Item 404(c) 

did not. The significant shareholders covered by 

Item 404(a) as adopted will continue to be any 

security holder who is known to the company to 

beneficially own more than five percent of any class 

of the company’s voting securities. See Instruction 

1.b.i. to Item 404(a). 

428See, e.g., letter from Sullivan. See also, letter 

from SCSGP. 

429See Instruction 4.b. to Item 404(a). Disclosure 

would be required, however, if the significant 

shareholder (or such shareholder’s immediate 

family member) was also a related person specified 

in Instruction 1.a. to Item 404(a), for example, if the 

significant shareholder was also an executive 

officer. 430Prior to these amendments, Item 404(c) also 

had required disclosure of some specific indirect 

interests of directors, nominees for director, and 

executive officers of the company in indebtedness 

through corporations, organizations, trusts, and 

estates. Disclosure of these specific interests had 

been required by subparagraphs (c)(4) and (c)(5) of 

Item 404. Under the amendments, these 

subparagraphs have been eliminated as duplicative 

and the need for disclosure in these situations will 

be determined using a materiality analysis under 

the principle for disclosure in Item 404(a). 

431See Section V.A.3. below. 

432 Instruction 2 to Item 404(a). 

433 Instruction 1 to Item 404(a). 

434As proposed, the principle for disclosure that 

we have adopted only applies to nominees for 

director if disclosure is being provided in a proxy 

or information statement involving the election of 

directors. Also, as proposed, ongoing disclosure is 

not required regarding nominees for director who 

were not elected (unless a nominee has been 

nominated again for director). 

435This position, which had been included in the 

proxy rule provisions that were the precursor to 

Item 404, was deleted from those provisions in 1967 

Continued 

regarding situations involving ‘‘the 

registrant or any of its subsidiaries.’’

Because companies must include 

subsidiaries in making materiality 

determinations in all circumstances, the 

reference to ‘‘subsidiaries’’ is 

superfluous, and we have therefore 

eliminated it. This modification does 

not change the scope of disclosure 

required under the Item.425

a. Indebtedness 

Section 402 of the Sarbanes-Oxley Act 

prohibits most personal loans by a 

company to its officers and directors.426

This development raises the issue of 

whether disclosure of indebtedness of 

the sort required under our rules prior 

to the amendments should be 

maintained. We believe that the 

approach to disclosure of indebtedness 

involving related persons that we adopt 

today is appropriate because of the 

scope of the direct and indirect interests 

covered by our disclosure requirements, 

because related persons include persons 

not covered by the prohibitions, and 

because there are certain exceptions to 

the prohibitions. We have, however, 

eliminated the distinction between 

indebtedness and other types of related 

person transactions. 

As a result of integrating what had 

been required to be disclosed under 

paragraph (c) of Item 404 into paragraph 

(a) of Item 404, the rule proposals would 

have changed the situations in which 

indebtedness disclosure is necessary by 

requiring disclosure of indebtedness 

transactions with regard to all related 

persons covered by the related person 

transaction disclosure requirement, 

including significant shareholders.427

Some commenters questioned whether 

disclosure of indebtedness of significant 

shareholders would be useful to 

investors and whether companies would 

have access to the information necessary 

to provide this disclosure.428 In 

response to these comments, the 

amendments do not require disclosure 

of indebtedness transactions of 

significant shareholders (or their 

immediate family members).429 Another 

result of integrating the disclosure 

requirements that had been specified in 

paragraph (c) of Item 404 into paragraph 

(a) of Item 404, is that the rule changes 

set a $120,000 threshold and require 

disclosure if there is a direct or indirect 

material interest in an indebtedness 

transaction, while prior to these 

amendments Item 404(c) required 

disclosure of all indebtedness exceeding 

$60,000.430 For example, under 

amended Item 404(a) disclosure is 

required if an executive officer had a 

material indirect interest in an 

indebtedness transaction (exceeding 

$120,000) between the company and 

another entity due to that executive 

officer’s ownership interest in the other 

entity. Disclosure of material indirect 

interests of related persons in 

transactions involving the company will 

be required by Item 404(a) as amended, 

just as it was prior to adoption of these 

amendments. We believe that disclosure 

requirements for indebtedness and for 

other related person transactions should 

be congruent. In particular, we believe 

that loans by companies other than 

financial institutions should be treated 

like any other related person 

transactions; however, as discussed 

below,431 we address certain ordinary 

course loans by financial institutions in 

an instruction to Item 404(a). 

b. Definitions 

We have defined the terms 

‘‘transaction,’’ ‘‘related person’’ and 

‘‘amount involved’’ substantially as 

proposed in order to streamline Item 

404(a) and to clarify the broad scope of 

financial transactions and relationships 

covered by the rule. 

The term ‘‘transaction’’ has a broad 

scope in Item 404(a).432 This term is not 

to be interpreted narrowly, but rather 

broadly includes, but is not limited to, 

any financial transaction, arrangement 

or relationship or any series of similar 

transactions, arrangements or 

relationships. The definition of 

‘‘transaction’’ also specifically notes that 

the term includes indebtedness and 

guarantees of indebtedness. 

The definition of ‘‘related person’’

identifies the persons covered, and 

clarifies the time periods during which 

they are covered. The term ‘‘related 

person’’ 433 means any person who was 

in any of the following categories at any 

time during the specified period for 

which disclosure under paragraph (a) of 

Item 404 is required: 

• Any director or executive officer of 

the company and his or her immediate 

family members; and 

• If disclosure were provided in a 

proxy or information statement relating 

to the election of directors, any nominee 

for director and the immediate family 

members of any nominee for director. 

In addition, a security holder known 

to the company to beneficially own 

more than five percent of any class of 

the company’s voting securities or any 

immediate family member of any such 

person, when a transaction in which 

such security holder or family member 

had a direct or indirect material interest 

occurred or existed, is also a related 

person. 

The definition of ‘‘related person’’

that we have adopted will require 

disclosure of related person transactions 

involving the company and a person 

(other than a significant shareholder or 

immediate family member of such 

shareholder) that occurred during the 

last fiscal year, if the person was a 

‘‘related person’’ during any part of that 

year.434 A person who had a position or 

relationship giving rise to the person 

being a ‘‘related person’’ during only 

part of the last fiscal year may have had 

a material interest in a transaction with 

the company during that year. While 

prior to these amendments Item 404(a) 

did not indicate whether disclosure was 

required for the transaction in this 

situation, the history of Item 404 

suggests that disclosure was required if 

the requisite relationship existed at the 

time of the transaction, even if the 

person was no longer a related person 

at the end of the year.435 We believe 


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as duplicative of a note that applied to all of the 

disclosure required in Schedule 14A (including the 

related party disclosure requirement in Schedule 

14A). Adoption of Amendments to Proxy Rules and 

Information Rules, Release No. 34–8206 (Dec. 14, 

1967) [32 FR 20960], at ‘‘Schedule 14A—Item7(f).’’

Before today’s amendments, Note C to Schedule 

14A provided that ‘‘[i]nformation need not be 

included for any portion of the period during which 

such person did not hold any such position or 

relationship, provided a statement to that effect is 

made.’’ We have amended Note C to Schedule 14A 

as proposed so that it will no longer apply to 

disclosure of related person transactions. 

436The persons included in these additions to the 

definition are also included in the definition of 

‘‘family member’’ in General Instruction A.1.(a)(5) 

to Securities Act Form S–8. 

437 Instruction 3 to Item 404(a). 

438Prior to today’s amendments, Instruction 3 to 

Item 404(a) had provided guidance regarding 

computing the amount involved in lease or other 

agreements providing for periodic payments or 

installments. 

439Prior to today’s amendments, the basis for 

determining the amount involved in indebtedness 

transactions had been set forth in Item 404(c). 

440Because of the manner in which the amount 

involved in the transaction is calculated for 

indebtedness, as discussed above, disclosure with 

respect to indebtedness will include the largest 

aggregate amount of principal outstanding during 

the period for which disclosure is provided, as well 

as the amount of principal and interest paid during 

the period for which disclosure is provided, the 

aggregate amount of principal outstanding as of the 

latest practicable date, and the rate or amount of 

interest payable on the indebtedness. Item 404(a)(5). 

441 Item 404(a)(4). 

442See letter from Sullivan. 

443This requirement had been set forth in 

Instruction 4 to Item 404(c) prior to these 

amendments. 

444See letter from SCSGP. 

that, because of the potential for abuse 

and the close proximity in time between 

the transaction and the person’s status 

as a ‘‘related person,’’ it is appropriate 

to require disclosure for transactions in 

which the person had a material interest 

occurring at any time during the fiscal 

year. For example, it is possible that a 

material interest of a person in a 

transaction during this timeframe could 

influence the person’s performance of 

his or her duties. 

We believe that transactions with 

persons who have been or who will 

become significant shareholders (or 

their immediate family members), but 

are not at the time of the transaction, 

raise different considerations and are 

harder to track, and thus we are 

excluding them as proposed. Disclosure 

will be required, however, regarding a 

transaction that begins before a 

significant shareholder becomes a 

significant shareholder, and continues 

(for example, through the on-going 

receipt of payments) on or after the time 

that the person becomes a significant 

shareholder. 

We are adopting the definition of 

‘‘immediate family member’’ as 

proposed. Under Item 404(a), the term 

‘‘immediate family member’’ means any 

child, stepchild, parent, stepparent, 

spouse, sibling, mother-in-law, fatherin-law, son-in-law, daughter-in-law, 

brother-in-law, or sister-in-law, and any 

person (other than a tenant or employee) 

sharing the household of any director, 

nominee for director, executive officer, 

or significant shareholder of the 

company. The amended definition 

differs from the former definition in that 

it includes stepchildren, stepparents, 

and any person (other than a tenant or 

employee) sharing the household of a 

director, nominee for director, executive 

officer, or significant shareholder of the 

company.436

The amended definition of ‘‘amount 

involved’’ is adopted as proposed.437

The definition incorporates two 

concepts that were included in Item 404 

prior to these amendments regarding 

how to determine the ‘‘amount 

involved’’ in transactions, and clarifies 

that the amounts reported must be in 

dollars even if the amount was set or 

expensed in a different currency. As 

adopted, the term ‘‘amount involved’’

means the dollar value of the 

transaction, or series of similar 

transactions, and includes: 

• In the case of any lease or other 

transaction providing for periodic 

payments or installments, the aggregate 

amount of all periodic payments or 

installments due on or after the 

beginning of the company’s last fiscal 

year, including any required or optional 

payments due during or at the 

conclusion of the lease or other 

transaction providing for periodic 

payments or installments; 438 and 

• In the case of indebtedness, the 

largest aggregate amount of all 

indebtedness outstanding at any time 

since the beginning of the company’s 

last fiscal year and all amounts of 

interest payable on it during the last 

fiscal year.439

2. Disclosure Requirements 

Subparagraphs of Item 404(a) as 

adopted provide the disclosure 

requirements for related person 

transactions. The company will be 

required to describe the transaction, 

including: 

• The person’s name and relationship 

to the company; 

• The person’s interest in the 

transaction with the company, 

including the related person’s position 

or relationship with, or ownership in, a 

firm, corporation, or other entity that is 

a party to or has an interest in the 

transaction; and 

• The approximate dollar value of the 

amount involved in the transaction and 

of the related person’s interest in the 

transaction.440

Companies will also be required to 

disclose any other information regarding 

the transaction or the related person in 

the context of the transaction that is 

material to investors in light of the 

circumstances of the particular 

transaction. 

As was the case prior to adoption of 

these amendments, the dollar value of 

the related person’s interest in the 

transaction will be computed without 

regard to the amount of the profit or loss 

involved in the transaction.441 One 

commenter pointed out that the 

proposals expanded the application of 

this provision to also cover the 

computation of the ‘‘amount involved’’

when the provision was moved from an 

instruction into the body of Item 

404(a).442 In streamlining Item 404(a), 

we did not intend to change the scope 

of the prior instruction. Therefore, the 

final rule clarifies the context in which 

profit or loss is not to be considered. 

Consistent with the principles-based 

approach that we are applying to related 

person transaction disclosure, we are 

eliminating an instruction that, in the 

case of a related person transaction 

involving a purchase or sale of assets by 

or to the company otherwise than in the 

ordinary course of business, called for 

specific disclosure of the cost of the 

assets to the purchaser, and if acquired 

within two years of the transaction, the 

cost of the assets to the seller and 

related information about the price of 

the assets. We note, however, that if 

such information is material under the 

revised standards of Item 404(a), 

because, for example, the recent 

purchase price to the related person is 

materially less than the sale price to the 

company, or the sale price to the related 

person is materially more than the 

recent purchase price to the company, 

disclosure of such prior purchase price 

and related information about the prices 

could be required. 

Prior to adoption of today’s 

amendments, disclosure was required 

under Item 404(c) regarding amounts 

possibly owed to the company under 

Section 16(b) of the Exchange Act.443

We believe that the purpose of related 

person transaction disclosure differs 

from the purpose of Section 16(b), and 

one commenter expressed support for 

eliminating this requirement.444

Accordingly, the rule amendments 

eliminate this former Section 16(b)- 

related disclosure requirement. 

3. Exceptions 

Some categories of transactions do not 

fall within the principle for disclosure 


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445 Instructions 4, 5, 6 and 7 to Item 404(a). 

446 Instruction 5.a. to Item 404(a). 

447See letter from NYCBA. 

448 Instruction 5.b. to Item 404(a). 

449One commenter believed that the proposals 

would have eliminated disclosure of related person 

transactions involving the employment of 

immediate family members. See letter from CRPTF. 

Item 404(a), as amended, continues to require 

disclosure of these types of related person 

transactions when the threshold for disclosure has 

been met and the immediate family member has or 

will have a direct or indirect material interest. 

450 Instruction 4.a. to Item 404(a), which is based 

on Instruction 2 to Item 404(c) as it was stated prior 

to today’s amendments. 

451 12 CFR part 220. 

452See Item III.C.1. and 2. of Industry Guide 3, 

Statistical Disclosure by Bank Holding Companies 

[17 CFR 229.802(c)]. 

453 Instruction 4.c. to Item 404(a). 

454Specifically, the language that was in 

Instruction 3 to paragraph (c) of Item 404 prior to 

these amendments has been modified to replace the 

reference ‘‘comparable transactions with other 

persons’’ with the phrase ‘‘comparable loans with 

persons not related to the lender.’’

455 Instruction 6 to Item 404(a). This amendment 

is based on the language that was in parts A and 

B of Instruction 8 to Item 404(a) prior to these 

amendments. This amendment omits the portion of 

that instruction (Instruction 8.C.) regarding interests 

arising solely from holding an equity or a creditor 

interest in a person other than the company that is 

a party to the transaction, when the transaction is 

not material to the other person. This exception 

may have resulted in inappropriate non-disclosure 

of transactions without regard to whether they were 

material to the company. In addition, we are 

eliminating the language that had been set forth in 

Instruction 6 to Item 404(a) prior to these 

amendments, which had covered a subset of 

transactions now covered by Instruction 6, as 

amended, and therefore was duplicative. 

456 Instruction 7.a. to Item 404(a). 

and therefore Item 404(a) as amended 

includes disclosure exceptions that we 

believe are consistent with our 

principles-based approach.445 The first 

category of transactions involves 

compensation. Disclosure of 

compensation to an executive officer 

will not be required if: 

• The compensation is reported 

pursuant to Item 402 of Regulation S–

K; or 

• The executive officer is not an 

immediate family member and such 

compensation would have been 

reported under Item 402 as 

compensation earned for services to the 

company if the executive officer was a 

named executive officer, and such 

compensation had been approved, or 

recommended to the board of directors 

of the company for approval, by the 

compensation committee of the board of 

directors (or group of independent 

directors performing a similar function) 

of the company.446

As proposed, this disclosure 

exception would have required 

compensation committee approval of an 

executive officer’s compensation if that 

executive officer’s compensation was 

not reported under Item 402. However, 

one commenter noted that in 

accordance with listing standards, 

compensation committees may only 

need to recommend to the board of 

directors, rather than approve, the 

compensation of executive officers 

(other than the chief executive 

officer).447 We believe that it is 

appropriate for this disclosure exception 

to apply a standard that is consistent 

with the listing standards and we have 

thus modified this exception from the 

proposal accordingly. Finally, as 

proposed disclosure of compensation to 

a director will not be required if the 

compensation is reported pursuant to 

the director compensation disclosure 

requirement in Item 402(k).448

As we explained in the Proposing 

Release, since the disclosure either 

would be reported under Item 402, or 

would not be required under Item 402, 

we do not believe that these particular 

compensation transactions fall within 

our Item 404 disclosure principle, or 

they will have already been disclosed. 

Transactions involving compensation 

that do not fall within these exceptions, 

such as compensation of immediate 

family members, are within the scope of 

the principle for disclosure in amended 

Item 404(a).449 These exceptions thus 

clarify the limited situations in which 

disclosure of compensation to related 

persons is not required under Item 404. 

The second category of transactions 

involves three types of situations that 

we believe do not raise the potential 

issues underlying our principle for 

disclosure. First, in the case of 

transactions involving indebtedness, as 

proposed we have adopted amendments 

so that the following items of 

indebtedness may be excluded from the 

calculation of the amount of 

indebtedness and need not be disclosed 

because they do not have the potential 

to impact the parties as do the 

transactions for which disclosure is 

required: Amounts due from the related 

person for purchases of goods and 

services subject to usual trade terms, for 

ordinary business travel and expense 

payments and for other transactions in 

the ordinary course of business.450 Also, 

in the case of a transaction involving 

indebtedness, the amendments provide, 

as proposed, that if the lender is a bank, 

savings and loan association, or brokerdealer extending credit under Federal 

Reserve Regulation T451 and the loans 

are not disclosed as nonaccrual, past 

due, restructured or potential 

problems,452 disclosure under 

paragraph (a) of Item 404 may consist of 

a statement, if correct, that the loans to 

such persons satisfied the following 

conditions: 

• They were made in the ordinary 

course of business; 

• They were made on substantially 

the same terms, including interest rates 

and collateral, as those prevailing at the 

time for comparable loans with persons 

not related to the lender; and 

• They did not involve more than the 

normal risk of collectibility or present 

other unfavorable features.453

This exception is based on the 

exception that was included in 

Instruction 3 to Item 404(c) prior to 

these amendments, and has been 

modified as proposed to be more 

consistent with the prohibition of the 

Sarbanes-Oxley Act on personal loans to 

officers and directors.454

Second, we are adopting as proposed 

an instruction indicating that a person 

who has a position or relationship with 

a firm, corporation, or other entity that 

engages in a transaction with the 

company shall not be deemed to have 

an indirect material interest within the 

meaning of paragraph (a) of Item 404 if: 

• The interest arises only: (i) From 

the person’s position as a director of 

another corporation or organization that 

is a party to the transaction; or (ii) from 

the direct or indirect ownership by such 

person and all other related persons, in 

the aggregate, of less than a ten percent 

equity interest in another person (other 

than a partnership) which is a party to 

the transaction; or (iii) from both such 

position and ownership; or 

• The interest arises only from the 

person’s position as a limited partner in 

a partnership in which the person and 

all other related persons, have an 

interest of less than ten percent, and the 

person is not a general partner of and 

does not have another position in the 

partnership.455

Finally, disclosure will not be 

required under paragraph (a) of Item 404 

in three other types of circumstances. 

First, disclosure will not be required 

under paragraph (a) of Item 404 as to 

any transaction where the rates or 

charges involved in the transaction are 

determined by competitive bids, or the 

transaction involves the rendering of 

services as a common or contract 

carrier, or public utility, at rates or 

charges fixed in conformity with law or 

governmental authority.456 We had 

proposed to eliminate this exception 

because we considered such bright-line 

presumptions as inconsistent with our 

principles-based approach to the rule. 

We are persuaded, however, by a 

commenter who indicated that the prior 


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457Letter from SCSGP. 

458 Instruction 7.b. to Item 404(a). 

459See, e.g., letters from American Bankers 

Association (‘‘American Bankers’’); Compass 

Bancshares; and Whitney Holding Corporation 

(‘‘Whitney Holding’’). 

460 Instruction 7.c. to Item 404(a). 

461Before the adoption of these amendments, 

Instruction 7.C. to Item 404(a) provided that no 

information was required under Item 404(a) for 

transactions where the interest of the related person 

arose solely from the ownership of securities of the 

company and such person received no extra or 

special benefit not shared on a pro rata basis. 

462See, e.g., letters from SCSGP and Sullivan. 

463The instruction as adopted differs from the 

language of Instruction 7.C. prior to these 

amendments in that it is limited to ownership of a 

class of equity securities rather than securities 

generally and focuses on benefits being provided 

pro rata to the holders of that class rather than the 

absence of certain extra or special benefits. 

464See, e.g., letters from SCSGP and Sullivan. 465 Del. Code Ann. tit. 8, § 144 (2004). See also 

NYSE, Inc. Listed Company Manual Section 307.00 

and NASD Manual, Marketplace Rules 4350(h) and 

4360(i). 

466See letter from NYCBA. 

467See Instruction to Item 404(b). For example, 

disclosure would not be required under Item 404(b) 

in a company’s Form 10–K for the fiscal year ended 

December 31, 2005 of a transaction that occurred in 

March 2005 between the company and an 

immediate family member of a person who later 

became a director of the company in August 2005. 

However, disclosure would be required under Item 

404(a) in this circumstance. This Instruction to Item 

404(b) does not apply to transactions of significant 

shareholders of the company, because Item 404(a) 

does not require disclosure of transactions with 

significant shareholders that are completed before 

they become significant shareholders. 

468 Item 404(c). 

exception embodied a conclusion that 

the terms of these types of transactions 

would likely not be influenced by the 

related persons and therefore should be 

excluded as not material.457 As a result, 

the instruction is retained in the rule as 

adopted. 

Second, disclosure need not be 

provided under paragraph (a) of Item 

404 if the transaction involves services 

as a bank depositary of funds, transfer 

agent, registrar, trustee under a trust 

indenture, or similar services.458 We 

had proposed to eliminate this 

exception. We are persuaded by 

commenters’ concerns that eliminating 

this exception may be detrimental to 

financial institutions and may not result 

in additional meaningful disclosure.459

Accordingly, we are retaining this 

exception. 

Third, we are adopting an exception 

indicating that disclosure need not be 

provided pursuant to paragraph (a) of 

Item 404 if the interest of the related 

person arises solely from the ownership 

of a class of equity securities of the 

company and all holders of that class of 

equity securities of the company 

received the same benefit on a pro rata 

basis.460 Commenters expressed concern 

that our proposal to eliminate the 

former exception 461 would require 

disclosure if a related person receives 

over $120,000 in dividends on company 

stock in a year, even though those 

dividends are paid on the same terms as 

for all other stockholders.462 We are 

persuaded by the commenters that 

related person transaction disclosure is 

not necessary for transactions where a 

related person receives pro rata 

dividends or returns on the ownership 

of equity securities, and therefore we 

have adopted an instruction to provide 

an exception from disclosure in these 

limited circumstances.463

Some commenters requested that we 

create a new exception for transactions 

undertaken in the ordinary course of 

business of the company and conducted 

on the same terms that the company 

offers generally in transactions with 

persons who are not related persons.464

Former Item 404(a) did not include such 

an ‘‘ordinary course of business’’

disclosure exception, and we are not 

persuaded that it should be expanded to 

include one. In this regard, we note that 

transactions which should properly be 

disclosed under Item 404(a) might be 

excluded under an ordinary course of 

business exception, such as 

employment of immediate family 

members of officers and directors. 

However, we note that whether a 

transaction which was not material to 

the company or the other entity 

involved and which was undertaken in 

the ordinary course of business of the 

company and on the same terms that the 

company offers generally in transactions 

with persons who are not related 

persons, are factors that could be taken 

into consideration when performing the 

materiality analysis for determining 

whether disclosure is required under 

the principle for disclosure. 

B. Procedures for Approval of Related 

Person Transactions 

We are adopting a new requirement 

for disclosure of the policies and 

procedures established by the company 

and its board of directors regarding 

related person transactions substantially 

as proposed. State corporate law and 

increasingly robust corporate 

governance practices support or provide 

for such procedures in connection with 

transactions involving conflicts of 

interest.465 We believe that this type of 

information may be material to 

investors, and our amendments 

therefore require disclosure of policies 

and procedures regarding related person 

transactions under paragraph (b) of Item 

404, as amended. 

Specifically, the amendments require 

a description of the company’s policies 

and procedures for the review, approval 

or ratification of transactions with 

related persons that are reportable under 

paragraph (a) of Item 404. The 

description must include the material 

features of these policies and 

procedures that are necessary to 

understand them. While the material 

features of such policies and procedures 

will vary depending on the particular 

circumstances, examples of such 

features may include, in given cases, 

among other things: 

• The types of transactions that are 

covered by such policies and 

procedures, and the standards to be 

applied pursuant to such policies and 

procedures; 

• The persons or groups of persons on 

the board of directors or otherwise who 

are responsible for applying such 

policies and procedures; and 

• Whether such policies and 

procedures are in writing and, if not, 

how such policies and procedures are 

evidenced. 

Item 404(b) requires identification of 

any transactions required to be reported 

under paragraph (a) of Item 404 where 

the company’s policies and procedures 

do not require review, approval or 

ratification or where such policies and 

procedures have not been followed. 

One commenter expressed concern 

that it is not reasonable or customary for 

a company’s related person transaction 

policy to extend to transactions 

occurring before an individual becomes 

affiliated with a company.466 In 

response, we have added an instruction 

indicating that disclosure need not be 

provided pursuant to paragraph (b) of 

Item 404 regarding any transaction that 

occurred at a time before the related 

person had the relationship that would 

trigger disclosure under Item 404(a), if 

the transaction did not continue after 

the related person had that 

relationship.467

C. Promoters and Control Persons 

As proposed and adopted, the 

amendments require a company to 

provide disclosure regarding the 

identity of promoters and its 

transactions with those promoters if the 

company had a promoter at any time 

during the last five fiscal years.468 The 

disclosure will be required in Securities 

Act registration statements on Form S–

1 or on Form SB–2 and Exchange Act 

Form 10 or Form 10–SB. The disclosure 

includes: 

• The names of the promoters; 

• The nature and amount of anything 

of value received by each promoter from 

the company and the nature and amount 


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469We also adopt as proposed similar revisions to 

the disclosure requirement referencing promoters in 

Item 401(g)(1) of Regulation S–K. In addition, as 

proposed our revisions add Form SB–2 to the list 

of registration statement forms in Item 404 for 

which promoter disclosure is required. While this 

revision updates the registration statement forms 

listed in Item 404, it does not change the promoter 

disclosure requirement of Form SB–2. 

470 Item 404(c)(2). The term ‘‘group’’ has the same 

meaning as in Exchange Act Rule 13d–5(b)(1) [17 

CFR 240.13d–5(b)(1)], that is, any two or more 

persons that agree to act together for the purpose 

of acquiring, holding, voting or disposing of equity 

securities of an issuer. The term ‘‘shell company’’

is defined in Securities Act Rule 405 and Exchange 

Act Rule 12b–2. 

471 Item 407 of Regulations S–K and S–B. As 

adopted, Item 407 consolidates corporate 

governance disclosure requirements located in 

several places under our rules and the principal 

markets’ listing standards, including in particular 

requirements that had been specified in Items 306, 

401(h), (i) and (j), 402(j) and 404(b) of Regulation 

S–K and Item 7 of Schedule 14A under the 

Exchange Act prior to these amendments. We are 

not making any changes to the substance of the 

requirements under Item 306, Item 401(h), (i) or (j), 

or Item 402(j) as part of this consolidation. 

However, as proposed, Item 407 reorders some 

provisions that were specified in Item 306 and 

reflects the relevant Public Company Accounting 

Oversight Board rules. See PCAOB Rulemaking: 

Public Company Accounting Oversight Board; 

Order Approving Proposed Technical Amendments 

to Interim Standards Rules, Release No. 34–49624 

(Apr. 28, 2004) [69 FR 24199]; and Order Regarding 

Section 101(d) of the Sarbanes-Oxley Act of 2002, 

Release No. 33–8223 (Apr. 25, 2003) [68 FR 2336]. 

472Letter from Fenwick. 

473See Section 10A(m) of the Exchange Act [15 

U.S.C. 78j–1(m)]; Exchange Act Rule 10A–3 [17 CFR 

240.10A–3]; and Standards Relating to Listed 

Company Audit Committees, Release No. 33–8220 

(Apr. 9, 2003) (the ‘‘Audit Committee Release’’) [68 

FR 18788]. 

474NASD and NYSE Listing Standards Release. 

The other exchanges have also adopted corporate 

governance listing standards. See Order Granting 

Approval of Proposed Rule Change by the American 

Stock Exchange LLC and Notice of Filing and Order 

Granting Accelerated Approval of Amendment No. 

2 Relating to Enhanced Corporate Governance 

Requirements Applicable to Listed Companies, 

Release No. 34–48863 (Dec. 1, 2003) [68 FR 68432]; 

Notice of Filing and Order Granting Accelerated 

Approval of Proposed Rule Change and 

Amendment Nos. 1 and 2 Thereto by the 

Philadelphia Stock Exchange, Inc. Relating to 

Corporate Governance, Release No. 34–49881 (June 

17, 2004) [69 FR 35408]; Order Approving Proposed 

Rule Change and Notice of Filing and Order 

Granting Accelerated Approval to Amendment Nos. 

2 and 3 to the Proposed Rule Change by the Chicago 

Stock Exchange, Inc. Relating to Governance of 

Issuers on the Exchange, Release No. 34–49911 

(June 24, 2004) [69 FR 39989]; Notice of Filing and 

Order Granting Accelerated Approval of Proposed 

Rule Change by the Boston Stock Exchange, Inc. to 

Amend Chapter XXVII, Section 10 of the Rules of 

the Board of Governors by Adding Requirements 

Concerning Corporate Governance Standards of 

Exchange-Listed Companies, Release No. 34–49955 

(July 1, 2004) [69 FR 41555]; Notice of Filing and 

Order Granting Accelerated Approval of Proposed 

Rule Change and Amendment Nos. 1 and 2 Thereto 

by the Chicago Board Options Exchange, 

Incorporated, Relating to Enhanced Corporate 

Governance Requirements for Listed Companies, 

Release No. 34–49995 (July 9, 2004) [69 FR 42476]; 

Notice of Filing and Order Granting Accelerated 

Approval of Proposed Rule Change and 

Amendment Nos. 1 and 2 Thereto by National 

Stock Exchange Relating to Corporate Governance, 

Release No. 34–49998 (July 9, 2004) [69 FR 42788]; 

and Notice of Filing and Immediate Effectiveness of 

Proposed Rule Change by the Pacific Exchange, Inc. 

to Amend the Corporate Governance Requirements 

for PCX Listed Companies, Release No. 34–50677 

(Nov. 16, 2004) [69 FR 68205]. 

The Commission has previously received a 

rulemaking petition submitted by the AFL/CIO, 

which requested the Commission to amend Items 

401 and 404 of Regulation S–K to require disclosure 

about transactions with non-profit organizations 

(letter dated Dec. 12, 2001 from Richard Trumka, 

Secretary-Treasurer, AFL/CIO, File No. 4–499, 

available at www.sec.gov/rules/petitions/petn4- 

499.pdf) and a rulemaking petition submitted by the 

Council of Institutional Investors, which requested 

amendments to Item 401 of Regulation S–K to 

require disclosure of certain transactions between 

directors, executive officers and nominees (letter 

dated Oct. 1, 1997, as amended Oct. 19, 1998, from 

Sarah A.B. Teslik, Executive Director, Council of 

Institutional Investors, File No. 4–404). We believe 

these requests have in large part been addressed by 

revised listing standards instituted by the 

exchanges, so that we are not now taking additional 

action under these petitions. 

475 Item 407(a). 

of any consideration received by the 

company; and 

• Additional information regarding 

any assets acquired by the company 

from a promoter. 

The amendments are consistent with 

the previous disclosure requirements 

regarding promoters. However, prior to 

these amendments this disclosure was 

not required if the company had been 

organized more than five years ago, even 

if the company otherwise had a 

promoter within the last five years. Our 

staff’s experience in reviewing 

registration statements, especially of 

smaller companies, suggests that the 

more appropriate five-year test for 

which the disclosure should be 

provided relates to the period of time 

during which the company had a 

promoter, as our revision provides, 

rather than the date of organization of 

the company.469 We are also requiring 

the same disclosure that is required for 

promoters for any person who acquired 

control, or is part of a group that 

acquired control, of an issuer that is a 

shell company.470 We are revising the 

title of this item to include the term 

control persons in order to clarify the 

scope of the disclosure requirement. 

D. Corporate Governance Disclosure 

We are consolidating our disclosure 

requirements regarding director 

independence and related corporate 

governance disclosure requirements 

under a single disclosure item and 

updating such disclosure requirements 

regarding director independence to 

reflect our current requirements and 

current listing standards.471 Prior to 

these amendments, Item 404(b) had 

required disclosure of specific business 

relationships between a director or 

nominee for director and the company 

that could bear on the ability of 

directors and nominees for director to 

exercise independent judgment in the 

performance of their duties. We 

proposed to eliminate the disclosure 

requirement that was stated under 

paragraph (b) of Item 404 in favor of 

more direct disclosure about the 

determination of the independence of 

directors and nominees for director, 

including information supplementing 

the amended related person transaction 

disclosure that would permit qualitative 

assessment of those independence 

determinations. While one commenter 

suggested that we retain a revised 

version of paragraph (b) to Item 404 as 

it was stated prior to these 

amendments,472 we continue to believe 

that disclosure focused on the 

determinations made regarding director 

independence is the appropriate 

approach. The comprehensive director 

independence disclosure requirement 

that we are adopting today recognizes 

the significant development of 

independence requirements since the 

disclosure requirements in former 

paragraph (b) of Item 404 were 

originally adopted. As directed by the 

Sarbanes-Oxley Act of 2002, we adopted 

a rule requiring national securities 

exchanges and national securities 

associations to adopt listing standards 

requiring independent audit committees 

meeting the standards of our rule.473

Further, in 2003 and 2004, we approved 

amendments to additional listing 

standards, including those of the New 

York Stock Exchange and Nasdaq,474

that imposed specific additional 

independence standards for boards of 

directors, and the compensation and 

nominating committees or persons 

performing similar functions. Each 

listed company (unless exempt) 

determines whether its directors and 

committee members are independent 

based on definitions that it adopts 

which, at a minimum, are required to 

comply with the listing standards 

applicable to the company. 

The amendments we are adopting 

today, substantially as proposed, 

include a disclosure requirement to 

identify the independent directors of the 

company (and, in the case of disclosure 

in proxy or information statements 

relating to the election of directors, 

nominees for director) under the 

definition for determining board 

independence applicable to it.475 The 

amendments also require disclosure of 

any members of the compensation, 

nominating and audit committees that 

the company has not identified as 

independent under the definition of 


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53204 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

476 Id. If the company does not have a separately 

designated compensation, nominating or audit 

committee or committee performing similar 

functions, it must provide this disclosure regarding 

independence under committee independence 

standards with respect to all members of the board 

of directors. 

477Under the amendments, ‘‘listed issuer’’ has the 

same meaning as in Exchange Act Rule 10A–3. 

478Under the amendments, ‘‘national securities 

exchange’’ means a national securities exchange 

registered pursuant to Section 6(a) of Exchange Act 

[15 U.S.C. 78f(a)]. 

479Under the amendments, ‘‘inter-dealer 

quotation system’’ means an automated inter-dealer 

quotation system of a national securities association 

registered pursuant to Section 15A(a) of the 

Exchange Act [15 U.S.C. 78o–3(a)], and a ‘‘national 

securities association’’ means a national securities 

association registered pursuant to Section 15A(a) of 

the Exchange Act [15 U.S.C. 78o–3(a)] that has been 

approved by the Commission (as that definition 

may be modified or supplemented). Inter-dealer 

quotation systems such as the OTC Bulletin Board, 

the Pink Sheets and the Yellow Sheets, which do 

not maintain or impose listing standards and do not 

have listing agreements or arrangements with the 

issuers whose securities are quoted through them, 

are not within this definition. See Section II.F.1. in 

the Audit Committee Release. 

480Similar disclosure had been required pursuant 

to Item 7(d)(2)(ii) and Item 7(d)(3)(iv) of Schedule 

14A prior to these amendments. As part of our 

consolidation of these provisions into new Item 

407, we adopt revised language for these provisions 

that reflects the general approach discussed above 

with regard to disclosure of director independence 

for board and committee purposes. 

481Letter from NYCBA. 

482 Instruction 1 to Item 407(a). 

483See Section 121.B.(2)(c) of the American Stock 

Exchange Company Guide; paragraph (g) of Chapter 

XXVII, Listed Securities, Section 10, Corporate 

Governance, of the Rules of the Board of Governors 

of the Boston Stock Exchange; and Rule 19(a)(1) of 

Article XXVIII, Listed Securities, of the Chicago 

Stock Exchange Rules. 

484 Item 407(a)(2). 

485See, e.g., letters from Chamber of Commerce; 

FSR; and Sidley Austin. 

486 Instruction 3 to Item 407(a). 

487 Instruction 2 to Item 407(a) has been revised 

to clarify this requirement. As proposed, disclosure 

under these amendments will not be required for 

persons no longer serving as a director in 

registration statements under the Securities Act or 

the Exchange Act filed at a time when the company 

is not subject to the reporting requirements of 

Exchange Act Section 13(a) or 15(d). As proposed, 

disclosure will not be required of anyone who was 

a director only during the time period before the 

company made its initial public offering if he or she 

was no longer a director at the time of the offering. 

488For this reason, we are not incorporating the 

concept previously found in Instruction 4 to Item 

404(b) into Item 407(a) as adopted. 

independence for that board committee 

applicable to it.476

More specifically, if the company is 

an issuer 477 with securities listed, or for 

which it has applied for listing, on a 

national securities exchange 478 or in an 

automated inter-dealer quotation system 

of a national securities association 479

which has requirements that a majority 

of the board of directors be 

independent, Item 407(a) requires 

disclosure of those directors and 

director nominees that the company 

identifies as independent (and 

committee members not identified as 

independent), using the definition for 

independence for directors (and for 

committee members) that it uses for 

determining compliance with the 

applicable listing standards. If the 

company is not a listed issuer, we are 

requiring disclosure of those directors 

and director nominees that the company 

identifies as independent (and 

committee members not identified as 

independent) using the definition for 

independence for directors (and for 

committee members) of a national 

securities exchange or a national 

securities association, specified by the 

company. The company will be required 

to apply the same definition 

consistently to all directors and also to 

use the independence standards of the 

same national securities exchange or 

national securities association for 

purposes of determining the 

independence of members of the 

compensation, nominating and audit 

committees.480

One commenter pointed out the rule 

proposals did not make clear what 

disclosure would be required for listed 

issuers that relied upon an exemption 

from independence requirements, most 

notably a ‘‘controlled company’’

exemption.481 To clarify the disclosure 

required in this situation, we added a 

requirement to the amendments that if 

the company is a listed issuer whose 

securities are listed on a national 

securities exchange or in an inter-dealer 

quotation system which has 

requirements that a majority of the 

board of directors be independent, and 

also has exemptions to those 

requirements (for board or committee 

member independence) upon which the 

company relied, the company must 

disclose the exemption relied upon and 

explain the basis for its conclusion that 

such exemption is applicable.482 Similar 

disclosure is required for those 

companies that are not listed issuers but 

would qualify for an exemption under 

the listing standards selected. In 

addition, this instruction clarifies that 

small business issuers listed on 

exchanges where at least half of the 

members of the board of directors, 

rather than a majority, are required to be 

independent must comply with the 

disclosure requirements specified in 

Item 407(a).483

The amendments require as proposed 

that an issuer which has adopted 

definitions of independence for 

directors and committee members must 

disclose whether those definitions are 

posted on the company’s Web site, and 

if they are not include the definitions as 

an appendix to the company’s proxy or 

information statement at least once 

every three years or if the policies have 

been materially amended since the 

beginning of the company’s last fiscal 

year.484 Further, if the policies are not 

on the company’s Web site, or included 

as an appendix to the company’s proxy 

or information statement, the company 

must disclose in which of the prior 

fiscal years the policies were included 

in the company’s proxy or information 

statement. 

In addition, the amendments require, 

for each director or director nominee 

identified as independent, a description, 

by specific category or type, of any 

transactions, relationships or 

arrangements not disclosed pursuant to 

paragraph (a) of Item 404 that were 

considered by the board of directors of 

the company in determining that the 

applicable independence standards 

were met. Under our proposals, 

disclosure of the specific details of each 

such transaction, relationship or 

arrangement would have been required. 

Several commenters objected to 

providing this disclosure, given the 

potential for extensive detail about these 

types of transactions, relationships or 

arrangements, and some suggested 

instead providing disclosure by category 

or type of transaction.485 In response to 

the commenters, we have revised the 

disclosure requirement to permit 

transactions, relationships or 

arrangements of each director or 

director nominee to be described by the 

specific category or type. Consistent 

with the rule proposals, the amended 

rule requires that the disclosure be 

made on a director by director basis, 

with separate disclosure of categories or 

types of transactions, relationships or 

arrangements for each director and 

director nominee. We have also adopted 

an instruction indicating that the 

description of the category or type must 

be sufficiently detailed so that the 

nature of the transactions, relationships 

or arrangements is readily apparent.486

As proposed, this independence 

disclosure is required for any person 

who served as a director of the company 

during any part of the year for which 

disclosure must be provided,487 even if 

the person no longer serves as director 

at the time of filing the registration 

statement or report or, if the information 

is in a proxy statement, if the director’s 

term of office as a director will not 

continue after the meeting. In this 

regard, we believe that the 

independence status of a director is 

material while the person is serving as 

director, and not just as a matter of 

reelection.488


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489However, we are not revising the provision 

that the Audit Committee Report is furnished and 

not filed. 

490 Item 407(d)(1) and Instruction 2 to Item 407. 

491 Item 407(d)(5). 

492These compensation committee disclosure 

requirements are included in Item 407(e). 

493See, e.g., letters from J. Brill 1; Hewitt; Mercer; 

Pearl Meyer & Partners; and SCSGP. 494See, e.g., letters from Buck Consultants; 

Chamber of Commerce; Hewitt; Pearl Meyer & 

Partners; Mercer; and Steven Hall & Partners. 

495See, e.g., letters from Brian Foley & Co.; 3CCompensation Consulting Consortium; BCIMC; CFA 

Centre 1; Governance for Owners; Michelle Leder; 

James McFadden; Institutional Investor Group; 

SBAF; and Theodore Schlissel. 

496See, e.g., letters from Compensia; FedEx 

Corporation; Hewitt; and Mercer. 

497Under the rules as adopted, disclosure would 

also not be required under this Item if an employee 

of a consulting firm met with company management 

to work on matters not involving compensation. See 

letter from Hewitt. 498Prior to these amendments, disclosure 

regarding compensation committee interlocks and 

insider participation in compensation decisions 

was required by Item 402(j). 499Prior to these amendments, this disclosure 

was required by Item 7(g) of Schedule 14A. 

500 Item 5.02(a) of Form 8–K. 

501 Item 22(b)(17) of Schedule 14A. 

502 Item 407(b) includes disclosure requirements 

previously specified in paragraphs (d)(1), (f), and 

(h)(3) of Item 7 of Schedule 14A. 

503 Instructions 1 and 2 to Item 407. Instruction 

2 also includes as proposed a requirement that the 

charter be provided if it is materially amended. 

We also amend the disclosure 

requirements regarding the audit 

committee and nominating committee 

applicable prior to these amendments in 

order to eliminate duplicative 

committee member independence 

disclosure and to update the required 

audit committee charter disclosure 

requirements for consistency with the 

more recently adopted nominating 

committee charter disclosure 

requirements.489 As a result, as 

proposed the audit committee charter 

will no longer be required to be 

delivered to security holders if it is 

posted on the company’s Web site.490

We also are moving the disclosure 

required by Section 407 of the SarbanesOxley Act regarding audit committee 

financial experts to Item 407, although 

as proposed we are not making any 

substantive changes to that 

requirement.491

The amendments require new 

disclosures regarding the compensation 

committee that are similar to the 

disclosures required regarding audit and 

nominating committees of the board of 

directors.492 The company must state 

whether the compensation committee 

has a charter, and if it does make the 

charter available through its Web site or 

proxy materials in one of the ways that 

the audit and nominating committee 

charters may be made available. As 

proposed, the company will be required 

to describe its processes and procedures 

for the consideration and determination 

of executive and director compensation 

including: 

• The scope of authority of the 

compensation committee (or persons 

performing the equivalent functions); 

• The extent to which the 

compensation committee (or persons 

performing the equivalent functions) 

may delegate any authority to other 

persons, specifying what authority may 

be so delegated and to whom; 

• Any role of executive officers in 

determining or recommending the 

amount or form of executive and 

director compensation; and 

• Any role of compensation 

consultants in determining or 

recommending the amount or form of 

executive and director compensation, 

identifying such consultants, stating 

whether such consultants are engaged 

directly by the compensation committee 

(or persons performing the equivalent 

functions) or any other person, 

describing the nature and scope of their 

assignment, and the material elements 

of the instructions or directions given to 

the consultants with respect to the 

performance of their duties under the 

engagement. 

Several commenters viewed this item 

as redundant with the Compensation 

Discussion and Analysis required under 

Item 402, and suggested that they be 

combined.493 While this item and the 

Compensation Discussion and Analysis 

both involve the determination of 

executive officer compensation, they 

have different focuses. Item 407(e) 

focuses on the company’s corporate 

governance structure that is in place for 

considering and determining executive 

and director compensation—such as the 

scope of authority of the compensation 

committee and others in making these 

determinations, as well as the resources 

utilized by the committee. In contrast, 

the Compensation Discussion and 

Analysis focuses on material 

information about the compensation 

policies and objectives of the company 

and seeks to put the quantitative 

disclosure about named executive 

officer compensation into perspective. 

We believe it is appropriate to discuss 

each of these matters separately and, 

accordingly, we have not combined 

them. 

As for the required disclosure 

regarding compensation consultants, 

some commenters objected to the 

proposed requirements,494 while other 

commenters suggested expanding the 

requirement to include, among other 

things, a discussion of the work 

performed by the compensation 

consultant for the company or others.495

In addition, some commenters suggested 

deleting the requirement in proposed 

Item 407(e) that companies identify any 

executive officer of the company that 

the compensation consultants contacted 

in carrying out their assignment.496 We 

continue to believe that the involvement 

of compensation consultants and their 

interaction with the compensation 

committee is material information that 

should be required. However, we are 

persuaded that disclosure regarding any 

executive officers of the company that 

the compensation consultants contacted 

in carrying out their assignment is not 

necessary. Therefore, we are adopting 

the compensation consultant disclosure 

requirement in Item 407(e) as proposed, 

except for the required disclosure 

regarding contacts with executive 

officers, which has not been adopted.497

Further, the amendments consolidate 

into this compensation committee 

disclosure requirement the disclosure 

requirements regarding compensation 

committee interlocks and insider 

participation in compensation 

decisions, as proposed.498

Finally, for registrants other than 

registered investment companies, the 

amendments eliminate an existing 

proxy disclosure requirement regarding 

directors who have resigned or declined 

to stand for re-election 499 which is no 

longer necessary since it has been 

superseded by a disclosure requirement 

in Form 8–K.500 For registered 

investment companies, which do not 

file current reports on Form 8–K, the 

requirement has been moved to Item 

22(b) of Schedule 14A.501 Also as 

proposed, the amendments combine 

various proxy disclosure requirements 

regarding board meetings and 

committees into one location.502 In 

addition, we are adopting as proposed 

two instructions to Item 407 to combine 

repetitive provisions, one relating to 

independence disclosure, and the other 

relating to board committee charters.503

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 


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53206 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

504We are revising Item 404(a) of Regulation S–

B from the proposal to clarify that the 

determination of a small business issuer’s total 

assets for purposes of this Item shall be made as of 

the issuer’s fiscal year-end for its last three 

completed fiscal years. 

505 Instruction 8 to Item 404(a) of Regulation S–

B. 

506This is consistent with the requirements of 

Regulation S–B prior to these amendments. 

507 Instruction 9 to Item 404(a) of Regulation S–

B. 

508For 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 issuer’s 

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 issuer’s 2005 Form 10–KSB. 

509 Item 404(b) of Regulation S–B. 

510The 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. 

512Amendments 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. 

513Amendments 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 today’s 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 today’s 

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 

today’s amendments pursuant to Item 7(d)(3) (other 

than the audit committee independence disclosures 

required prior to today’s amendments by Items 

7(d)(3)(iv)(A)(1) and (B)). 

$120,000 or one percent of the average 

of the small business issuer’s 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–B 507 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) of 

Regulation S–K, particularly in 

situations where Item 404(a) 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 issuer’s 

immediate parent, if any.509

One conforming change that we are 

not making to Regulation S–B, however, 

concerns the calculation of a related 

person’s interest in a given transaction. 

Prior to today’s amendments, Item 

404(a) of Regulation S–B differed from 

Item 404(a) of Regulation S–K with 

respect to, among other things, the 

calculation of the dollar value of a 

person’s interest in a related person 

transaction. Prior to these amendments, 

Instruction 4 to Item 404(a) 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 

person’s 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 

person’s 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 today’s 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 issuer’s 

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 crossreferences 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 


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514Amendments 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 today’s 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 today’s 

amendments. 

515 Instruction to Item 22(b)(15)(ii)(B) of Schedule 

14A; Instruction to Item 22(b)(16)(ii) of Schedule 

14A. 

516Amendments 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. 

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. 

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

Regulation BTR. 

521Rule 100(a)(2) of Regulation BTR. 

522Exchange 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. 

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

524See letter from Sullivan. 

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

526Proposing Release at n. 309. 

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. 

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 NonEmployee 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 issuer’s 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) dollar disclosure threshold; 

• Do not possess an interest in any 

other transaction for which Item 404(a) 

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 

today’s 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 company’s securities are 

traded.524 If the company has no 

securities traded on an exchange, the 

commenter suggested relying on the 

director’s eligibility to serve on the 

issuer’s 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 issuer’s 

securities are listed.526 Further, basing 

the Non-Employee Director definition 

on eligibility to serve on the issuer’s 

audit committee could burden the audit 

committee with a compensation 

committee function. 

As proposed and adopted, the NonEmployee Director definition continues 

to permit consulting and similar 

arrangements subject to limits measured 

by reference to the revised Item 404(a) 

disclosure requirements. Because the 

disclosure threshold of Item 404(a) is 

raised from $60,000 to $120,000, 

however, the effect in some cases may 

be to permit previously ineligible 


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53208 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

527See, e.g., letter from SCSGP. 

528Note 4 to Rule 16b–3. 

529As 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. 

530See 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. 

531See 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). The 

amendments to Form 8–K that reference Regulation 

S–B require disclosure of the information required 

by amended Item 404(a) of Regulation S–B. 

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

533See 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. 

534See 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. 

535See 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. 

536See amendments to Item 1107(e) of Regulation 

AB. 

537See, e.g., letters from SCSGP; jointly, Angela 

Chappa, Annie Gabel and Michelle Prater; SBAF; 

and Standard Life. 

538See, e.g., letters from SCSGP; Foley; and 

Mercer. 

directors to be Non-Employee Directors. 

In other cases, where revised Item 

404(a) 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 definition’s 

tests at the time he or she votes to 

approve a transaction. For purposes of 

determining a director’s status under 

those tests that are based on Item 404(a), 

a company may rely on the disclosure 

provided under Item 404 of Regulation 

S–K for the issuer’s 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 director’s 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) 

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) 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) 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), 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

VI. Plain English Disclosure 

We are adopting as proposed a 

requirement that most of the disclosure 

called for by amended Items 402, 403, 

404 and 407 be provided in plain 

English. This plain English requirement 

will apply when information 

responding to these items is included 

(whether directly or through 

incorporation by reference) in reports 

required to be filed under Exchange Act 

Sections 13(a) or 15(d). Commenters 

were generally supportive of the plain 

English requirement,537 and some 

commenters suggested extending the 

plain English requirements to the proxy 

statement as a whole and to other 

Commission filings.538

In 1998, we adopted rule changes 

requiring issuers preparing prospectuses 

to write the cover page, summary and 


jlentini on PROD1PC65 with RULES2
Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53209 

539Plain English Disclosure, Release No. 33–7497 

(Jan. 28, 1998) [63 FR 6369] (adopting revisions to 

Securities Act Rule 421 [17 CFR 230.421]). We have 

also required that risk factor disclosure included in 

annual reports and Summary Term Sheets in 

business combination filings be in plain English. 

See Item 1A. to Form 10–K and Item 1001 of 

Regulation M–A [17 CFR 229.1001], respectively. 

540See, e.g., General Instruction G(3) to Form 10–

K and General Instruction E.3. to Form 10–KSB 

(specifying information that may be incorporated by 

reference from a proxy or information statement in 

an annual report on Form 10–K or 10–KSB). 

541Of course, the tables required under the rules 

we adopt today must be included and cannot be 

modified except as specifically allowed for in the 

rules. See Item 402(a)(5) of Regulation S–K and Item 

402(a)(4) of Regulation S–B. 

542See, e.g., letters from Amalgamated; CFA 

Centre 1; CII; IUE–CWA; Mercer; and SBAF. 

543See, e.g., letters from Buck Consultants; 

Frederic W. Cook & Co.; HRPA; ISS; Mercer; and 

The Value Alliance and Corporate Governance 

Alliance. 

544See, e.g., letters from ABA; ACC; Brian Foley 

& Co.; Jesse Brill, Chair of 

CompensationStandards.com and Chair of the 

National Association of Stock Plan Professionals, 

dated April 28, 2006; Buck Consultants; Foley; 

Frederic W. Cook & Co.; Fried Frank; Mercer; and 

Sullivan. 

545See letter from BDO Seidman. 

risk factors section of prospectuses in 

plain English and apply plain English 

principles to other portions of the 

prospectus.539 These rules transformed 

the landscape of public offering 

disclosure and made prospectuses more 

accessible to investors. We believe that 

plain English principles should apply to 

the disclosure requirements that we are 

adopting, so disclosure provided in 

response to those requirements is easier 

to read and understand. Clearer, more 

concise presentation of executive and 

director compensation, related person 

transactions, beneficial ownership and 

corporate governance matters can 

facilitate more informed investing and 

voting decisions in the face of complex 

information about these important areas. 

We are adding Exchange Act Rules 

13a–20 and 15d–20 to require that 

companies prepare their executive and 

director compensation, related person 

transaction, beneficial ownership and 

corporate governance disclosures 

included in Exchange Act reports using 

plain English, including the following 

principles: 

• Present information in clear, 

concise sections, paragraphs and 

sentences; 

• Use short sentences; 

• Use definite, concrete, everyday 

words; 

• Use the active voice; 

• Avoid multiple negatives; 

• Uuse descriptive headings and 

subheadings; 

• Use a tabular presentation or bullet 

lists for complex material, wherever 

possible; 

• Avoid legal jargon and highly 

technical business and other 

terminology; 

• Avoid frequent reliance on 

glossaries or defined terms as the 

primary means of explaining 

information; 

• Define terms in the glossary or other 

section of the document only if the 

meaning is unclear from the context; 

• Use a glossary only if it facilitates 

understanding of the disclosure; and 

• In designing the presentation of the 

information, include pictures, logos, 

charts, graphs, schedules, tables or other 

design elements so long as the design is 

not misleading and the required 

information is clear, understandable, 

consistent with applicable disclosure 

requirements and any other included 

information, drawn to scale and not 

misleading. 

The new rule also provides additional 

guidance on drafting the disclosure that 

would comply with plain English 

principles, including guidance as to the 

following practices that companies 

should avoid: 

• Legalistic or overly complex 

presentations that make the substance of 

the disclosure difficult to understand; 

• vague ‘‘boilerplate’’ explanations 

that are overly generic; 

• complex information copied 

directly from legal documents without 

any clear and concise explanation of the 

provision(s); and 

• disclosure repeated in different 

sections of the document that increases 

the size of the document but does not 

enhance the quality of the information. 

Under the new rules, if disclosures 

about executive compensation, 

beneficial ownership, related person 

transaction or corporate governance 

matters are incorporated by reference 

into an Exchange Act report from a 

company’s proxy or information 

statement, the disclosure is required to 

be in plain English in the proxy or 

information statement.540 The plain 

English rules are part of the disclosure 

rules applicable to filings required 

under Sections 13(a) and 15(d) of the 

Exchange Act. We believe that these 

plain English requirements are best 

administered by the Commission under 

these rules, and therefore we are not at 

this time extending plain English 

requirements to the entire proxy 

statement or to other Commission 

filings. 

We believe that several areas where 

commenters requested that information 

be required in a specific format, such as 

tables, are best addressed by application 

of our plain English principles. The 

plain English rules adopted today 

specifically provide that, in designing 

the presentation of the information, 

companies may include tables or other 

design elements, so long as the design 

is not misleading and the required 

information is clear, understandable, 

consistent with applicable disclosure 

requirements, consistent with any other 

included information, and not 

misleading.541 In response to our 

request for comment, several 

commenters recommended using a 

separate supplemental table, rather than 

footnotes, to identify the components of 

All Other Compensation, including 

individual perquisites, reported in the 

Summary Compensation Table.542

While we have not mandated such a 

separate table, we encourage companies 

to use additional tables wherever 

tabular presentation facilitates clearer, 

more concise disclosure. Several 

commenters also requested that we 

specifically permit tabular disclosure of 

the required potential post-employment 

payments disclosure.543 Because of the 

difficulty of prescribing a single format 

that would cover all circumstances, the 

rule as proposed and adopted does not 

mandate tabular disclosure. However, 

consistent with the plain English 

principles that we adopt today, we 

encourage companies to develop their 

own tables to report post-termination 

compensation if such tabular 

presentation facilitates clearer, more 

concise disclosure. Similarly, while we 

do not require tabular presentation of 

the narrative disclosure following the 

director compensation table, such as a 

breakdown of director fees, consistent 

with the plain English rules we adopt 

today, we encourage tabular 

presentation where it facilitates an 

understanding of the disclosure. 

Companies should also consider ways 

in which design elements such as tables 

can facilitate the presentation of the 

related person transaction disclosure 

and corporate governance disclosures. 

VII. Transition 

A number of commenters 

recommended that we adopt the rules 

by September or October 2006 in order 

for companies to have sufficient time to 

implement them for the 2007 proxy 

season.544 One commenter expressed 

concern on how the transition would 

apply to Securities Act registration 

statements.545 In keeping with these 

comments, we believe we have adopted 

the new rules and amendments in 

sufficient time for compliance in the 

2007 proxy season. Therefore, the 

compliance dates are as follows: 


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53210 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

546The amendments to the cross-references in 

Item 10 of Form N–CSR will appear in the Form 

concurrent with the effective date of the 

amendments to our proxy rules, and will be 

effective for a particular registrant’s Forms N–CSR 

that are filed after the filing of any proxy statement 

that includes a response to new Item 407(c)(2)(iv) 

of Regulation S–K (as required by new Item 

22(b)(15) of Schedule 14A). The substance of the 

information required by the Item has not been 

changed. 

547The other amended executive and director 

compensation disclosure requirements which relate 

to the last completed fiscal year will not be affected 

by this transition approach. The Summary 

Compensation Table will be treated differently 

because, as amended, it requires disclosure of 

compensation to the named executive officers for 

the last three fiscal years. 

548 44 U.S.C. 3501 et seq. 

549 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

550The paperwork burden from Regulations S–K 

and S–B is imposed through the forms that are 

subject to the requirements in those Regulations 

and is reflected in the analysis of those forms. To 

avoid a Paperwork Reduction Act inventory 

reflecting duplicative burdens, for administrative 

convenience we estimate the burdens imposed by 

each of Regulations S–K and S–B to be a total of 

one hour. 

551The pertinent annual reports are those on 

Form 10–K or 10–KSB. 

• For Forms 8–K, compliance is 

required for triggering events that occur 

60 days or more after publication in the 

Federal Register; 

• For Forms 10–K and 10–KSB, 

compliance is required for fiscal years 

ending on or after December 15, 2006; 

• For proxy and information 

statements covering registrants other 

than registered investment companies, 

compliance is required for any proxy or 

information statements filed on or after 

December 15, 2006 that are required to 

include Item 402 and 404 disclosure for 

fiscal years ending on or after December 

15, 2006; 

• For Securities Act registration 

statements covering registrants other 

than registered investment companies 

and Exchange Act registration 

statements (including pre-effective and 

post-effective amendments, as 

applicable), compliance is required for 

registration statements that are filed 

with the Commission on or after 

December 15, 2006 that are required to 

include Item 402 and 404 disclosure for 

fiscal years ending on or after December 

15, 2006; 

• For initial registration statements 

and post-effective amendments that are 

annual updates to effective registration 

statements that are filed on Forms N–

1A, N–2 and N–3 (except those filed by 

business development companies), 

compliance is required for registration 

statements and post-effective 

amendments that are filed with the 

Commission on or after December 15, 

2006; and 

• For proxy and information 

statements covering registered 

investment companies, compliance is 

required for any new proxy or 

information statement filed on or after 

December 15, 2006.546

Commenters expressed some 

confusion concerning the periods for 

which disclosure under the new rules 

and amendments will be required 

during the transition from the former 

rules. As we noted in the Proposing 

Release, companies will not be required 

to ‘‘restate’’ compensation or related 

person transaction disclosure for fiscal 

years for which they previously were 

required to apply our rules prior to the 

effective date of today’s amendments. 

This means, for example, that only the 

most recent fiscal year will be required 

to be reflected in the revised Summary 

Compensation Table when the new 

rules and amendments applicable to the 

Summary Compensation Table become 

effective, and therefore the information 

for years prior to the most recent fiscal 

year will not have to be presented at all. 

For the subsequent year’s Summary 

Compensation Table, companies will be 

required to present only the most recent 

two fiscal years in the Summary 

Compensation Table, and for the next 

and all subsequent years will be 

required to present all three fiscal years 

in the Summary Compensation Table.547

As another example, if a calendar yearend company files its initial public 

offering on Form S–1 in November, the 

initial filing will contain compensation 

disclosure regarding 2005 following the 

prior rules. If the registration statement 

does not become effective until after the 

Item 402 disclosure must be updated, 

then an amendment will have to be filed 

that includes the 2006 compensation 

information that complies with the rules 

we adopt today. The Summary 

Compensation Table, however, will only 

contain the information for 2006 and 

will not need to contain the information 

restated from 2005. 

This transition approach will result in 

phased-in implementation of the 

amended Summary Compensation Table 

and amended Item 404(a) disclosure 

over a three-year period for Regulation 

S–K companies, and a two-year period 

for Regulation S–B companies. During 

this phase-in period, companies will not 

be required to present prior years’

compensation disclosure or Item 404(a) 

disclosure under the former rules. 

VIII. Paperwork Reduction Act 

A. Background 

The new rules and amendments 

contain ‘‘collection of information’’

requirements within the meaning of the 

Paperwork Reduction Act of 1995.548

We published a notice requesting 

comment on the collection of 

information requirements in the 

Proposing Release, and we submitted 

these requirements to the Office of 

Management and Budget for review in 

accordance with the Paperwork 

Reduction Act.549 The titles for the 

collection of information are: 550

(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 

annual 551 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 amendments to the 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; 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53211 

552The amended disclosure requirements 

regarding executive and director compensation, 

beneficial ownership, related person transactions 

and parts of the amended corporate governance 

disclosure requirements are in Form 10–K, 

Schedule 14A and Schedule 14C. Form 10–K 

permits the incorporation by reference of 

information in Schedule 14A or 14C to satisfy the 

disclosure requirements of Form 10–K. The analysis 

that follows assumes that companies would either 

provide the required disclosure in a Form 10–K 

only, if the company is not subject to the proxy 

rules, or would incorporate the required disclosure 

into the Form 10–K by reference to the proxy or 

information statement if the company is subject to 

the proxy rules. This approach takes into account 

the burden from the amended disclosure 

requirements that are included in both the Form 

10–K and in Schedule 14A or Schedule 14C. 

• 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 amendments 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 are mandatory. However, the 

information collection requirements 

relating exclusively to proxy and 

information statements will only apply 

to issuers subject to the proxy rules. 

There is no mandatory retention period 

for the information disclosed, and the 

information disclosed will be made 

publicly available on the EDGAR filing 

system. 

B. Summary of Information Collections 

The amendments will increase 

existing disclosure burdens for annual 

reports on Form 10–K 552 and 

registration statements on Forms 10, S–

1, S–4 and S–11 by requiring: 

• An expanded and reorganized 

Summary Compensation Table, which 

will 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 equity-based 

awards computed in accordance with 

FAS 123R, and the aggregate annual 

change in the actuarial present value of 

the named executive officers’

accumulated benefit under 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 Plan-Based Awards Table, which 

builds upon former tabular disclosures 

regarding long term incentive plans and 

awards of option and stock appreciation 

rights to supplement the information 

required to be included in the amended 

Summary Compensation Table; 

• Expanded disclosure regarding 

holdings and exercises by named 

executive officers of previously awarded 

stock, options and similar instruments 

(with disclosure regarding outstanding 

option awards required on an award-byaward basis), including disclosure of 

option exercise prices and expiration 

dates, as well as the amounts (both the 

number of shares and the value) realized 

upon the exercise of options and the 

vesting of stock; 

• 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; 

• With regard to Form 10–K, a short 

Compensation Committee Report 

regarding the compensation committee’s 

review and discussion with 

management of the Compensation 

Discussion and Analysis, and the 

compensation committee’s 

recommendation to the board of 

directors concerning the disclosure of 

the Compensation Discussion and 

Analysis in the Form 10–K or proxy or 

information statement; 

• 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 the more general disclosure 

requirements in place prior to these 

amendments; 

• Disclosure regarding additional 

related persons by expanding the 

definition of ‘‘immediate family 

member’’ under an amended related 

person transaction disclosure 

requirement; 

• New disclosure regarding a 

company’s policies and procedures for 

the review, approval or ratification of 

transactions with related persons; 

• New disclosure regarding corporate 

governance matters such as the 

independence of directors; and 

• Additional disclosure regarding 

pledges of securities by officers and 

directors and directors’ qualifying 

shares. 

At the same time, the amendments 

will decrease existing disclosure 

burdens for annual reports on Form 10–

K and registration statements on Forms 

10, S–1, S–4 and S–11 by: 

• Eliminating tabular presentation 

regarding projected stock option values 

under alternative stock appreciation 

scenarios; 

• Eliminating a generalized tabular 

presentation regarding defined benefit 

plans, which will offset in part the 

increased burdens regarding pension 

plan disclosure; and 

• Eliminating a disclosure 

requirement regarding specific director 

relationships that could affect 

independence. 

In addition, the amendments may 

increase or decrease existing disclosure 

burdens, or not affect them at all, for 

annual reports on Form 10–K and 

registration statements on Forms 10, S–

1, S–4 and S–11, depending on a 

company’s 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 will be 

required to be included or incorporated 

by reference (as applicable) in annual 

reports and registration statements; 

• Increasing the dollar value 

threshold for determining if related 

person transaction disclosure is 

required from $60,000 to $120,000; 

• Narrowing the scope of an 

instruction that provides bright line 

tests for determining whether 

transactions with related persons are 

required to be disclosed in particular 

circumstances; and 

• Requiring disclosure about reliance 

on an exemption from requirements for 

director independence when such an 

exemption is available. 

Specifically with respect to proxy and 

information statements, the 

amendments will impose a new 

disclosure requirement regarding the 


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53212 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

553The same analysis as discussed above with 

regard to the relationship of Form 10–K to the 

disclosure required in proxy or information 

statements is also applied to Form 10–KSB. 

company’s processes and procedures for 

the consideration and determination of 

executive and director compensation 

with respect to the compensation 

committee or persons performing the 

equivalent functions, and disclosure 

regarding the availability of the 

compensation committee’s 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 

company’s Web site. These amendments 

will not require a compensation 

committee to establish or maintain a 

charter. The amended disclosure that 

will be required regarding compensation 

committees is similar to what is 

currently required for audit committees 

and nominating committees. The 

amendments will decrease disclosure 

requirements for proxy and information 

statements by eliminating a disclosure 

requirement regarding the resignation of 

directors and a compensation committee 

report on the repricing of options and 

stock appreciation rights. The 

amendments require the Compensation 

Discussion and Analysis disclosure in 

the annual report on Form 10–K and in 

proxy or information statements to be 

accompanied by a short Compensation 

Committee Report regarding the 

compensation committee’s review and 

discussion with management of the 

Compensation Discussion and Analysis, 

and the compensation committee’s 

recommendation to the board of 

directors with regard to the disclosure of 

the Compensation Discussion and 

Analysis. This new Compensation 

Committee Report, along with the 

Compensation Discussion and Analysis, 

is required instead of the Board 

Compensation Committee Report on 

Executive Compensation that was 

previously required to be furnished with 

proxy and information statements prior 

to these amendments. The extent to 

which eliminating the former 

requirements to provide the Board 

Compensation Committee Report on 

Executive Compensation and a 

compensation committee report on the 

repricing of options and stock 

appreciation rights reduces burdens for 

proxy and information statements will 

be offset to a substantial extent, as 

discussed above, by the periodic 

reporting and proxy or information 

statement requirements for 

Compensation Discussion and Analysis, 

the new Compensation Committee 

Report and a narrative disclosure 

requirement regarding repricings and 

other modifications of outstanding 

awards. The Compensation Discussion 

and Analysis and narrative disclosure 

requirement regarding repricings and 

other modifications will be required to 

be included or incorporated by 

reference in annual reports and 

registration statements, while the 

Compensation Committee Report will 

only be required to be included or 

incorporated by reference from the 

proxy or information statement in the 

annual report on Form 10–K. We 

estimate that, on balance, the changes 

that are specific to proxy or information 

statements will result in some 

incremental burdens on proxy or 

information statement collections of 

information, as described in more detail 

below. 

The amendments will increase 

existing disclosure burdens for annual 

reports on Form 10–KSB553 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 

will 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 equity-based 

awards computed in accordance with 

FAS 123R; 

• Disclosure at lower dollar 

thresholds for information regarding 

perquisites and other personal benefits; 

• Expanded disclosure regarding 

holdings by named executive officers of 

previously awarded stock, options and 

similar instruments (with disclosure 

regarding outstanding option awards 

required on an award-by-award basis), 

including disclosure of option exercise 

prices and expiration dates. 

• A new table for director 

compensation, to replace narrative 

disclosure requirements that existed 

prior to these amendments; 

• A narrative description of 

retirement plans; 

• Disclosure regarding additional 

related persons under the amended 

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 amendments 

will decrease existing disclosure 

burdens for annual reports on Form 10–

KSB and registration statements on 

Forms 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; and 

• Eliminating tabular disclosure 

regarding long-term incentive plan 

awards in the last fiscal year. 

In addition, the amendments may 

increase or decrease, or not affect, 

existing disclosure burdens for annual 

reports on Form 10–KSB or registration 

statements on Forms 10–SB and SB–2 

filed by small business issuers 

depending on the small business 

issuer’s 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, which 

will be required to be included or 

incorporated by reference (as 

applicable) in annual reports and 

registration statements; 

• 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 issuer’s total assets at year-end 

for the last three completed fiscal years; 

and 

• Narrowing the scope of an 

instruction that provides bright line 

tests for determining whether 

transactions with related persons are 

required to be disclosed in particular 

circumstances. 

The amendments may increase or 

decrease existing disclosure burdens, or 

not affect them at all, depending on the 

particular circumstances, for Forms N–

1A, N–2, and N–3 by increasing to 

$120,000 the former $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 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53213 

554One commenter noted our aggregate burden 

estimates in commenting that the ‘‘administrative 

costs’’ noted in the Proposing Release did not 

account for the need to overcome compliance risks 

‘‘where concern for satisfying new rules is 

multiplied by the potential legal risks associated 

with sufficiency and completeness under a regime 

of CEO and CFO certification.’’ Letter from Hodak 

Value Advisors. 

555See letter from Chamber of Commerce. 

556See, e.g., letters from Computer Sciences; 

HRPA; N. Ludgus; and Kathy B. Wheby. 

557See letter from Computer Sciences. 

558See letter from HRPA. 

559See letter from Sullivan. 

560See, e.g., letters from Hodak Value Advisors 

and Chamber of Commerce. 

561See, e.g., letters from E&Y and KPMG. 

562See, e.g., letters from Hodak Value Advisors; 

ACC; Eli Lilly; and NACCO Industries. 

563See, e.g., letters from ABA; Leggett & Platt; 

SCSGP; and Sidley Austin. 

564See, e.g., letters from ABA; Hewitt; HRPA; and 

Towers Perrin. 

565See, e.g., letters from Sullivan; Kellogg; 

SCSGP; and Chamber of Commerce. 

566See, e.g., letters from American Bankers; 

Whitney Holding; SCSGP; and FSR. 

567See, e.g., letters from BRT; Chadbourne; 

Chamber of Commerce; FSR; Intel; SCSGP; Sidley 

Austin; and Sullivan. 

568See, e.g., letters from Chamber of Commerce 

and Compensia. 

569See, e.g., letters from Mercer and Compensia. 

570See, e.g., letters from ABA; ACB; ICBA; and 

SCSGP. 

these items. The amendments will 

increase the existing disclosure burdens 

for Form N–2 by requiring business 

development companies to provide 

additional disclosure regarding 

compensation. However, the 

amendments will 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 amendments will decrease the 

Form 8–K disclosure burdens, by 

focusing the Form 8–K disclosure 

requirement on more presumptively 

material employment agreements, plans 

or arrangements of the narrower group 

of named executive officers, which 

should reduce the number of current 

reports on Form 8–K filed each year 

relating to executive and director 

compensation matters. 

We do not believe that our 

amendments regarding exhibit filing 

requirements for Form 20–F and our 

treatment of foreign private issuers 

under the revised rules will impose any 

incremental increase or decrease in the 

disclosure burden for these issuers. 

C. Summary of Comment Letters and 

Revisions to Proposals 

We requested comment on the 

Paperwork Reduction Act analysis 

contained in the Proposing Release. We 

did not receive comments on our 

Paperwork Reduction Act estimates; 554

however, a number of commenters 

expressed concerns that costs associated 

with the proposals were understated. 

Commenters also raised concerns with 

costs and burdens associated with 

particular aspects of the proposals. 

One commenter indicated that the 

Commission needs to take into 

consideration that the disclosure is 

more detailed and lengthy, and 

realistically will require more 

preparation time by more people; 

historically, the individuals involved in 

the process outside a company have 

been attorneys and accountants who are 

preparing or reviewing the documents, 

but compensation consultants and their 

advisors and special counsel to the 

directors would be introduced into the 

process; and the cost analysis does not 

reflect additional director time that will 

be required to read the lengthy new 

disclosure.555 The commenter also 

expressed the view that smaller to midsize issuers will be negatively affected 

disproportionately more than larger 

public companies, as disclosure 

requirements increase and greater 

reliance on external support is thus 

necessitated. 

Other commenters stated their belief 

that the Commission underestimated the 

cost of the proposed disclosure 

requirements.556 One of these 

commenters cited the limited 

availability of information from existing 

information systems and requested that 

the Commission afford an adequate 

transition period to accommodate the 

proposed changes,557 while another 

commenter suggested that the proposal 

would notably impose a reporting and 

administrative burden that would add to 

the already substantial reporting 

obligations imposed by the SarbanesOxley Act of 2002 and related rules.558

Another commenter noted that 

companies will likely incur 

considerable costs in preparing the first 

proxy statement under the revised rules, 

even if, as was proposed, they do not 

have to ‘‘restate’’ compensation for prior 

years.559

Other commenters noted that specific 

aspects of the proposals would result in 

significant costs or burdens, including: 

• Compensation Discussion and 

Analysis generally, as well as the status 

of this disclosure as filed rather than 

furnished; 560

• Disclosure of the increase in 

actuarial value of pension plans in the 

Summary Compensation Table and its 

inclusion in the determination of named 

executive officer status; 561

• Lowering the disclosure threshold 

for perquisites and other personal 

benefits to $10,000, and changing the 

threshold for separate identification and 

quantification; 562

• Footnote disclosure to the 

Outstanding Equity Awards at Year-End 

Table regarding expiration and vesting 

dates; 563

• Plan-by-plan disclosure of pension 

benefits; 564

• Numerical estimates of termination 

or change in control payments; 565

• Amendments to the related person 

transaction disclosure requirement; 566

• Disclosure of director relationships 

(other than those disclosed under the 

related person transaction disclosure 

requirement) considered by the board of 

directors when making independence 

determinations; 567 and 

• Disclosure regarding the use of 

compensation consultants by the 

compensation committee 568 as well as 

the contacts between compensation 

consultants and executive officers of the 

company.569

Some commenters also noted their 

belief that costs and burdens arising 

from the proposals would 

disproportionately affect small business 

issuers and smaller public 

companies.570

We have made substantive 

modifications to the proposals that 

address, in part, the concerns expressed 

by commenters about costs. Some of the 

changes in the final rules include: 

• Treating Compensation Discussion 

and Analysis as filed (and not 

furnished), but requiring a separate 

Compensation Committee Report over 

the names of compensation committee 

members as a means of emphasizing the 

committee’s involvement in the 

disclosure and providing additional 

information to which the principal 

executive officer and principal financial 

officer may look to in completing their 

certifications; 

• Requiring disclosure of the actuarial 

present value of the named executive 

officers’ accumulated benefits under 

defined benefit and actuarial pension 

plans in the Pension Benefits Table, 

which under the final rules will include 

the actuarial present value of 

accumulated benefits computed by 

utilizing assumptions used for financial 

reporting purposes under generally 

accepted accounting principles (rather 

than requiring disclosure of an estimate 

of the annual benefit payable upon 

retirement as proposed), and requiring 

in the Summary Compensation Table 


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53214 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

571The pre-existing estimate for Form N–2 

represents the internal hour burden per response. 

In addition there is a pre-existing external cost 

estimate for Form N–2 of $12,766 per response. 

572For administrative convenience, the 

presentation of the totals related to the paperwork 

burden hours have been rounded to the nearest 

whole number and the cost totals have been 

rounded to the nearest hundred. 

573Our estimates are based on annual responses 

on Form 10–K of 8,602 and annual responses on 

Form 10–KSB of 3,504. Our estimates of the number 

of annual responses to the collections of 

information are based on the number of filings 

made in the period from October 1, 2004 through 

September 30, 2005. 

574At the proposing stage, we used an estimated 

hourly rate of $300.00 to determine the estimated 

cost to public companies of executive compensation 

and related disclosure prepared or reviewed by 

outside counsel. We recently have increased this 

hourly rate estimate to $400.00 per hour after 

consulting with several private law firms. The cost 

estimates in this release are based on the $400.00 

hourly rate. 

the aggregate annual change in that 

value, so that the Summary 

Compensation Table data will directly 

relate to the data presented in the 

Pension Benefits Table; 

• Specifying that companies compute 

estimates of compensation under posttermination arrangements applying the 

assumptions that the triggering event 

occurred on the last day of the 

company’s last completed fiscal year 

and the price per share of the company’s 

securities is the closing market price on 

that day; 

• Specifying that companies must 

exclude the amounts for the aggregate 

annual change in the actuarial present 

value of accumulated benefits under 

defined benefit and actuarial pension 

plans and the above-market or 

preferential earnings on nonqualified 

deferred compensation when 

determining which executive officers 

are named executive officers for the 

purposes of disclosure in the 

compensation tables; 

• Including some instructions to the 

related person disclosure requirement 

that were proposed to be eliminated, so 

that some bright line standards for nondisclosure, as modified, continue to 

apply with respect to specific 

transactions; 

• Requiring disclosure of director 

relationships (other than any 

transactions, relationships or 

arrangements disclosed under the 

related person transaction disclosure 

requirement) considered by the board of 

directors when making independence 

determinations by specific category or 

type, rather than by individual 

transactions, relationships or 

arrangements as proposed; and 

• Not requiring that companies 

identify the executive officers that 

compensation consultants have 

contacted as proposed. 

Further, the final rules applicable to 

small business issuers are adopted 

substantially as proposed, providing for 

significantly less detailed disclosure 

regarding executive compensation for 

these companies as compared to the 

disclosure required for larger issuers. 

We made other modifications to the 

proposals in response to issues raised by 

commenters that could, depending on 

the particular circumstances, increase 

costs relative to the costs estimated for 

the proposals. In this regard, the final 

rules: 

• Require expanded disclosure about 

option grants and outstanding options, 

including disclosure of the date the 

compensation committee or full board 

took action or was deemed to take 

action to grant an award if that date is 

different from the grant date, a 

description of the methodology for 

determining the exercise price of 

options if the exercise price is not 

determined based on the closing market 

price on the date of grant, and the 

amount of securities underlying 

unexercised options, the exercise prices 

and the option expiration dates for each 

outstanding option (rather than on an 

aggregate basis as proposed); 

• Require disclosure of the 

Performance Graph (which would have 

been eliminated under the proposals) in 

annual reports to security holders that 

precede or accompany a proxy or 

information statement relating to an 

annual meeting at which directors are to 

be elected; and 

• Require disclosure about reliance 

on an exemption from requirements for 

director independence when such an 

exemption is available. 

D. Revisions to Paperwork Reduction 

Act Burden Estimates 

As discussed above, in consideration 

of commenters’ concerns that the costs 

associated with the disclosure 

requirements were understated in the 

Proposing Release, we are revising our 

Paperwork Reduction Act burden 

estimates that were originally submitted 

to the Office of Management and 

Budget. In revising our estimates, we 

have considered the comments 

identifying increased costs and burdens 

in the proposals, as well as the revisions 

that we have made in the final rules as 

compared to the proposals in response 

to some of the commenters’ concerns. 

The discussion that follows focuses 

on the incremental change in burden 

estimates resulting from the 

amendments adopted today. The preexisting burden estimates to which 

these incremental changes will be added 

reflect the current aggregate burden 

assigned to each information collection, 

which already include the estimated 

burden of complying with the executive 

compensation, related person 

transaction and corporate governance 

disclosure requirements in place before 

adoption of these amendments. The 

burden estimates (expressed as total 

burden hours per form) prior to adding 

the additional burdens imposed by the 

amended executive compensation, 

related person transaction and corporate 

governance rules are as follows: 2,202 

hours for Form 10–K; 1,646 hours for 

Form 10–KSB; 156 hours for Form 10; 

133 hours for Form 10–SB; 593 hours 

for Form SB–2; 1,102 hours for Form S–

1; 4,048 hours for Form S–4; 1,892 

hours for Form S–11; 271.4 hours for 

Form N–2; 571 5 hours for Form 8–K; 

84.5 hours for Schedule 14A; and 84 

hours for Schedule 14C. The estimated 

incremental burden arising from today’s 

amendments for each of these forms has 

been estimated with reference to each of 

these pre-existing burden estimates. 

For purposes of the Paperwork 

Reduction Act, we now estimate that the 

annual incremental increase in the 

paperwork burden for companies to 

comply with our collection of 

information requirements to be 

approximately 783,284 hours of inhouse company personnel time and to 

be approximately $133,883,300 for the 

services of outside professionals.572

These estimates include the additional 

time and the cost of collecting 

information, preparing and reviewing 

disclosure, filing documents and 

retaining records over our existing 

burden estimate for preparing executive 

compensation, related person 

transaction and corporate governance 

disclosures. Our methodologies for 

deriving these revised estimates are 

discussed below. 

Our revised estimates represent the 

average burden for all issuers, both large 

and small.573 As described below, we 

expect that the burdens and costs could 

be greater for larger issuers and lower 

for smaller issuers under the rules as 

adopted. For Exchange Act annual 

reports on Forms 10–K or 10–KSB, 

current reports on Form 8–K, proxy 

statements and information statements, 

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 $400 per hour.574 For Securities Act 

registration statements on Forms SB–2, 

S–1, S–4, S–11, or N–2 and Exchange 

Act registration statements on Forms 10 


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575As mentioned above, we do not believe that 

the amendments increasing 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 

significantly impact the hours of company 

personnel time and cost of outside professionals in 

responding to these items. 

576We calculated an annual average over a three 

year period because OMB approval of Paperwork 

Reduction Act submissions covers a three year 

period. Embedded in the three year period is the 

recognition that the costs in the initial year of 

compliance are likely to be higher than in later 

years. 

577 In the Proposing Release, we estimated that 

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. 

578Similarly, the hours of company personnel 

time and outside professional time required to 

prepare the disclosure required by the amended 

conforming revisions to Item 22(b) relating to the 

independence of members of nominating and audit 

committees of investment companies will be 

approximately the same as for compliance with the 

requirements regarding disclosure of the 

independence of nominating and audit committee 

members of investment companies that were 

required by Item 7 of Schedule 14A prior to today’s 

amendments. 

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 $400 per hour.575 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, Exchange Act Annual 

Reports, Proxy Statements and 

Information Statements 

For the purposes of the Paperwork 

Reduction Act, we estimate that, over a 

three year period,576 the annual 

incremental disclosure burden imposed 

by the amendments will average 95 

hours per Form 10–K; 50 hours per 

Form 10–KSB; 85 hours per Form 10; 45 

hours per Forms 10–SB and SB–2; 74 

hours per Form S–1; 17 hours per Form 

S–4; 85 hours per Form S–11; 3 hours 

per Schedules 14A and 14C; and 5 

hours per Form N–2.577 While the 

amendments to Item 22(b) of Schedule 

14A and increasing to $120,000 the 

former $60,000 threshold in Forms N–

1A, N–2, and N–3 for disclosure of 

certain interests, transactions, and 

relationships of disinterested directors 

may increase or decrease existing 

disclosure burdens, or not affect them at 

all, depending on the particular 

circumstances, we estimate that, as 

discussed below, the amendments will 

not impose an annual incremental 

disclosure burden. 

These estimates were based on the 

following assumptions: 

• The hours of company personnel 

time and outside professional time 

required to prepare the disclosure 

regarding executive and director 

compensation under amended Item 402 

of Regulation S–K will be greater in 

light of the expansion and 

reorganization of the amended 

disclosure requirements relative to the 

disclosure requirements on these topics 

in place prior to adoption of these 

amendments, in particular the 

requirements regarding Compensation 

Discussion and Analysis, expanded 

disclosures concerning options and 

other equity-based awards and new 

disclosure requirements regarding 

pension benefits, non-qualified deferred 

compensation, other potential postemployment payments and director 

compensation. 

• Companies filing annual reports on 

Form 10–K that will be required to 

include disclosure under Item 402 of 

Regulation S–K, as we are amending it, 

and Item 407(e)(4) of Regulation S–K 

(regarding compensation committee 

interlocks and insider participation), 

will experience greater costs in 

responding to these disclosure 

requirements in the first year of 

compliance with them, and, to a lesser 

extent, in the second and third years, as 

systems and processes are implemented 

to obtain the relevant data and 

disclosure controls and procedures with 

respect to new or expanded disclosure 

requirements are implemented, with 

lower incremental costs expected in 

subsequent years. 

• The hours of company personnel 

time and outside professional time 

required to prepare the disclosure 

regarding related person transactions 

under amended Item 404, director 

independence under new Item 407(a) 

and compensation committee functions 

under paragraphs (e)(1) through (e)(3) of 

Item 407 of both Regulation S–K and 

Regulation S–B, will be greater as 

compared to the burden that was 

imposed in complying with the related 

party transaction disclosure 

requirements and disclosure about the 

board of directors required by Item 404 

of Regulations S–K and S–B and Item 7 

of Schedule 14A prior to these 

amendments. The new Compensation 

Committee Report that is required in the 

Form 10–K (and is not required for 

small business issuers, because they are 

not required to include Compensation 

Discussion and Analysis) will increase 

the burdens. Other amendments to be 

made by moving disclosure 

requirements relating to corporate 

governance to new Item 407 of 

Regulations S–K and S–B will not 

change the substance of the disclosure 

requirements and will therefore not 

increase burdens, particularly for proxy 

or information statements where much 

of the disclosure about these topics is 

currently required. 

• For Form 10–K, we estimate that it 

would take issuers 170 additional hours 

to prepare the amended disclosure in 

year one, 80 hours in year two and 35 

hours in year three and thereafter, 

which results in an average of 95 hours 

over the three year period to comply 

with the amended disclosure 

requirements. This estimate takes into 

account that the burden will be incurred 

by either including the required 

disclosure in the report directly or 

incorporating by reference from a proxy 

or information statement. This 

estimated incremental burden is based 

on a consideration of the extent to 

which the amendments will increase, 

decrease or not affect the burden 

imposed by the requirements in place 

prior to these amendments, as described 

in Section VIII.B., above. The 

incremental burden represents the 

estimate of the average burden across 

the range of companies that file annual 

reports on Form 10–K, recognizing that 

larger companies with more complex 

executive and director compensation 

arrangements, more related person 

transactions and more involved 

corporate governance structures may 

require more time to comply with the 

amended disclosure requirements, 

while smaller issuers with potentially 

less complex circumstances are likely to 

require less time to comply with the 

amended requirements. 

• For proxy statements on Schedule 

14A and information statements on 

Schedule 14C, we estimate that it would 

take companies 6 additional hours to 

prepare the additional corporate 

governance and other compensation 

committee disclosures required only in 

the proxy or information statement in 

year one, and 2 hours in year two and 

2 hours in year three and thereafter, 

which results in an average of 

approximately 3 hours over the three 

year period.578 As with the estimates for 

Form 10–K, this estimated incremental 

burden is based on a consideration of 

the extent to which the amendments 

will increase, decrease or not affect the 

burden imposed by the requirements in 

place prior to these amendments, as 

described in Section VIII.B., above. The 

incremental burden represents the 

estimate of the average burden across 

the range of companies that file proxy 

statements on Schedule 14A and 


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53216 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

579For Form S–1, we estimate an average 

incremental burden of 74 hours, based on an 

estimate that 459 out of the 528 registration 

statements that we estimate will be filed on Form 

S–1 will not include the disclosure contemplated 

by these rule changes through incorporation by 

reference to a Form 10–K or Form 10–KSB (459 

filings times 85 hours = 39,015 hours, which when 

divided by the 528 total annual filings results in 

approximately 74 hours per Form S–1). For Form 

S–4, we estimate an average incremental burden of 

17 hours, based on an estimate that 123 out of the 

619 registration statements that we estimate will be 

filed on Form S–4 will not include the disclosure 

contemplated by these rule changes through 

incorporation by reference to a Form 10–K or Form 

10–KSB (123 filings times 85 hours = 10,455 hours, 

which when divided by the 619 total annual filings 

results in approximately 17 hours per Form S–4). 

information statements on Schedule 

14C, taking into account that larger 

companies may require more time to 

comply with the amended disclosure 

requirements, while smaller companies 

(including small business issuers) with 

potentially less complex circumstances 

may require less additional time to 

comply with the amended requirements. 

• 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) will in many 

cases not have been required to comply 

with the amended disclosure 

requirements prior to filing such 

registration statements, and will 

therefore take an estimated 85 

additional hours on average to comply 

with the changes in the disclosure 

requirements. For Forms S–1 and S–4, 

which permit incorporation of 

information by reference to disclosure 

provided in Exchange Act reports, we 

have estimated a lower average 

incremental number of burden hours in 

order to recognize that the incremental 

burden arising from the amendments is 

already factored into the estimated 

average incremental burden for Forms 

10–K and 10–KSB.579 These estimated 

incremental burdens are based on a 

consideration of the extent to which the 

amendments will increase, decrease or 

not affect the burden imposed by the 

requirements in place prior to these 

amendments, as described in Section 

VIII.B., above. The additional time 

required by these companies to obtain 

the relevant data and to compile the 

required executive compensation 

information is offset to some extent by 

the fact that only one year of executive 

compensation information will 

generally be required for presentation in 

the Summary Compensation Table, as 

compared to three years for issuers 

already subject to Exchange Act 

reporting requirements. By contrast, 

information regarding related person 

transactions, as was the case prior to the 

amendments, is generally required for 

three years in Securities Act and 

Exchange Act registration statements, so 

that any additional burden associated 

with obtaining data and compiling the 

related person transaction disclosure 

under the amended requirements would 

be with respect to this three year period. 

• Small business issuers filing annual 

reports on Form 10–KSB will be subject 

to lower incremental costs than other 

issuers as a result of the amendments, 

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 will 

experience greater costs in responding 

to the amended disclosure requirements 

in the first year of compliance with 

them, as systems are implemented to 

obtain the relevant data and disclosure 

controls and procedures with respect to 

new or expanded disclosure 

requirements are implemented, with 

lower incremental costs in subsequent 

years. 

• For Form 10–KSB, we estimate that 

it would take issuers an estimated 100 

additional hours on average to prepare 

their disclosure under the amended 

requirements in year one, 35 additional 

hours in year two and 15 additional 

hours in year three and thereafter, 

which results in an average of 50 

additional hours over the three year 

period. This estimate assumes that the 

burden would be incurred by either 

including the amended disclosure in the 

report directly or incorporating by 

reference from a proxy or information 

statement. This estimated incremental 

burden is based on a consideration of 

the extent to which the amendments 

will increase, decrease or not affect the 

burden imposed by the requirements in 

place prior to these amendments, as 

described in Section VIII.B., above. The 

incremental burden represents the 

estimate of the average burden across 

the range of companies that file annual 

reports on Form 10–KSB, recognizing 

that small business issuers with more 

complex executive and director 

compensation arrangements, more 

related person transactions and more 

involved corporate governance 

structures may require more time to 

comply with the amended disclosure 

requirements, while other small 

business issuers with potentially less 

complex circumstances, particularly the 

smallest companies in this group, are 

likely to require less time to comply 

with the amended requirements. 

• Small business issuers filing 

registration statements on Forms 10–SB 

and SB–2, including those small 

business issuers that are not already 

filing periodic reports pursuant to 

Exchange Act Sections 13(a) or 15(d) 

and thus will not have been required to 

comply with the amended disclosure 

requirements prior to filing such 

registration statements, will take an 

estimated 45 additional hours on 

average to comply with the 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 will 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 

issuers to write certain sections of 

prospectuses in plain English, drafting 

documents in plain English will 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. To the extent that companies 

incorporate required information by 

reference to proxy or information 

statements, the amended plain English 

requirements would apply to disclosure 

in those filings; however, the 

incremental burden of preparing plain 

English disclosure is factored into the 

burden estimates for Forms 10–K and 

10–KSB. The plain English rule 

amendments will 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. 

• The amendments to increase to 

$120,000 the former $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 may increase or 

decrease existing disclosure burdens, or 

not affect them at all, depending on the 

particular circumstances. Because these 

forms are already required to disclose 

these interests, transactions, and 

relationships in amounts exceeding 

$60,000, 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, and we estimate these 

amendments will neither increase nor 

decrease the annual paperwork burden. 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53217 

580For Form N–2, we estimate that it will take 

business development companies 150 additional 

hours to prepare the amended disclosure in year 

one, 75 hours in year two and 30 hours in year three 

and thereafter, which results in an average of 85 

hours for each business development company to 

comply with the amended compensation 

disclosures that would be required on Form N–2. 

We estimate an average annual incremental 

disclosure burden of 5 hours per Form N–2, based 

on 85 hours per Form N–2 filing by business 

development companies times 27 filings on Form 

N–2 by business development companies 

(representing all Form N–2 and N–2/A filings by 

business development companies during the year 

ended December 31, 2005) (85 hours times 27 Form 

N–2 filings (including amendments) = 2,295 hours), 

divided by 462 total annual filings on Form N–2 

(representing all Form N–2 and N–2/A filings 

during the year ended December 31, 2005) (2,295 

hours divided by 462 filings on Form N–2 

(including amendments) = approximately 5 hours 

per Form N–2 (including amendments)). 

We note that in the Proposing Release, we 

estimated 935 total annual filings on Form N–2 and 

N–2/A, but this higher number double counted 

certain filings that were made under both the 

Securities Act and the Investment Company Act. 

Our revised estimate is 462 annual filings. 

581The burden estimates for Form 10–K and 10–

KSB assume that the amended requirements are 

satisfied by either including information directly in 

the annual reports or incorporating the information 

by reference from the proxy statement or 

information statement in Schedule 14A or Schedule 

14C, respectively. As described above, we now 

estimate that the changes to executive 

compensation and corporate governance disclosure 

requirements applicable only in proxy or 

information statements (and thus not in Securities 

Act registration statements or Exchange Act reports 

or registration statements) will impose an 

incremental burden. 

582The amendments do not change the exhibit 

filing requirements under Item 601(b)(10) of 

Regulations S–K and S–B, therefore companies may 

be required to file compensatory plans, contracts or 

arrangements as exhibits to filings even if current 

reporting on Form 8–K is no longer required for the 

entry into or amendment of those plans, contracts 

or arrangements. 

583This is based on the number of responses 

made in the period from October 1, 2004 through 

September 30, 2005. 

• Business development companies 

filing Form N–2 will be required to 

include Item 402 of Regulation S–K, as 

we are amending it, and will 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.580

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, proxy 

statements, information statements, 

Securities Act registration statements 

and Exchange Act registration 

statements. 

TABLE 1.—CALCULATION OF INCREMENTAL PAPERWORK REDUCTION ACT BURDEN ESTIMATES FOR EXCHANGE ACT

PERIODIC REPORTS, PROXY STATEMENTS AND INFORMATION STATEMENTS

Form Annual 

responses 

Incremental 

hours/form 

Incremental 

burden 75% Issuer 25% Professional 

$400 Professional 

cost 

(A) (B) (C)=(A)*(B) (D)=(C)*0.75 (E)=(C)*0.25 (F)=(E)*$400 

10–K581. ................................................... 8,602 95 817,190 612,892.50 204,297.50 $81,719,000 

10–KSB .................................................... 3,504 50 175,200 131,400.00 43,800.00 17,520,000 

DEF 14A .................................................. 7,250 3 21,750 16,312.50 5,437.50 2,175,000 

DEF 14C .................................................. 681 3 2,043 1,532.25 510.75 204,300 

Total .................................................. ........................ ........................ 1,016,183 762,137.25 254,045.75 101,618,300 

TABLE 2.—CALCULATION OF INCREMENTAL PAPERWORK REDUCTION ACT BURDEN ESTIMATES FOR SECURITIES ACT

REGISTRATION STATEMENTS AND EXCHANGE ACT REGISTRATION STATEMENTS

Form Annual 

responses 

Incremental 

hours/form 

Incremental 

burden 75% Issuer 25% Professional 

$400 Professional 

cost 

(A) (B) (C)=(A)*(B) (D)=(C)*0.25 (E)=(C)*0.75 (F)=(E)*$400 

10 ............................................................. 72 85 6,120 1,530.00 4,590.00 $1,836,000 

10–SB ...................................................... 166 45 7,470 1,867.50 5,602.50 2,241,000 

SB–2 ........................................................ 885 45 39,825 9,956.25 29,868.75 11,947,500 

S–1 ........................................................... 528 74 39,072 9,768.00 29,304.00 11,721,600 

S–4 ........................................................... 619 17 10,523 2,630.75 7,892.25 3,156,900 

S–11 ......................................................... 60 85 5,100 1,275.00 3,825.00 1,530,000 

N–2 ........................................................... 462 5 2,310 577.50 1,732.50 693,000 

Total .................................................. ........................ ........................ 110,420 27,605.00 82,815.00 33,126,000 

2. Exchange Act Current Reports 

For purposes of the Paperwork 

Reduction Act, we estimate that the 

amendments affecting the collection of 

information requirements related to 

current reports on Form 8–K will reduce 

the annual paperwork burden by 

approximately 6,458 hours of company 

personnel time and by a cost of 

approximately $861,000 for the services 

of outside professionals. This estimate 

reflects the reduction in the number of 

filings that could result from our 

amendments.582 These estimates were 

based on the following assumptions: 

• The number of annual responses for 

Form 8–K is estimated to be 110,416.583

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 annually pursuant to 

Item 1.01 of Form 8–K; 

• Based on a review of Item 1.01 of 

Form 8–K filings made in September 

2005, we estimate that 6,625 of the 

22,083 current reports on Form 8–K that 

would be filed annually under Item 1.01 


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53218 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

584For Form 8–K, the current burden estimate is 

5 hours per filing. 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 $400 per hour. The computation of 

the reduction in burden is thus based on 1,722 

fewer current reports on Form 8–K filed with a per 

filing burden of 3.75 hours carried by the company 

and 1.25 hours at a cost of $400 per hour (or $500 

per filing). 

585Prior to these amendments, Item 402(a)(2) of 

Regulation S–B required compensation disclosure 

for all individuals serving as the small business 

issuer’s chief executive officer and the small 

business issuer’s four highest paid executive 

officers other than the chief executive officer. 

586Prior to these amendments, Item 402(b)(1) of 

Regulation S–B required disclosure in the Summary 

Compensation Table of compensation of the named 

executive officers for each of the last three fiscal 

years, and narrative disclosure was not required to 

accompany the Summary Compensation Table. 

Under the amendments adopted today, new 

narrative disclosure will address some elements of 

compensation previously required to be disclosed 

in tables. 

would relate to executive or director 

compensation matters; and 

• Based on a review of Item 1.01 of 

Form 8–K filings made in September 

2005, we estimate that 1,722 fewer 

current reports on Form 8–K would be 

filed annually as a result of more 

focused current reporting of executive 

officer and director compensation 

transactions under new Item 5.02(e) of 

Form 8–K.584

IX. Cost-Benefit Analysis 

A. Background 

We are adopting amendments 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 

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 are also amending 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 are amending 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 

amending our beneficial ownership 

disclosure requirement to require 

disclosure regarding pledges of 

securities by management and directors’

qualifying shares. Finally, we are 

requiring that most of the disclosure 

that will be called for by the 

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 is incorporated 

by reference from proxy or information 

statements. While we believe that these 

amendments will result in significant 

benefits, we also recognize that the 

amendments to the disclosure 

requirements will impose additional 

costs. We have considered the costs and 

benefits in adopting these amendments. 

B. Summary of Amendments 

In light of the complexity of, and 

variations in, compensation programs, 

the sometimes inflexible and highly 

formatted nature of former Item 402 of 

Regulations 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 changes 

to Item 402 apply a broader approach 

that eliminates some tables, simplifies 

or refocuses other tables, reflects total 

compensation in the Summary 

Compensation Table, and reorganizes 

the compensation tables 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 

will 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 will provide 

transparency regarding company 

compensation policies and procedures, 

and is designed to be sufficiently 

flexible to operate effectively as new 

forms of compensation continue to 

evolve. 

We have also taken into account the 

relative burden of providing disclosure 

by smaller companies that file 

information pursuant to Regulation S–B 

(as opposed to Regulation S–K). Under 

the amendments, the scope and 

presentation of information in Item 402 

of Regulation S–B will differ in a 

number of significant ways from Item 

402 of Regulation S–K. Item 402 of 

Regulation S–B will: 

• Limit the named executive officers 

for whom disclosure is required to a 

smaller group, consisting of the 

principal executive officer and the two 

other highest paid executive officers; 585

• Require a revised Summary 

Compensation Table to disclose 

compensation information for the small 

business issuer’s two most recent fiscal 

years, and to require that narrative 

disclosure accompany the Summary 

Compensation Table; 586

• 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 

includes expanded disclosure regarding 

holdings of previously awarded stock, 

options and similar instruments, which 

includes the value of stock and other 

similar incentive plan awards that have 

not vested, as well as information 

regarding options on an award-by-award 

basis; 

• Require additional narrative 

disclosure addressing the material terms 

of defined benefit and defined 

contribution plans and other posttermination compensation 

arrangements; and 

• Require a new Director 

Compensation Table. 

Item 402 of Regulation S–B will not 

include the following disclosures that 

will be required by amended Item 402 

of Regulation S–K: 

• Compensation Discussion and 

Analysis or a Compensation Committee 

Report; 

• Information regarding two 

additional executive officers; 

• A third fiscal year of Summary 

Compensation Table disclosure; 

• The supplementary Grants of PlanBased Awards Table, the Option 

Exercises and Stock Vested Table, the 

Pension Benefits Table, the 

Nonqualified Deferred Compensation 

Table, and the separate Potential 

Payments Upon Termination or Changein-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. 

In addition, 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 

company’s proxy statement for its 

annual meeting of shareholders. The 

amendments to Items 1.01 and 5.02 of 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53219 

587We are also adopting conforming revisions to 

Item 22(b) relating to the independence of members 

of nominating and audit committees of investment 

companies. 

Form 8–K 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. 

Further, the amendments streamline 

and modernize Item 404 of Regulation 

S–K, while making it more principlesbased. For example, indebtedness of 

related persons is limited by the 

Sarbanes-Oxley Act, and the disclosure 

requirement regarding indebtedness of 

related persons has been combined into 

the requirement regarding other 

transactions with related persons. This 

consolidated disclosure requirement 

applies to an expanded group of related 

persons through amendments to the 

definition of the term ‘‘immediate 

family member.’’ While the pre-existing 

principles for disclosure have been 

retained, the amendments increase the 

threshold for disclosure from $60,000 to 

$120,000 and eliminate or narrow the 

scope of certain instructions delineating 

what transactions are reportable or 

excludable. The disclosure requirements 

in Item 404 regarding transactions with 

promoters have been slightly expanded 

in the amendments 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, 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 similarly increase to 

$120,000 the former $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, amended Form N–2 

requires business development 

companies to include the compensation 

disclosure required by Item 402 of 

Regulation S–K, as amended. 

The amendments also replace the 

disclosure requirement for certain 

business relationships of directors that 

had been required by Item 404(b) of 

Regulation S–K prior to these 

amendments, which focused on 

relationships relevant to director 

independence, with requirements for 

director independence disclosure in 

new Item 407 discussed below. Under 

the amendments, some of the disclosure 

that had been required under 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. Item 404(b) of 

Regulation S–K as amended requires 

disclosure regarding the company’s 

policies for the review, approval or 

ratification of transactions with related 

persons. 

We are adopting similar amendments 

to Item 404 of Regulation S–B, which 

will result in a more detailed related 

person transaction disclosure 

requirement than had existed in Item 

404 of Regulation S–B prior to these 

amendments. However, unlike Item 404 

of Regulation S–K, Item 404 of 

Regulation S–B as amended does not 

require disclosure regarding the 

company’s policies for the review, 

approval or ratification of transactions 

with related persons. We are retaining 

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 are adopting a new disclosure 

requirement in Item 407 of Regulations 

S–K and S–B that consolidates 

disclosures previously required in 

several places throughout our rules 

addressing director independence, 

board committee functions and other 

related corporate governance matters. 

This new Item, which requires 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 national 

securities exchanges and automated 

inter-dealer quotation systems of a 

national securities association.587 Item 

407 of Regulations S–K and S–B also 

includes a new disclosure requirement 

regarding the compensation committee’s 

processes and procedures for the 

consideration and determination of 

executive and director compensation, 

and disclosure regarding the availability 

of the compensation committee’s 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 company’s Web site. The 

amendments to Item 407 of Regulation 

S–K require a short Compensation 

Committee Report regarding the 

compensation committee’s review and 

discussion with management of the 

Compensation Discussion and Analysis, 

and the compensation committee’s 

recommendation to the Board with 

regard to the disclosure of the 

Compensation Discussion and Analysis. 

This new Compensation Committee 

Report, along with the Compensation 

Discussion and Analysis, is required 

instead of the Board Compensation 

Committee Report on Executive 

Compensation that was previously 

required by Item 402 of Regulation S–

K prior to today’s amendments. 

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 management’s 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 are amending Item 403 of 

Regulations S–K and S–B to require this 

disclosure as well as disclosure 

regarding directors’ beneficial 

ownership of qualifying shares. 

We are requiring 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 

will make these documents easier to 

understand. 

The amendments to Item 402 of 

Regulation S–K, Items 402 and 404 of 

Regulation S–B, and Form 8–K will 

affect all companies reporting under 

Sections 13(a) and 15(d) of the Exchange 

Act, other than registered investment 

companies. The amendments to Item 

404 of Regulation S–K will 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 changes to Items 402 

and 404 of Regulation S–K and 

Regulation S–B will also affect 

additional companies filing Securities 

Act and Exchange Act registration 

statements. The changes to Item 22(b) of 

Schedule 14A will affect business 


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53220 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

588For a discussion of the debate concerning 

board of directors and managerial decision-making 

in the area of executive compensation, see, e.g., 

Steven M. Bainbridge, Executive Compensation: 

Who Decides?, 83 Tex. L. Rev. 1615 (2005). 

development companies and registered 

investment companies filing proxy 

statements with respect to the election 

of directors. The changes to Form N–1A 

will affect open-end investment 

companies registering with the 

Commission on Form N–1A. The 

changes to Form N–2 will affect closedend investment companies (including 

business development companies) 

registering with the Commission on 

Form N–2. The 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 

amendments is 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 is 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 

disclosure for retirement plans and 

similar benefits, nonqualified deferred 

compensation, post-termination benefits 

and director compensation. The 

amendments 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 amendments also 

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 

amendments of executive and director 

compensation, such as equity-based 

compensation, non-equity incentive 

plan compensation, and retirement and 

other post-employment compensation, 

combined with the ability of investors to 

track the elements of compensation and 

the relative weights of those elements 

over time (and the reasons why 

companies allocate compensation in the 

manner that they do), will better enable 

investors to make comparisons both 

within and across companies. A 

presentation facilitating the 

comparability of 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 compensation disclosure 

across companies. Disclosure of total 

compensation will 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 will 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.588 Particularly with respect to the 

proxy statement for the annual meeting 

at which directors are elected, this 

improved disclosure will 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. 

With respect to the new 

Compensation Committee Report 

regarding the compensation committee’s 

review and discussion with 

management of the Compensation 

Discussion and Analysis, and the 

compensation committee’s 

recommendation to the board of 

directors with regard to disclosure of the 

Compensation Discussion and Analysis, 

we believe that benefits will be derived 

from the attention of the compensation 

committee to the disclosure provided in 

Compensation Discussion and Analysis. 

Further, the principal executive officer 

and principal financial officer can look 

to the Compensation Committee Report 

when providing their certifications. 

Finally, the Board Compensation 

Committee Report on Executive 

Compensation has been eliminated in 

favor of company disclosure in the form 

of the Compensation Discussion and 

Analysis, which will provide investors 

with enhanced disclosure about the 

objectives and implementation of 

executive compensation programs. 

We believe that the extent to which 

increased transparency and 

completeness in executive and director 

compensation disclosure will 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 

will affect investors’ decision-making 

with respect to that company. 

Disclosure under these new 

regulations will provide substantial 

benefit to investors in terms of the 

accuracy, transparency, completeness 

and accessibility of executive 

compensation and related person 

transaction disclosure. Improved 

transparency in executive and director 

compensation under these amendments 

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 amendments, including 

requirements to disclose a total amount 

of compensation and more detail 

regarding compensation policies, alter 

existing and future policies or practices 

in these areas. We emphasize that we 

are not seeking to foster any particular 

policy or practice. Our objective is to 

increase transparency to enable 

decision-makers to make more informed 

decisions, which could result in 

different policies or practices or an 

increase in investor confidence in 

existing policies or practices. 

Enhanced disclosure of outstanding 

option awards on an award-by-award 

basis, and additional disclosure 

regarding other equity-based awards, 

will further benefit investors by making 

it easier to evaluate the components of 

equity compensation for each named 

executive officer and the valuations of 

those equity awards provided by 

companies in the Summary 

Compensation Table. 

The amendments to Form 8–K will 

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 will be 

filed pursuant to Item 5.02 of Form 8–

K. To find this information, 

shareholders and investors no longer 

will need to examine multiple Item 1.01 

disclosures relating to other actions. 

Companies will also be relieved of 

obligations to quickly report arguably 

less important compensation 

information on Form 8–K. 

The amendments to Item 404 will 

provide investors with more complete 

disclosure of related person transactions 

and director independence, and new 

disclosure regarding a company’s 

policies and procedures for the review, 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53221 

589The new plain English requirements will 

require both the rewriting of existing disclosures in 

plain English, as well as drafting new disclosures 

in plain English, such as Compensation Discussion 

and Analysis. 

590The Compensation Discussion and Analysis, 

unlike the Board Compensation Committee Report 

on Executive Compensation that was required prior 

to the adoption of these amendments, but like all 

of the rest of the current compensation disclosure, 

is considered filed and as such will be part of the 

documents for which certifications apply. The new 

Compensation Committee Report will be furnished 

rather than filed. The release adopting our 

certification requirements discussed the costs and 

benefits of the requirements as follows: 

The new certification requirement may lead to 

some additional costs for issuers. The new rules 

require an issuer’s principal executive and financial 

officers to review the issuer’s periodic reports and 

to make the required certification. To the extent that 

corporate officers would need to spend additional 

time thinking critically about the overall context of 

their company’s disclosure, issuers would incur 

costs (although investors would benefit from 

improved disclosure). The certification requirement 

creates a new legal obligation for an issuer’s 

principal executive and financial officers, but does 

not change the standard of legal liability. * * * 

Conversely, the new rules are likely to provide 

significant benefits by ensuring that information 

about an issuer’s business and financial condition 

is adequately reviewed by the issuer’s principal 

executive and financial officers. Certification 

Release, at Section VII. 591While our rules do not require the retention 

of consultants or other advisers, to the extent that 

companies do retain compensation consultants or 

other professionals we understand that they would 

generally charge per-hour rates comparable to those 

rates charged by outside counsel, which we have 

estimated for the purposes of our Paperwork 

Reduction Act analysis are approximately $400 per 

hour. 

approval or ratification of relationships 

with related persons. These 

amendments will 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 former Item 404 into a 

single combined disclosure 

requirement, the amendments will 

reduce confusion that may have 

occurred regarding the disclosure 

required when more than one of the 

provisions of Item 404 applied to a 

particular transaction or relationship 

before these amendments. Improved 

corporate governance disclosure in new 

Item 407 will provide investors with 

better organized and more complete 

information regarding the independence 

of members of the board of directors. 

The amendments to Item 403 of 

Regulation S–K and Regulation S–B will 

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. This 

information will contribute to investor 

understanding of the economic 

incentives for executives and directors 

of public companies. 

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 may 

increase or decrease existing disclosure 

burdens imposed on investment 

companies, or not affect them at all, 

depending on the particular 

circumstances, 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). 

The amendments to the executive and 

director compensation, related person 

transaction, beneficial ownership and 

corporate governance disclosure 

requirements will in many respects 

make these requirements clearer for 

companies and their advisors, which 

could have the benefit of improving 

overall compliance with these 

provisions, including those provisions 

where disclosure requirements have not 

changed substantively. 

Finally, presentation in plain English 

will facilitate investor understanding of 

most of the matters contemplated by our 

amendments. 

D. Costs 

In our view, the amendments to the 

executive officer and director 

compensation, related person 

transaction and corporate governance 

disclosure requirements will increase 

the costs of complying with the 

Commission’s rules. We further believe 

that the costs related to preparing 

required disclosure in plain English will 

be short-term costs arising mainly in the 

first two years of implementation.589

We believe that compliance with 

these amendments will, on balance, be 

more costly for companies than 

compliance with the former disclosure 

requirements, with the highest 

incremental annual costs occurring 

principally in the first two years as 

companies and their advisors 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 

adopting will incrementally increase 

costs for companies in several ways as 

a result of the following new or 

expanded requirements. First, we are 

requiring that companies provide a 

Compensation Discussion and Analysis 

involving a discussion and analysis of 

material factors underlying 

compensation decisions reflected in the 

tabular presentations.590 To respond to 

commenters’ concerns that it is 

appropriate for the compensation 

committee to continue to focus on the 

executive compensation disclosure 

process as well as concerns with 

certifications, we are adopting a new 

Compensation Committee Report 

regarding the compensation committee’s 

review and discussion with 

management of the Compensation 

Discussion and Analysis, and the 

compensation committee’s 

recommendation to the board of 

directors with regard to the disclosure of 

the Compensation Discussion and 

Analysis. To the extent that members of 

the compensation committee would 

need to spend additional time and 

resources reviewing the executive and 

director compensation disclosures and 

potentially retaining experts and 

advisors to assist them in that review,591

this requirement will result in 

additional costs to issuers. 

In addition to the Compensation 

Discussion and Analysis section, we are 

requiring narrative disclosure to 

accompany tabular presentations so that 

the data included in the tables may be 

understood in context. We are also 

expanding disclosure regarding 

compensation-related equity-based and 

other plan-based holdings, as well as 

retirement and similar plans. Finally, 

we are adopting a Director 

Compensation Table that will require 

more detailed information regarding 

director compensation than was 

specified in the narrative disclosure 

requirement that existed prior to today’s 

amendments. Each of these revisions 

seeks to elicit clearer and more 

complete information than was required 

under the requirements in place before 

adoption of these amendments. We have 

also decided to retain the Performance 

Graph in light of commenters’

overwhelming support for this 

disclosure requirement, but we are 

moving it to new paragraph (e) of Item 

201 of Regulation S–K and requiring 

that it will be furnished in the annual 

report to security holders rather than the 

proxy or information statement. Since 

we originally proposed to delete the 

Performance Graph altogether, its 

retention requires us to consider the 

costs incurred by issuers to continue to 

comply with this requirement; however, 


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53222 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

592Several commenters recommended expanded 

disclosure of the number and key terms of out-ofthe-money instruments. See n. 277. Other 

commenters suggested award-by-award disclosure 

for options. See letters from Hodak Value Advisors 

and The Rock Center for Corporate Governance. 

593See, e.g., letters from Brian Foley & Co.; Buck 

Consultants; and Grundfest. 

the substance of what is required with 

regard to the Performance Graph will 

not change substantially from what was 

required prior to the adoption of these 

amendments. 

While the Summary Compensation 

Table as amended will require reporting 

of the grant date fair value of equitybased awards, we do not believe that 

this change will 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 the year to year 

incremental changes in the actuarial 

present value of the named executive 

officers’ accumulated benefit under 

defined benefit and actuarial pension 

plans for the purposes of reporting such 

compensation in the Summary 

Compensation Table. In an effort to 

reduce costs in response to commenters’

suggestions, we have revised the 

requirement to specify that in 

computing the amount to be disclosed 

under the amendments, companies must 

use the same assumptions (other than 

the normal retirement age) that they use 

for financial reporting purposes under 

generally accepted accounting 

principles. Another change which may 

help to make the calculation less costly 

is our revision to the proposal that the 

incremental change in the actuarial 

present value of the named executive 

officers’ accumulated benefit under 

defined benefit and actuarial pension 

plans required in the Summary 

Compensation Table directly 

correspond to the disclosure required in 

the Pension Benefits Table. Therefore, a 

second and different calculation of 

pension benefits is not being adopted as 

proposed. 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 will 

increase costs, because former 

disclosure requirements already 

mandated the disclosure of all 

compensation, and the mechanical 

process of adding up disclosure 

amounts should not be significant. 

Companies will incur additional costs 

associated with disclosing the number 

and key terms of out-of-the-money 

instruments in the Outstanding Equity 

Awards at Fiscal Year-End Table. As 

adopted, this table will require 

companies to disclose, on an award-byaward basis, the number of underlying 

securities, the exercise or base price and 

the expiration date with respect to each 

award of unexercised options, stock 

appreciation rights and similar 

instruments with option-like features. 

Given the detailed information required, 

the disclosure generated may be 

lengthy, but commenters indicated that 

this information is meaningful to 

them.592 Instead of disclosure on an 

aggregate basis, as was proposed and as 

was required for some outstanding 

option awards before adoption of these 

amendments, the disclosure of 

individual awards will enable investors 

to understand the extent and magnitude 

to which an executive’s previously 

awarded options provide the potential 

to generate upside growth in the value 

of these holdings.593 We have attempted 

to minimize the cost of this rule as 

amended by requiring that companies 

list only the key terms of the securities, 

as opposed to computing the weighted 

average of exercise prices or some other 

calculation necessary for the purposes 

of aggregation. 

Additional costs may also be incurred 

in preparing and presenting required 

disclosures regarding 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 amendments. 

However, these costs will likely be 

mitigated to some extent for the 

following reasons: 

• As noted above, the calculation of 

the actuarial value of pension benefits 

required in the Pension Benefits Table 

and the Summary Compensation Table 

will be standardized to a significant 

extent by requiring companies to use 

many of the same assumptions for 

purposes of these calculations as they 

use for financial reporting purposes 

under generally accepted accounting 

principles; 

• The Pension Benefits Table will not 

require different calculations from those 

called for in the Summary 

Compensation Table and will not 

require the disclosure of estimated 

retirement benefits payable upon early 

retirement, as proposed; and 

• We have adopted commenters’

suggestions that the quantitative 

disclosure required for post-termination 

agreements in new Item 402(j) of 

Regulation S–K be calculated by 

applying standard assumptions as to the 

share price of the company’s securities 

and the date of the event triggering 

termination. 

In addition, because the 

determination of named executive 

officers will be based on total 

compensation rather than salary and 

bonus, some companies will incur 

higher costs tracking the compensation 

paid to all executive officers in order to 

determine which are the most highly 

compensated. At the same time, 

however, companies will not be 

required to track the incremental change 

in the value of pension benefits or the 

amount of above-market or preferential 

earnings on nonqualified deferred 

compensation for purposes of 

identifying named executive officers, as 

they would have under the proposed 

requirements. 

Under the amendments regarding 

Form 8–K, disclosure regarding 

executive and director arrangements 

and other plans that are no longer 

required to be reported within four days 

under Item 1.01 of Form 8–K will 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 will reduce its value to 

investors, the amendments may impose 

costs on investors other than those 

associated with transitioning to the new 

threshold. 

We believe that there will be some 

increase in the cost of complying with 

the related person transaction disclosure 

requirement and corporate governance 

disclosures. The amendments may 

increase the cost of complying with the 

related person transaction 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.’’ We did 

not adopt, as proposed, a requirement 

for disclosure of indebtedness 

transactions with significant 

shareholders. Similarly, with respect to 

registered investment companies and 

business development companies, 

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 will 

increase to $120,000 the former $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). 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53223 

Since these forms already require such 

disclosure using the $60,000 threshold, 

we do not believe the amendments 

would impose additional costs. 

Amended Item 404(b) of Regulation 

S–K introduces 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 disclosure requirements 

regarding policies for the review, 

approval or ratification of related person 

transactions, we understand that 

companies will incur costs of collecting 

the type of information that will be 

required to be disclosed. These costs 

will 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 new rules do not require companies 

to create new policies or processes for 

review, approval or ratification of 

relationships with related persons. 

However, to the extent that companies 

do create new policies or processes that 

require the collection of different or 

additional information, they may incur 

incremental costs. 

The amended disclosures regarding 

director independence are similar to 

disclosure requirements under the 

proxy rules regarding the independence 

of directors who are members of the 

company’s audit and nominating 

committees. Thus, for companies that 

are subject to the proxy rules, the task 

of complying with the disclosure 

requirement regarding director 

independence can be performed by the 

same person or group of persons already 

responsible for compliance with the 

rules requiring disclosure about the 

independence of nominating and audit 

committee members. Because the rules 

prior to these amendments already 

required 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 amended 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 categories or 

types of director relationships. 

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 pre-existing disclosure 

requirements or corporate governance 

listing standards. Finally, additional 

costs may be incurred by companies 

complying with Item 407(a) when 

companies rely on an exemption from 

independence standards, as we are 

requiring disclosure regarding reliance 

on any such exemption, including the 

basis for the conclusion that the 

exemption is available. 

We believe that, overall, the costs 

noted above which are associated with 

the amended disclosure requirements 

for related person transactions and 

director independence will be offset to 

some extent by cost decreases associated 

with narrowing the scope of other 

disclosure requirements under the 

amendments, such as the disclosure that 

was required about director 

relationships under Item 404(b) of 

Regulation S–K before today’s 

amendments. In this regard, we believe 

that companies will generally be 

required to provide an amount of 

information that is comparable to what 

had been required by our rules before 

the amendments. However, under the 

amendments the information regarding 

these matters will be presented in a 

manner that recognizes recent changes, 

such as the imposition of corporate 

governance listing standards at the 

major markets. 

Moreover, our amendments to the 

related person transaction and director 

independence disclosure requirements 

differ in certain respects from the 

proposals, which may lessen the 

expected compliance costs. In response 

to commenters’ concerns, we are 

retaining certain exceptions to the 

related person transaction disclosure 

requirements that existed under the 

rules prior to these amendments, and 

we are not requiring disclosure of 

indebtedness transactions with 

significant shareholders (or their 

immediate family members). For the 

amended disclosures under new Item 

407(a), any additional compliance costs 

associated with requiring companies to 

disclose the transactions, relationships 

and arrangements considered by the 

board of directors in determining the 

independence of directors or director 

nominees is mitigated to some extent 

because the amendments require only 

the disclosure of the specific type or 

category of transactions considered by 

the board of directors that are not 

otherwise disclosed under the related 

person transaction disclosure 

requirement of Item 404(a). In contrast, 

under the rule proposals, disclosure of 

the specific details of each such 

transaction, relationship or arrangement 

would have been required. Furthermore, 

in response to several commenters, we 

have eliminated the proposed 

requirement under new Item 407(e) to 

identify any executive officer within the 

company that a compensation 

consultant contacted in carrying out its 

assignment. The overall effect of these 

modifications to Items 404(a) and 407 as 

they were proposed will be to reduce 

the number and type of transactions or 

contacts for which disclosure will be 

required under the new rules and lessen 

the aggregate burden imposed on 

companies to comply with the new 

rules. We recognize, as suggested by 

commenters, that additional costs may 

be incurred in preparing the additional 

disclosures required regarding the 

compensation committee process, 

including disclosure regarding the use 

of compensation consultants, as well as 

in the compensation committee’s 

involvement with the Compensation 

Discussion and Analysis through the 

Compensation Committee Report. 

Our plain English amendments 

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 

are required to be disclosed in Exchange 

Act reports such as annual reports on 

Forms 10–K or 10–KSB. We believe the 

amended rules will result in a shortterm 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 

amendments. Additional costs, if any, 

should be one-time or otherwise shortterm. 

We believe that there would be little, 

if any, increase in the cost of complying 

with the beneficial ownership rule 

amendments. A company will 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 can 

inquire as to this information in 

questionnaires it already circulates to 

the company’s 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 collection of 

information requirements to be 

approximately 783,284 hours of inhouse company personnel time and to 

be approximately $133,883,300 for the 


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53224 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

594See Section VIII. above. 

595 15 U.S.C. 78w(a)(2). 

596 15 U.S.C. 77b(b). 

597 15 U.S.C. 78c(f). 

598 15 U.S.C. 80a–2(c). 

599For example, we have attempted to reduce the 

burden on quantifying post-employment 

compensation. See Section II.C.5. In addition, 

several of our other modifications to the proposals 

were made to address some commenter concerns 

over the possible perception of ‘‘double-counting’’

of compensation elements, which should also help 

to improve the utility of the compensation 

disclosures to investors. 

services of outside professionals. As 

noted in the Paperwork Reduction Act 

section, we have revised these estimates 

both in response to comments about the 

proposed estimates and in light of the 

changes we have made from the 

proposal.594 These costs are based on 

our estimates that the annual 

incremental disclosure burden imposed 

by the revisions that we adopt today 

will average 95 hours per Form 10–K; 50 

hours per Form 10–KSB; 3 hours per 

Schedule 14A and Schedule 14C; 85 

hours per Form 10; 45 hours per Forms 

10–SB and SB–2; 74 hours per Form S–

1; 17 hours per Form S–4; 85 hours per 

Form S–11; and 5 hours per Form N–2. 

We estimate that the amendments to 

Item 22(b) of Schedule 14A and 

increasing to $120,000 the former 

$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 $861,000 for the services 

of outside professionals, based on an 

estimate that 1,722 fewer current reports 

on Form 8–K will be filed because of 

more focused current reporting of 

compensation transactions. Based on 

these estimates solely computed for the 

purposes of the Paperwork Reduction 

Act and assuming that the cost of inhouse company personnel time is $175, 

the total estimated incremental costs of 

the amendments is approximately 

$270,958,000. These estimates of 

incremental costs, which were prepared 

for the purposes of the Paperwork 

Reduction Act, are limited to hours and 

costs associated with collecting 

information, preparing disclosure, filing 

forms, and retaining records imposed by 

the applicable forms, and were based in 

part with reference to the pre-existing 

burden estimates for each of the forms. 

X. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition and Capital 

Formation 

Exchange Act Section 23(a)(2) 595

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),596 Exchange Act Section 3(f) 597

and Investment Company Act Section 

2(c) 598 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. 

We have also discussed other impacts 

of the amendments in our Cost-Benefit, 

Paperwork Reduction Act and Final 

Regulatory Flexibility Act Analyses. The 

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 transactions 

disclosure available to investors and the 

financial markets. These amendments 

will enhance investors’ understanding 

of how corporate resources are used, 

and enable shareholders to better 

evaluate the actions of the board of 

directors in fulfilling their 

responsibilities, as well as the 

incentives for executive officers. 

The amendments to Form 8–K are 

intended to facilitate the ability of 

investors and shareholders to access 

real-time disclosure of public 

companies’ executive compensation 

events that are unquestionably or 

presumptively material by requiring this 

disclosure only for compensatory 

agreements with specified executive 

officers. To find this information, 

shareholders and investors no longer 

need to examine multiple Form 8–K 

disclosures relating to other executive 

officers or other material non-ordinary 

course definitive agreements. 

The amendments to expand and 

consolidate into one item the director 

independence and related corporate 

governance disclosure requirements in 

new Item 407 of Regulation S–K will 

improve the understanding of 

shareholders and investors about the 

composition and functions of the board 

of directors and board committees. 

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 requirement that most of the 

information called for in these 

amendments 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 amended rules will enhance 

the reporting requirements in place 

before adoption of these amendments by 

providing more effective material 

disclosure to investors in a timely 

manner. We anticipate that these 

amendments will improve investors’

ability to make informed investment 

and voting decisions and, therefore, may 

lead to increased efficiency and 

competitiveness of the U.S. capital 

markets. As discussed more fully in our 

Cost-Benefit Analysis, improved 

transparency in disclosure under these 

amendments 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. 

Some commenters were concerned as 

to whether including examples in the 

principles-based Compensation 

Discussion and Analysis disclosure item 

would in some way cause companies 

and compensation committees to feel 

obligated to conform their compensation 

decision-making processes to those 

examples. As we discussed in Section 

II.B.1., we emphasize that application of 

a particular example must be tailored to 

the company. We believe using a 

disclosure concept along with 

illustrative examples strikes an 

appropriate balance to effectively elicit 

meaningful disclosure applicable to the 

company. Companies must assess the 

materiality to investors of the 

information that is identified by the 

examples in light of the particular 

situation of the company. 

We recognize that increased time and 

resources will need to be devoted by 

companies and their officers, directors 

and advisors to prepare the revised 

disclosures required by these 

amendments. As discussed in more 

detail above, we have made substantive 

modifications to the proposals to 

address, in part, cost and burden 

concerns raised by some 

commenters.599 We have also revisited 

and increased our burden estimates for 

Paperwork Reduction Act purposes. 

Ultimately, the impact of additional 


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600See, e.g., letters from CalPERS; CalSTRS; D. 

Cayot; CII; CRPTF; C. Green; ICI; Institutional 

Investors Group; M. McPherson; A. Silverstein; and 

M. von Euler. 

601See, e.g., letters from CII; CFA Centre 1; ICI; 

and ISS. 602The principal financial officer is not specified 

as a named executive officer in Item 402 of 

Regulation S–B. 

603 Item 404 of Regulation S–B as adopted does 

not require disclosure about policies and 

procedures for the review, approval or ratification 

of related person transactions. 

resources being used by companies to 

prepare the new disclosures will be 

borne by the companies’ shareholders. 

Based on the extensive comment we 

received from investors supporting our 

proposals, strong evidence suggests that 

shareholders are willing to bear these 

costs.600

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 and Exchange 

Act, will be required to make the 

amended 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 Item 402 before adoption of these 

amendments, a company will not be 

required to disclose target levels with 

respect to specific quantitative or 

qualitative performance-related factors, 

or any other factors or criteria involving 

confidential trade secrets and 

commercial or financial information, the 

disclosure of which would result in 

competitive harm to 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, although 

much of this information is already 

available from compensation 

consultants and other sources. 

We have considered any impact the 

amendments may have on smaller as 

opposed to larger public companies, 

including the ability of smaller 

companies to absorb the costs of the 

amendments and whether any resulting 

disproportionate impact might affect the 

competitiveness of smaller issuers or 

their capital formation decisions. 

Further, as discussed in our Final 

Regulatory Flexibility Act Analysis, we 

have considered alternatives to 

minimize any significant adverse impact 

on smaller companies, including 

adopting different and less restrictive 

reporting requirements for small 

business issuers under Regulation S–B, 

particularly given that small business 

issuer compensation structures are 

likely to be less complex than those of 

larger issuers. We believe the changes 

that are reflected in the amendments to 

Regulation S–B will balance the 

information needs of investors in 

smaller companies with the burdens 

imposed on such companies by the 

disclosure requirements. 

We do not expect that the incremental 

effect of the amendments overall will 

have a material effect on competition. 

We expect that the amended reporting 

requirements will enhance the 

efficiency of capital formation. Investors 

have stated that they believe that the 

improved transparency and 

completeness of executive 

compensation information resulting 

from these amendments will help them 

make more informed investment and 

voting decisions.601 Investors are likely 

to be more confident allocating capital 

to firms in which compensation 

practices are well-aligned with the 

investors’ interests when investors 

possess more information regarding 

executive compensation. Improved 

transparency thus may encourage 

investors to commit their capital and 

thereby facilitate issuers’ access to 

capital. 

XI. Final Regulatory Flexibility Act 

Analysis 

This Final Regulatory Flexibility Act 

Analysis has been prepared in 

accordance with 5 U.S.C. 603. It relates 

to 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,602 other highly paid 

executive officers and all members of 

the board of directors, and of related 

person transactions. These changes 

include amending 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 on 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 most of the disclosure 

required by the amended rules be 

provided in plain English. 

A. Need for the Rules and Amendments 

On January 27, 2006, we issued 

proposals to change the rules requiring 

disclosure of executive and director 

compensation, related person 

transactions, director independence and 

other corporate governance matters, and 

security ownership of officers and 

directors. 

We are adopting amendments that 

establish a broader-based approach to 

eliciting executive and director 

compensation disclosure, while 

retaining comparability. In addition, we 

are adopting amendments to Form 8–K 

in order to focus current disclosure on 

compensation-related events that are 

unquestionably or presumptively 

material to investors. Given the close 

relationship between executive and 

director compensation and other 

financial transactions and relationships 

involving companies and their directors, 

executive officers, significant 

shareholders and respective immediate 

family members, we are also adopting 

amendments to streamline and 

modernize the related person 

transaction disclosure requirements, 

while also making the requirements 

more principles-based and expanding 

the requirements to elicit disclosure 

about policies and procedures for the 

review, approval or ratification of 

related person transactions.603 With 

respect to disclosure about director 

independence, we are replacing 

requirements for disclosure about 

specific relationships that can affect 

director independence with a narrative 

explanation of the independence status 

of directors under a company’s 

independence policies for the majority 

of the board and for the nominating, 

audit and compensation committees. 

We are also consolidating these and 

other requirements regarding director 

independence, board committees and 

other corporate governance matters in a 

new disclosure item. In addition, we are 

adopting 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 


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604See, e.g., letters from ABA; ACB; ICBA; and 

SCSGP. 

605 17 CFR 230.157. 

606 17 CFR 240.0–10(a). 

607 17 CFR 270.0–10(a). 

608 Item 10 of Regulation S–B (17 CFR 228.10) 

defines a small business issuer as a registrant that 

has revenues of less than $25 million, is a U.S. or 

Canadian issuer, is not an investment company, and 

has a public float of less than $25 million. Also, if 

it is a majority owned subsidiary, the parent 

corporation also must be a small business issuer. 

609Amended Item 404(a) of Regulation S–K only 

includes $120,000 as the threshold. 

an ‘‘interested person’’ of the fund 

within the meaning of Section 2(a)(19) 

of the Investment Company Act (and 

their immediate family members). 

Further, we are adopting amendments to 

require disclosure of the number of 

shares pledged by named executive 

officers, directors and director 

nominees, given that these shares are 

subject to risks and contingencies that 

do not apply to other shares beneficially 

owned by these persons. Finally, in 

order to emphasize that most of these 

amended requirements must be 

presented in a manner that is clear, 

concise and understandable for 

investors, we are adopting rules 

requiring that the disclosure regarding 

executive and director compensation, 

beneficial ownership, related person 

transactions and most corporate 

governance matters be provided in plain 

English when included in Exchange Act 

reports. 

B. Significant Issues Raised by Public 

Comment 

In the Proposing Release, we 

requested comment on any aspect of the 

Initial Regulatory Flexibility Act 

Analysis, including the number of small 

entities that would be affected by the 

proposals, and both the qualitative and 

quantitative nature of the impact. 

Several commenters noted that costs 

and burdens arising from the proposals 

would have disproportionately affected 

small business issuers and smaller 

public companies that are not small 

business issuers but did not provide any 

specific comments on the Initial 

Regulatory Flexibility Act Analysis.604

As summarized in Section XI.D. below 

and discussed in greater detail in 

previous sections, we have taken these 

comments into account in adopting 

different requirements for small 

business issuers. 

C. Small Entities Subject to the Rules 

and Amendments 

The amendments will 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 amendments also 

will affect small entities that file, or 

have filed, a registration statement that 

has not yet become effective under the 

Securities Act or the Exchange Act and 

that has not been withdrawn. Securities 

Act Rule 157 605 and Exchange Act Rule 

0–10(a) 606 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. These 

are the types of entities that we refer to 

as small entities in this section. We 

believe that the amendments will 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.607 We believe that the 

amendments will affect small entities 

that are investment companies. We 

estimate that there are approximately 

240 investment companies that may be 

considered small entities. 

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

We note that small business 

issuers,608 which is a broader category 

of issuers than small entities, in certain 

circumstances may provide the 

executive and director compensation, 

relationships with related persons and 

promoters, beneficial ownership and 

corporate governance disclosure 

specified, respectively, in Items 402, 

403, 404 and 407 of Regulation S–B, 

rather than the corresponding disclosure 

specified in Items 402, 403, 404 and 407 

of Regulation S–K. 

The amendments to Item 402 of 

Regulation S–K expand some former 

disclosure requirements, and 

consolidate or eliminate others. The 

amendments to Item 402 of Regulation 

S–B will require less extensive 

disclosure for small business issuers 

than will be required for companies 

complying with Item 402 of Regulation 

S–K as amended. Under the 

amendments, the scope and 

presentation of information in Item 402 

of Regulation S–B will differ in a 

number of significant ways from Item 

402 of Regulation S–K. Item 402 of 

Regulation S–B will: 

• Limit the named executive officers 

for whom disclosure will 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 posttermination compensation 

arrangements; and 

• Require the Director Compensation 

Table. 

New Item 402 of Regulation S–B does 

not include the following disclosures 

that are required by new Item 402 of 

Regulation S–K: 

• Compensation Discussion and 

Analysis or a Compensation Committee 

Report; 

• Information regarding two 

additional executive officers; 

• The third fiscal year of Summary 

Compensation Table disclosure; and 

• The supplementary Grants of PlanBased Awards Table, the Option 

Exercises and Stock Vested Table, the 

Pension Benefits Table, and the 

Nonqualified Deferred Compensation 

Table and the separate Potential 

Payments Upon Termination or Changein-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 amendments to Item 

402 of Regulation S–B will not result in 

the same level of incremental increase 

in costs or burdens as will the 

requirements of amendments to Item 

402 of Regulation S–K. 

The amendments to Item 404 of 

Regulations S–K and S–B will decrease 

the related person transaction disclosure 

requirement that companies, including 

small entities, must comply with in 

some respects and expand it in other 

respects. The amendments to Item 404 

of Regulation S–B will 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 at year-end for the 

last three completed fiscal years.609 At 


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610As was the case prior to these amendments, 

compensation committee interlocks disclosure is 

required by Regulation S–K but is not required 

under Regulation S–B. 

the same time, the amendments to Item 

404 of Regulation S–B will increase the 

scope of the related person transaction 

disclosure requirement by expanding 

the group of related persons covered to 

include additional ‘‘immediate family 

members.’’ In addition, the amendments 

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 amendments to Item 404 of 

Regulation S–K, the amendments to 

Item 404 of Regulation S–B will 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 amendments 

to Item 404 of Regulation S–B and new 

Item 407 of Regulation S–B require, 

depending upon the particular 

circumstances of a company, more or 

less disclosure by changing the 

disclosure requirement regarding 

director independence.610 Unlike the 

amendments to Item 407 of Regulation 

S–K, the amendments to Item 407 of 

Regulation S–B do not require a 

Compensation Committee Report 

regarding the compensation committee’s 

review and discussion with 

management of the Compensation 

Discussion and Analysis, and the 

compensation committee’s 

recommendation to the board of 

directors with regard to the disclosure of 

the Compensation Discussion and 

Analysis, because Item 402 of 

Regulation S–B does not require 

Compensation Discussion and Analysis 

disclosure. 

Similar to amended Item 404(a) of 

Regulation S–K, 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 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 former 

$60,000 threshold for disclosure of such 

interests, transactions, and 

relationships. 

The amendments to Item 403 of 

Regulations S–K and S–B 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 imposes an additional 

disclosure requirement on companies, 

including small entities. 

The new plain English rules 

applicable to Exchange Act reports and 

proxy or information statements 

incorporated by reference into Exchange 

Act reports will not affect the substance 

of disclosures that companies must 

make. The new plain English rules will 

also not impose any new recordkeeping 

requirements or require reporting of 

additional information. Other changes 

to our rules will 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 amendments are expected 

to result in increased costs to all subject 

companies, large or small, as follows: 

• Incremental increase in costs is 

expected with changes to executive and 

director compensation disclosure 

requirements; 

• 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 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 amended 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 expanded director 

independence disclosure in new Item 

407 of Regulations S–K and S–B could 

be performed by the same person or 

group of persons responsible for 

compliance under the former rules at a 

minimal incremental cost. Additional 

costs will likely be incurred to provide 

additional disclosure regarding 

compensation committee processes. 

Our plain English amendments 

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 

are required to be disclosed in Exchange 

Act reports such as annual reports on 

Forms 10–K or 10–KSB. We believe the 

new rules will 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 

amendments. Additional costs, if any, 

should be one-time or otherwise shortterm. 

For purposes of the Paperwork 

Reduction Act, we estimate that with 

respect to Form 10–KSB, it will take 

issuers 100 additional hours to prepare 

the revised disclosure in year one, 35 

additional hours in year two, and 15 

additional hours in year three and 

thereafter, which results in an average of 

50 additional hours over the three year 

period. The same estimates 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 will file 

a Form 10–K, we estimate for purposes 

of the Paperwork Reduction Act that it 

will take issuers 170 additional hours to 

prepare the revised disclosure in year 

one, 80 additional hours in year two, 

and 35 additional hours in year three 

and thereafter, which results in an 

average of 95 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 

will be performed by the company 

internally at a cost of $175 per hour and 

25% of the burden will be carried by 

outside professionals retained by the 

company at a cost of $400 per hour, the 

average annual cost to comply with the 

amended disclosure requirements in 

periodic reports and/or proxy or 

information statements will be 

approximately $11,563. The extent to 

which an additional average compliance 

cost of approximately $11,563 per small 

entity over a three year period 

constitutes a significant economic 

impact for small entities will depend on 

the relative revenues, costs and 

allocation of resources toward 

compliance with the Commission’s 

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 will take 

business development companies 150 

additional hours to prepare the revised 


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disclosure in year one, 75 hours in year 

two and 30 hours in year three and 

thereafter, which results in an average of 

85 hours for each business development 

company to comply with the revised 

compensation disclosures that will be 

required on Form N–2. If we assume 

that 25% of the burden will be borne 

internally at a cost of $175 per hour and 

75% of the burden will be carried by 

outside professionals retained by the 

company at a cost of $400 per hour, the 

average annual cost for business 

development companies to comply with 

the revised disclosure requirements on 

Form N–2 will be approximately 

$29,219. The extent to which an 

additional average compliance cost of 

approximately $29,219 per small entity 

over a three year period constitutes a 

significant economic impact for small 

entities will depend on the relative 

assets, income, operating expenses and 

the allocation of resources toward 

compliance with the Commission’s 

rules for small entities both individually 

and as a group. 

E. Agency Action To Minimize Effect on 

Small Entities 

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 

amendments, 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 

adopted different compliance or 

reporting requirements for small 

entities. 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 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 are necessary to promote the 

goal of relatively uniform presentation 

of comparable information for the 

benefit of investors. Finally, although 

we are exempting some information 

required of larger issuers, a wholesale 

exemption for small entities is not 

appropriate because the amendments 

are designed to make uniform the 

application of the disclosure and other 

requirements that we are adopting. We have used design rather than 

performance standards in connection 

with the amendments for two reasons. 

First, based on our past experience, we 

believe the disclosure provided in 

response to the amended requirements 

will be more useful to investors if there 

are specific informational requirements. 

The mandated disclosures we are 

adopting are intended to result in more 

focused and comprehensive disclosure. 

Second, the specific disclosure 

requirements in the amendments will 

promote more consistent disclosure 

among public companies, because they 

provide greater certainty as to the scope 

of required disclosure. 

XII. Statutory Authority and Text of the 

Amendments 

We are adopting new rules and 

amendments pursuant to Sections 3(b), 

6, 7, 10, and 19(a) of the Securities Act, 

as amended, Sections 10(b), 12, 13, 14, 

15(d), 16 and 23(a) of the Exchange Act, 

as amended, Sections 8, 20(a), 24(a), 30 

and 38 of the Investment Company Act 

of 1940, as amended, and Sections 3(a) 

and 306(a) of the Sarbanes-Oxley Act of 

2002. 

List of Subjects 

17 CFR Part 228 

Reporting and recordkeeping 

requirements, Securities, Small 

businesses. 

17 CFR Parts 229, 232, 239, 240, 245 

and 249 

Reporting and recordkeeping 

requirements, Securities. 

17 CFR Part 274 

Investment companies, Reporting and 

recordkeeping requirements, Securities. 

■ For the reasons set out in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations, is 

amended as follows: 

PART 228—INTEGRATED 

DISCLOSURE SYSTEM FOR SMALL 

BUSINESS ISSUERS 

■ 1. The authority citation for part 228 

continues to read in part as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 

77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll, 

78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b–

11, and 7201 et seq.; and 18 U.S.C. 1350. 

* * * * * 

■ 2. Amend § 228.201 by revising 

Instruction 2 to paragraph (d) to read as 

follows: 

§ 228.201 (Item 201) Market for common 

equity and related stockholder matters. 

* * * * * 

Instructions to paragraph (d). 

1. * * * 

2. For purposes of this paragraph, an 

‘‘individual compensation arrangement’’

includes, but is not limited to, the following: 

a written compensation contract within the 

meaning of ‘‘employee benefit plan’’ under 

§ 230.405 of this chapter and a plan (whether 

or not set forth in any formal document) 

applicable to one person as provided under 

Item 402(a)(5)(ii) of Regulation S–B 

(§ 228.402(a)(5)(ii)). 

* * * * * 

§ 228.306 [Removed and reserved] 

■ 3. Remove and reserve § 228.306. 

§ 228.401 [Amended] 

■ 4. Amend § 228.401 by removing 

paragraphs (e), (f) and (g). 

■ 5. Revise § 228.402 to read as follows: 

§ 228.402 (Item 402) Executive 

compensation. 

(a) General—(1) All compensation 

covered. This Item requires clear, 

concise and understandable disclosure 

of all plan and non-plan compensation 

awarded to, earned by, or paid to the 

named executive officers designated 

under paragraph (a)(2) of this Item, and 

directors covered by paragraph (f) of this 

Item, by any person for all services 

rendered in all capacities to the small 

business issuer and its subsidiaries, 

unless otherwise specifically excluded 

from disclosure in this Item. All such 

compensation shall be reported 

pursuant to this Item, even if also called 

for by another requirement, including 

transactions between the small business 

issuer and a third party where a purpose 

of the transaction is to furnish 

compensation to any such named 

executive officer or director. No amount 

reported as compensation for one fiscal 

year need be reported in the same 

manner as compensation for a 

subsequent fiscal year; amounts 

reported as compensation for one fiscal 

year may be required to be reported in 

a different manner pursuant to this Item. 

(2) Persons covered. Disclosure shall 

be provided pursuant to this Item for 

each of the following (the ‘‘named 

executive officers’’): 

(i) All individuals serving as the small 

business issuer’s principal executive 

officer or acting in a similar capacity 

during the last completed fiscal year 

(‘‘PEO’’), regardless of compensation 

level; 

(ii) The small business issuer’s two 

most highly compensated executive 


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officers other than the PEO who were 

serving as executive officers at the end 

of the last completed fiscal year; and 

(iii) Up to two additional individuals 

for whom disclosure would have been 

provided pursuant to paragraph (a)(2)(ii) 

of this Item but for the fact that the 

individual was not serving as an 

executive officer of the small business 

issuer at the end of the last completed 

fiscal year. 

Instructions to Item 402(a)(2). 

1. Determination of most highly 

compensated executive officers. The 

determination as to which executive officers 

are most highly compensated shall be made 

by reference to total compensation for the last 

completed fiscal year (as required to be 

disclosed pursuant to paragraph (b)(2)(x) of 

this Item) reduced by the amount required to 

be disclosed pursuant to paragraph 

(b)(2)(viii) of this Item, provided, however, 

that no disclosure need be provided for any 

executive officer, other than the PEO, whose 

total compensation, as so reduced, does not 

exceed $100,000. 

2. Inclusion of executive officer of 

subsidiary. It may be appropriate for a small 

business issuer to include as named 

executive officers one or more executive 

officers or other employees of subsidiaries in 

the disclosure required by this Item. See Rule 

3b–7 under the Exchange Act (17 CFR 

240.3b–7). 

3. Exclusion of executive officer due to 

overseas compensation. It may be 

appropriate in limited circumstances for a 

small business issuer not to include in the 

disclosure required by this Item an 

individual, other than its PEO, who is one of 

the small business issuer’s most highly 

compensated executive officers due to the 

payment of amounts of cash compensation 

relating to overseas assignments attributed 

predominantly to such assignments. 

(3) Information for full fiscal year. If 

the PEO served in that capacity during 

any part of a fiscal year with respect to 

which information is required, 

information should be provided as to all 

of his or her compensation for the full 

fiscal year. If a named executive officer 

(other than the PEO) served as an 

executive officer of the small business 

issuer (whether or not in the same 

position) during any part of the fiscal 

year with respect to which information 

is required, information shall be 

provided as to all compensation of that 

individual for the full fiscal year. 

(4) Omission of table or column. A 

table or column may be omitted if there 

has been no compensation awarded to, 

earned by, or paid to any of the named 

executive officers or directors required 

to be reported in that table or column 

in any fiscal year covered by that table. 

(5) Definitions. For purposes of this 

Item: 

(i) The term stock means instruments 

such as common stock, restricted stock, 

restricted stock units, phantom stock, 

phantom stock units, common stock 

equivalent units or any similar 

instruments that do not have option-like 

features, and the term option means 

instruments such as stock options, stock 

appreciation rights and similar 

instruments with option-like features. 

The term stock appreciation rights 

(‘‘SARs’’) refers to SARs payable in cash 

or stock, including SARs payable in 

cash or stock at the election of the small 

business issuer or a named executive 

officer. The term equity is used to refer 

generally to stock and/or options. 

(ii) The term plan includes, but is not 

limited to, the following: Any plan, 

contract, authorization or arrangement, 

whether or not set forth in any formal 

document, pursuant to which cash, 

securities, similar instruments, or any 

other property may be received. A plan 

may be applicable to one person. Small 

business issuers may omit information 

regarding group life, health, 

hospitalization, or medical 

reimbursement plans that do not 

discriminate in scope, terms or 

operation, in favor of executive officers 

or directors of the small business issuer 

and that are available generally to all 

salaried employees. 

(iii) The term incentive plan means 

any plan providing compensation 

intended to serve as incentive for 

performance to occur over a specified 

period, whether such performance is 

measured by reference to financial 

performance of the small business issuer 

or an affiliate, the small business 

issuer’s stock price, or any other 

performance measure. An equity 

incentive plan is an incentive plan or 

portion of an incentive plan under 

which awards are granted that fall 

within the scope of Financial 

Accounting Standards Board Statement 

of Financial Accounting Standards No. 

123 (revised 2004), Share-Based 

Payment, as modified or supplemented 

(‘‘FAS 123R’’). A non-equity incentive 

plan is an incentive plan or portion of 

an incentive plan that is not an equity 

incentive plan. The term incentive plan 

award means an award provided under 

an incentive plan. 

(iv) The terms date of grant or grant 

date refer to the grant date determined 

for financial statement reporting 

purposes pursuant to FAS 123R. 

(v) Closing market price is defined as 

the price at which the small business 

issuer’s security was last sold in the 

principal United States market for such 

security as of the date for which the 

closing market price is determined. 

(b) Summary compensation table—(1) 

General. Provide the information 

specified in paragraph (b)(2) of this 

Item, concerning the compensation of 

the named executive officers for each of 

the small business issuer’s last two 

completed fiscal years, in a Summary 

Compensation Table in the tabular 

format specified below. 

SUMMARY COMPENSATION TABLE

Name and principal position Year Salary 

($) 

Bonus 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Nonequity 

incentive 

plan compensation 

($) 

Nonqualified 

deferred 

compensation 

earnings 

($) 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

PEO .

A .................................................

B .................................................


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(2) The Table shall include: 

(i) The name and principal position of 

the named executive officer (column 

(a)); 

(ii) The fiscal year covered (column 

(b)); 

(iii) The dollar value of base salary 

(cash and non-cash) earned by the 

named executive officer during the 

fiscal year covered (column (c)); 

(iv) The dollar value of bonus (cash 

and non-cash) earned by the named 

executive officer during the fiscal year 

covered (column (d)); 

Instructions to Item 402(b)(2)(iii) and (iv). 

1. If the amount of salary or bonus earned 

in a given fiscal year is not calculable 

through the latest practicable date, a footnote 

shall be included disclosing that the amount 

of salary or bonus is not calculable through 

the latest practicable date and providing the 

date that the amount of salary or bonus is 

expected to be determined, and such amount 

must then be disclosed in a filing under Item 

5.02(f) of Form 8–K (17 CFR 249.308). 

2. Small business issuers need not include 

in the salary column (column (c)) or bonus 

column (column (d)) any amount of salary or 

bonus forgone at the election of a named 

executive officer pursuant to a small business 

issuer’s program under which stock, equitybased or other forms of non-cash 

compensation may be received by a named 

executive officer instead of a portion of 

annual compensation earned in a covered 

fiscal year. However, the receipt of any such 

form of non-cash compensation instead of 

salary or bonus earned for a covered fiscal 

year must be disclosed in the appropriate 

column of the Summary Compensation Table 

corresponding to that fiscal year (e.g., stock 

awards (column (e)); option awards (column 

(f)); all other compensation (column (i))), or, 

if made pursuant to a non-equity incentive 

plan and therefore not reportable in the 

Summary Compensation Table when granted, 

a footnote must be added to the salary or 

bonus column so disclosing and referring to 

the narrative disclosure to the Summary 

Compensation Table (required by paragraph 

(c) of this Item) where the material terms of 

the award are reported. 

(v) For awards of stock, the aggregate 

grant date fair value computed in 

accordance with FAS 123R (column (e)); 

(vi) For awards of options, with or 

without tandem SARs (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R (column (f)); 

Instructions to Item 402(b)(2)(v) and (vi). 

1. For awards reported in columns (e) and 

(f), include a footnote disclosing all 

assumptions made in the valuation by 

reference to a discussion of those 

assumptions in the small business issuer’s 

financial statements, footnotes to the 

financial statements, or discussion in the 

Management’s Discussion and Analysis. The 

sections so referenced are deemed part of the 

disclosure provided pursuant to this Item. 

2. If at any time during the last completed 

fiscal year, the small business issuer has 

adjusted or amended the exercise price of 

options or SARs previously awarded to a 

named executive officer, whether through 

amendment, cancellation or replacement 

grants, or any other means (‘‘repriced’’), or 

otherwise has materially modified such 

awards, the small business issuer shall 

include, as awards required to be reported in 

column (f), the incremental fair value, 

computed as of the repricing or modification 

date in accordance with FAS 123R, with 

respect to that repriced or modified award. 

(vii) The dollar value of all earnings 

for services performed during the fiscal 

year pursuant to awards under nonequity incentive plans as defined in 

paragraph (a)(5)(iii) of this Item, and all 

earnings on any outstanding awards 

(column (g)); 

Instructions to Item 402(b)(2)(vii). 

1. If the relevant performance measure is 

satisfied during the fiscal year (including for 

a single year in a plan with a multi-year 

performance measure), the earnings are 

reportable for that fiscal year, even if not 

payable until a later date, and are not 

reportable again in the fiscal year when 

amounts are paid to the named executive 

officer. 

2. All earnings on non-equity incentive 

plan compensation must be identified and 

quantified in a footnote to column (g), 

whether the earnings were paid during the 

fiscal year, payable during the period but 

deferred at the election of the named 

executive officer, or payable by their terms at 

a later date. 

(viii) Above-market or preferential 

earnings on compensation that is 

deferred on a basis that is not taxqualified, including such earnings on 

nonqualified defined contribution plans 

(column (h)); 

Instruction to Item 402(b)(2)(viii). 

Interest on deferred compensation is 

above-market only if the rate of interest 

exceeds 120% of the applicable federal longterm rate, with compounding (as prescribed 

under section 1274(d) of the Internal 

Revenue Code, (26 U.S.C. 1274(d))) at the rate 

that corresponds most closely to the rate 

under the small business issuer’s plan at the 

time the interest rate or formula is set. In the 

event of a discretionary reset of the interest 

rate, the requisite calculation must be made 

on the basis of the interest rate at the time 

of such reset, rather than when originally 

established. Only the above-market portion of 

the interest must be included. If the 

applicable interest rates vary depending 

upon conditions such as a minimum period 

of continued service, the reported amount 

should be calculated assuming satisfaction of 

all conditions to receiving interest at the 

highest rate. Dividends (and dividend 

equivalents) on deferred compensation 

denominated in the small business issuer’s 

stock (‘‘deferred stock’’) are preferential only 

if earned at a rate higher than dividends on 

the small business issuer’s common stock. 

Only the preferential portion of the 

dividends or equivalents must be included. 

Footnote or narrative disclosure may be 

provided explaining the small business 

issuer’s criteria for determining any portion 

considered to be above-market. 

(ix) All other compensation for the 

covered fiscal year that the small 

business issuer could not properly 

report in any other column of the 

Summary Compensation Table (column 

(i)). Each compensation item that is not 

properly reportable in columns (c)–(h), 

regardless of the amount of the 

compensation item, must be included in 

column (i). Such compensation must 

include, but is not limited to: 

(A) Perquisites and other personal 

benefits, or property, unless the 

aggregate amount of such compensation 

is less than $10,000; 

(B) All ‘‘gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 

(C) For any security of the small 

business issuer or its subsidiaries 

purchased from the small business 

issuer or its subsidiaries (through 

deferral of salary or bonus, or otherwise) 

at a discount from the market price of 

such security at the date of purchase, 

unless that discount is available 

generally, either to all security holders 

or to all salaried employees of the small 

business issuer, the compensation cost, 

if any, computed in accordance with 

FAS 123R; 

(D) The amount paid or accrued to 

any named executive officer pursuant to 

a plan or arrangement in connection 

with: 

(1) Any termination, including 

without limitation through retirement, 

resignation, severance or constructive 

termination (including a change in 

responsibilities) of such executive 

officer’s employment with the small 

business issuer and its subsidiaries; or 

(2) A change in control of the small 

business issuer; 

(E) Small business issuer 

contributions or other allocations to 

vested and unvested defined 

contribution plans; 

(F) The dollar value of any insurance 

premiums paid by, or on behalf of, the 

small business issuer during the covered 

fiscal year with respect to life insurance 

for the benefit of a named executive 

officer; and 

(G) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 

were not factored into the grant date fair 

value required to be reported for the 

stock or option award in columns (e) or 

(f); and 

Instructions to Item 402(b)(2)(ix). 

1. Non-equity incentive plan awards and 

earnings and earnings on stock or options, 


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except as specified in paragraph (b)(2)(ix)(G) 

of this Item, are required to be reported 

elsewhere as provided in this Item and are 

not reportable as All Other Compensation in 

column (i). 

2. Benefits paid pursuant to defined benefit 

and actuarial plans are not reportable as All 

Other Compensation in column (i) unless 

accelerated pursuant to a change in control; 

information concerning these plans is 

reportable pursuant to paragraph (e)(1) of this 

Item. 

3. Reimbursements of taxes owed with 

respect to perquisites or other personal 

benefits must be included in the columns as 

tax reimbursements (paragraph (b)(2)(ix)(B) 

of this Item) even if the associated perquisites 

or other personal benefits are not required to 

be included because the aggregate amount of 

such compensation is less than $10,000. 

4. Perquisites and other personal benefits 

shall be valued on the basis of the aggregate 

incremental cost to the small business issuer. 

5. For purposes of paragraph (b)(2)(ix)(D) of 

this Item, an accrued amount is an amount 

for which payment has become due. 

(x) The dollar value of total 

compensation for the covered fiscal year 

(column (j)). With respect to each 

named executive officer, disclose the 

sum of all amounts reported in columns 

(c) through (i). 

Instructions to Item 402(b). 

1. Information with respect to the fiscal 

year prior to the last completed fiscal year 

will not be required if the small business 

issuer was not a reporting company pursuant 

to section 13(a) or 15(d) of the Exchange Act 

(15 U.S.C. 78m(a) or 78o(d)) at any time 

during that year, except that the small 

business issuer will be required to provide 

information for any such year if that 

information previously was required to be 

provided in response to a Commission filing 

requirement. 

2. All compensation values reported in the 

Summary Compensation Table must be 

reported in dollars and rounded to the 

nearest dollar. Reported compensation values 

must be reported numerically, providing a 

single numerical value for each grid in the 

table. Where compensation was paid to or 

received by a named executive officer in a 

different currency, a footnote must be 

provided to identify that currency and 

describe the rate and methodology used to 

convert the payment amounts to dollars. 

3. If a named executive officer is also a 

director who receives compensation for his 

or her services as a director, reflect that 

compensation in the Summary Compensation 

Table and provide a footnote identifying and 

itemizing such compensation and amounts. 

Use the categories in the Director 

Compensation Table required pursuant to 

paragraph (f) of this Item. 

4. Any amounts deferred, whether 

pursuant to a plan established under section 

401(k) of the Internal Revenue Code (26 

U.S.C. 401(k)), or otherwise, shall be 

included in the appropriate column for the 

fiscal year in which earned. 

(c) Narrative disclosure to summary 

compensation table. Provide a narrative 

description of any material factors 

necessary to an understanding of the 

information disclosed in the Table 

required by paragraph (b) of this Item. 

Examples of such factors may include, 

in given cases, among other things: 

(1) The material terms of each named 

executive officer’s employment 

agreement or arrangement, whether 

written or unwritten; 

(2) If at any time during the last fiscal 

year, any outstanding option or other 

equity-based award was repriced or 

otherwise materially modified (such as 

by extension of exercise periods, the 

change of vesting or forfeiture 

conditions, the change or elimination of 

applicable performance criteria, or the 

change of the bases upon which returns 

are determined), a description of each 

such repricing or other material 

modification; 

(3) The waiver or modification of any 

specified performance target, goal or 

condition to payout with respect to any 

amount included in non-stock incentive 

plan compensation or payouts reported 

in column (g) to the Summary 

Compensation Table required by 

paragraph (b) of this Item, stating 

whether the waiver or modification 

applied to one or more specified named 

executive officers or to all compensation 

subject to the target, goal or condition; 

(4) The material terms of each grant, 

including but not limited to the date of 

exercisability, any conditions to 

exercisability, any tandem feature, any 

reload feature, any tax-reimbursement 

feature, and any provision that could 

cause the exercise price to be lowered; 

(5) The material terms of any nonequity incentive plan award made to a 

named executive officer during the last 

completed fiscal year, including a 

general description of the formula or 

criteria to be applied in determining the 

amounts payable and vesting schedule; 

(6) The method of calculating 

earnings on nonqualified deferred 

compensation plans including 

nonqualified defined contribution 

plans; and 

(7) An identification to the extent 

material of any item included under All 

Other Compensation (column (i)) in the 

Summary Compensation Table. 

Identification of an item shall not be 

considered material if it does not exceed 

the greater of $25,000 or 10% of all 

items included in the specified category 

in question set forth in paragraph 

(b)(2)(ix) of this Item. All items of 

compensation are required to be 

included in the Summary Compensation 

Table without regard to whether such 

items are required to be identified. 

Instruction to Item 402(c). 

The disclosure required by paragraph (c)(2) 

of this Item would not apply to any repricing 

that occurs through a pre-existing formula or 

mechanism in the plan or award that results 

in the periodic adjustment of the option or 

SAR exercise or base price, an antidilution 

provision in a plan or award, or a 

recapitalization or similar transaction equally 

affecting all holders of the class of securities 

underlying the options or SARs. 

(d) Outstanding equity awards at 

fiscal year-end table. (1) Provide the 

information specified in paragraph 

(d)(2) of this Item, concerning 

unexercised options; stock that has not 

vested; and equity incentive plan 

awards for each named executive officer 

outstanding as of the end of the small 

business issuer’s last completed fiscal 

year in the following tabular format: 


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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name 

Option awards Stock awards 

Number of 

securities 

underlying 

unexercised 

options 

(#) 

exercisable 

Number of 

securities underlying 

unexercised 

options 

(#) 

unexercisable 

Equity 

incentive 

plan 

awards: 

Number of 

securities 

underlying 

unexercised 

unearned 

options 

(#) 

Option 

exercise 

price 

($) 

Option 

expiration 

date 

Number 

of shares 

or units of 

stock that 

have not 

vested 

(#) 

Market 

value of 

shares of 

units of 

stock that 

have not 

vested 

($) 

Equity 

incentive 

plan 

awards: 

Number 

of unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

(#) 

Equity 

incentive 

plan 

awards: 

Market or 

payout 

value of 

unearned 

shares, 

units or 

others 

rights that 

have not 

vested 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

PEO 

A 

B 

(2) The Table shall include: 

(i) The name of the named executive 

officer (column (a)); 

(ii) On an award-by-award basis, the 

number of securities underlying 

unexercised options, including awards 

that have been transferred other than for 

value, that are exercisable and that are 

not reported in column (d) (column (b)); 

(iii) On an award-by-award basis, the 

number of securities underlying 

unexercised options, including awards 

that have been transferred other than for 

value, that are unexercisable and that 

are not reported in column (d) (column 

(c)); 

(iv) On an award-by-award basis, the 

total number of shares underlying 

unexercised options awarded under any 

equity incentive plan that have not been 

earned (column (d)); 

(v) For each instrument reported in 

columns (b), (c) and (d), as applicable, 

the exercise or base price (column (e)); 

(vi) For each instrument reported in 

columns (b), (c) and (d), as applicable, 

the expiration date (column (f)); 

(vii) The total number of shares of 

stock that have not vested and that are 

not reported in column (i) (column (g)); 

(viii) The aggregate market value of 

shares of stock that have not vested and 

that are not reported in column (j) 

(column (h)); 

(ix) The total number of shares of 

stock, units or other rights awarded 

under any equity incentive plan that 

have not vested and that have not been 

earned, and, if applicable the number of 

shares underlying any such unit or right 

(column (i)); and 

(x) The aggregate market or payout 

value of shares of stock, units or other 

rights awarded under any equity 

incentive plan that have not vested and 

that have not been earned (column (j)). 

Instructions to Item 402(d)(2). 

1. Identify by footnote any award that has 

been transferred other than for value, 

disclosing the nature of the transfer. 

2. The vesting dates of options, shares of 

stock and equity incentive plan awards held 

at fiscal-year end must be disclosed by 

footnote to the applicable column where the 

outstanding award is reported. 

3. Compute the market value of stock 

reported in column (h) and equity incentive 

plan awards of stock reported in column (j) 

by multiplying the closing market price of 

the small business issuer’s stock at the end 

of the last completed fiscal year by the 

number of shares or units of stock or the 

amount of equity incentive plan awards, 

respectively. The number of shares or units 

reported in column (d) or (i), and the payout 

value reported in column (j), shall be based 

on achieving threshold performance goals, 

except that if the previous fiscal year’s 

performance has exceeded the threshold, the 

disclosure shall be based on the next higher 

performance measure (target or maximum) 

that exceeds the previous fiscal year’s 

performance. If the award provides only for 

a single estimated payout, that amount 

should be reported. If the target amount is 

not determinable, small business issuers 

must provide a representative amount based 

on the previous fiscal year’s performance. 

4. Multiple awards may be aggregated 

where the expiration date and the exercise 

and/or base price of the instruments is 

identical. A single award consisting of a 

combination of options, SARs and/or similar 

option-like instruments shall be reported as 

separate awards with respect to each tranche 

with a different exercise and/or base price or 

expiration date. 

5. Options or stock awarded under an 

equity incentive plan are reported in 

columns (d) or (i) and (j), respectively, until 

the relevant performance condition has been 

satisfied. Once the relevant performance 

condition has been satisfied, even if the 

option or stock award is subject to forfeiture 

conditions, options are reported in column 

(b) or (c), as appropriate, until they are 

exercised or expire, or stock is reported in 

columns (g) and (h) until it vests. 

(e) Additional narrative disclosure. 

Provide a narrative description of the 

following to the extent material: 

(1) The material terms of each plan 

that provides for the payment of 

retirement benefits, or benefits that will 

be paid primarily following retirement, 

including but not limited to taxqualified defined benefit plans, 

supplemental executive retirement 

plans, tax-qualified defined contribution 

plans and nonqualified defined 

contribution plans. 

(2) The material terms of each 

contract, agreement, plan or 

arrangement, whether written or 

unwritten, that provides for payment(s) 

to a named executive officer at, 

following, or in connection with the 

resignation, retirement or other 

termination of a named executive 

officer, or a change in control of the 

small business issuer or a change in the 

named executive officer’s 

responsibilities following a change in 

control, with respect to each named 

executive officer. 

(f) Compensation of directors. (1) 

Provide the information specified in 


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paragraph (f)(2) of this Item, concerning 

the compensation of the directors for the 

small business issuer’s last completed 

fiscal year, in the following tabular 

format: 

DIRECTOR COMPENSATION

Name 

Fees 

earned or 

paid in 

cash 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-equity 

incentive 

plan 

compensation 

($) 

Nonqualified 

deferred 

compensation 

earnings 

($) 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) 

A 

B 

C 

D 

E 

(2) The Table shall include: 

(i) The name of each director unless 

such director is also a named executive 

officer under paragraph (a) of this Item 

and his or her compensation for service 

as a director is fully reflected in the 

Summary Compensation Table pursuant 

to paragraph (b) of this Item and 

otherwise as required pursuant to 

paragraphs (c) through (e) of this Item 

(column (a)); 

(ii) The aggregate dollar amount of all 

fees earned or paid in cash for services 

as a director, including annual retainer 

fees, committee and/or chairmanship 

fees, and meeting fees (column (b)); 

(iii) For awards of stock, the aggregate 

grant date fair value computed in 

accordance with FAS 123R (column (c)); 

(iv) For awards of options, with or 

without tandem SARs (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R (column (d)); 

Instruction to Item 402(f)(2)(iii) and (iv). 

For each director, disclose by footnote to 

the appropriate column, the aggregate 

number of stock awards and the aggregate 

number of option awards outstanding at 

fiscal year end. 

(v) The dollar value of all earnings for 

services performed during the fiscal 

year pursuant to non-equity incentive 

plans as defined in paragraph (a)(5)(iii) 

of this Item, and all earnings on any 

outstanding awards (column (e)); 

(vi) Above-market or preferential 

earnings on compensation that is 

deferred on a basis that is not taxqualified, including such earnings on 

nonqualified defined contribution plans 

(column (f)); 

(vii) All other compensation for the 

covered fiscal year that the small 

business issuer could not properly 

report in any other column of the 

Director Compensation Table (column 

(g)). Each compensation item that is not 

properly reportable in columns (b)–(f), 

regardless of the amount of the 

compensation item, must be included in 

column (g) and must be identified and 

quantified in a footnote if it is deemed 

material in accordance with paragraph 

(c)(7) of this Item. Such compensation 

must include, but is not limited to: 

(A) Perquisites and other personal 

benefits, or property, unless the 

aggregate amount of such compensation 

is less than $10,000; 

(B) All ‘‘gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 

(C) For any security of the small 

business issuer or its subsidiaries 

purchased from the small business 

issuer or its subsidiaries (through 

deferral of salary or bonus, or otherwise) 

at a discount from the market price of 

such security at the date of purchase, 

unless that discount is available 

generally, either to all security holders 

or to all salaried employees of the small 

business issuer, the compensation cost, 

if any, computed in accordance with 

FAS 123R; 

(D) The amount paid or accrued to 

any director pursuant to a plan or 

arrangement in connection with: 

(1) The resignation, retirement or any 

other termination of such director; or 

(2) A change in control of the small 

business issuer; 

(E) Small business issuer 

contributions or other allocations to 

vested and unvested defined 

contribution plans; 

(F) Consulting fees earned from, or 

paid or payable by the small business 

issuer and/or its subsidiaries (including 

joint ventures); 

(G) The annual costs of payments and 

promises of payments pursuant to 

director legacy programs and similar 

charitable award programs; 

(H) The dollar value of any insurance 

premiums paid by, or on behalf of, the 

small business issuer during the covered 

fiscal year with respect to life insurance 

for the benefit of a director; and 

(I) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 

were not factored into the grant date fair 

value required to be reported for the 

stock or option award in column (c) or 

(d); and 

Instruction to Item 402(f)(2)(vii). 

Programs in which small business issuers 

agree to make donations to one or more 

charitable institutions in a director’s name, 

payable by the small business issuer 

currently or upon a designated event, such as 

the retirement or death of the director, are 

charitable awards programs or director legacy 

programs for purposes of the disclosure 

required by paragraph (f)(2)(vii)(G) of this 

Item. Provide footnote disclosure of the total 

dollar amount payable under the program 

and other material terms of each such 


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program for which tabular disclosure is 

provided. 

(viii) The dollar value of total 

compensation for the covered fiscal year 

(column (h)). With respect to each 

director, disclose the sum of all amounts 

reported in columns (b) through (g). 

Instruction to Item 402(f)(2). 

Two or more directors may be grouped in 

a single row in the Table if all elements of 

their compensation are identical. The names 

of the directors for whom disclosure is 

presented on a group basis should be clear 

from the Table. 

(3) Narrative to director compensation 

table. Provide a narrative description of 

any material factors necessary to an 

understanding of the director 

compensation disclosed in this Table. 

While material factors will vary 

depending upon the facts, examples of 

such factors may include, in given 

cases, among other things: 

(i) A description of standard 

compensation arrangements (such as 

fees for retainer, committee service, 

service as chairman of the board or a 

committee, and meeting attendance); 

and 

(ii) Whether any director has a 

different compensation arrangement, 

identifying that director and describing 

the terms of that arrangement. 

Instruction to Item 402(f). 

In addition to the Instruction to paragraph 

(f)(2)(vii) of this Item, the following apply 

equally to paragraph (f) of this Item: 

Instructions 2 and 4 to paragraph (b) of this 

Item; the Instructions to paragraphs (b)(2)(iii) 

and (iv) of this Item; the Instructions to 

paragraphs (b)(2)(v) and (vi) of this Item; the 

Instructions to paragraph (b)(2)(vii) of this 

Item; the Instruction to paragraph (b)(2)(viii) 

of this Item; the Instructions to paragraph 

(b)(2)(ix) of this Item; and paragraph (c)(7) of 

this Item. These Instructions apply to the 

columns in the Director Compensation Table 

that are analogous to the columns in the 

Summary Compensation Table to which they 

refer and to disclosures under paragraph (f) 

of this Item that correspond to analogous 

disclosures provided for in paragraph (b) of 

this Item to which they refer. 

■ 6. Amend § 228.403 by revising 

paragraph (b) to read as follows: 

§ 228.403 (Item 403) Security ownership of 

certain beneficial owners and management. 

* * * * * 

(b) Security ownership of 

management. Furnish the following 

information, as of the most recent 

practicable date, in substantially the 

tabular form indicated, as to each class 

of equity securities of the small business 

issuer or any of its parents or 

subsidiaries, including directors’

qualifying shares, beneficially owned by 

all directors and nominees, naming 

them, each of the named executive 

officers as defined in Item 402(a)(2) 

(§ 228.402(a)(2)), and directors and 

executive officers of the small business 

issuer as a group, without naming them. 

Show in column (3) the total number of 

shares beneficially owned and in 

column (4) the percent of the class so 

owned. Of the number of shares shown 

in column (3), indicate, by footnote or 

otherwise, the amount of shares that are 

pledged as security and the amount of 

shares with respect to which such 

persons have the right to acquire 

beneficial ownership as specified in 

§ 240.13d–3(d)(1) of this chapter. 

(1) Title of class (2) Name of beneficial owner (3) Amount and nature of 

beneficial ownership (4) Percent of class 

* * * * * 

■ 7. Revise § 228.404 to read as follows: 

§ 228.404 (Item 404) Transactions with 

related persons, promoters and certain 

control persons. 

(a) Transactions with related persons. 

Describe any transaction, since the 

beginning of the small business issuer’s 

last fiscal year, or any currently 

proposed transaction, in which the 

small business issuer was or is to be a 

participant and the amount involved 

exceeds the lesser of $120,000 or one 

percent of the average of the small 

business issuer’s total assets at year-end 

for the last three completed fiscal years, 

and in which any related person had or 

will have a direct or indirect material 

interest. Disclose the following 

information regarding the transaction: 

(1) The name of the related person 

and the basis on which the person is a 

related person. 

(2) The related person’s interest in the 

transaction with the small business 

issuer, including the related person’s 

position(s) or relationship(s) with, or 

ownership in, a firm, corporation, or 

other entity that is a party to, or has an 

interest in, the transaction. 

(3) The approximate dollar value of 

the amount involved in the transaction. 

(4) The approximate dollar value of 

the amount of the related person’s 

interest in the transaction, which shall 

be computed without regard to the 

amount of profit or loss. 

(5) In the case of indebtedness, 

disclosure of the amount involved in the 

transaction shall include the largest 

aggregate amount of principal 

outstanding during the period for which 

disclosure is provided, the amount 

thereof outstanding as of the latest 

practicable date, the amount of 

principal paid during the periods for 

which disclosure is provided, the 

amount of interest paid during the 

period for which disclosure is provided, 

and the rate or amount of interest 

payable on the indebtedness. 

(6) Any other information regarding 

the transaction or the related person in 

the context of the transaction that is 

material to investors in light of the 

circumstances of the particular 

transaction. 

Instructions to Item 404(a). 

1. For the purposes of paragraph (a) of this 

Item, the term related person means: 

a. Any person who was in any of the 

following categories at any time during the 

specified period for which disclosure under 

paragraph (a) of this Item is required: 

i. Any director or executive officer of the 

small business issuer; 

ii. Any nominee for director, when the 

information called for by paragraph (a) of this 

Item is being presented in a proxy or 

information statement relating to the election 

of that nominee for director; or 

iii. Any immediate family member of a 

director or executive officer of the small 

business issuer, or of any nominee for 

director when the information called for by 

paragraph (a) of this Item is being presented 

in a proxy or information statement relating 

to the election of that nominee for director, 

which means any child, stepchild, parent, 

stepparent, spouse, sibling, mother-in-law, 

father-in-law, son-in-law, daughter-in-law, 

brother-in-law, or sister-in-law of such 

director, executive officer or nominee for 

director, and any person (other than a tenant 

or employee) sharing the household of such 

director, executive officer or nominee for 

director; and 

b. Any person who was in any of the 

following categories when a transaction in 

which such person had a direct or indirect 

material interest occurred or existed: 

i. A security holder covered by Item 403(a) 

(§ 228.403(a)); or 

ii. Any immediate family member of any 

such security holder, which means any child, 

stepchild, parent, stepparent, spouse, sibling, 

mother-in-law, father-in-law, son-in-law, 

daughter-in-law, brother-in-law, or sister-inlaw of such security holder, and any person 

(other than a tenant or employee) sharing the 

household of such security holder. 


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2. For purposes of paragraph (a) of this 

Item, a transaction includes, but is not 

limited to, any financial transaction, 

arrangement or relationship (including any 

indebtedness or guarantee of indebtedness) 

or any series of similar transactions, 

arrangements or relationships. 

3. The amount involved in the transaction 

shall be computed by determining the dollar 

value of the amount involved in the 

transaction in question, which shall include: 

a. In the case of any lease or other 

transaction providing for periodic payments 

or installments, the aggregate amount of all 

periodic payments or installments due on or 

after the beginning of the small business 

issuer’s last fiscal year, including any 

required or optional payments due during or 

at the conclusion of the lease or other 

transaction providing for periodic payments 

or installments; and 

b. In the case of indebtedness, the largest 

aggregate amount of all indebtedness 

outstanding at any time since the beginning 

of the small business issuer’s last fiscal year 

and all amounts of interest payable on it 

during the last fiscal year. 

4. In the case of a transaction involving 

indebtedness: 

a. The following items of indebtedness may 

be excluded from the calculation of the 

amount of indebtedness and need not be 

disclosed: amounts due from the related 

person for purchases of goods and services 

subject to usual trade terms, for ordinary 

business travel and expense payments and 

for other transactions in the ordinary course 

of business; 

b. Disclosure need not be provided of any 

indebtedness transaction for the related 

persons specified in Instruction 1.b. to 

paragraph (a) of this Item; and 

c. If the lender is a bank, savings and loan 

association, or broker-dealer extending credit 

under Federal Reserve Regulation T (12 CFR 

part 220) and the loans are not disclosed as 

nonaccrual, past due, restructured or 

potential problems (see Item III.C.1. and 2. of 

Industry Guide 3, Statistical Disclosure by 

Bank Holding Companies (17 CFR 

229.802(c))), disclosure under paragraph (a) 

of this Item may consist of a statement, if 

such is the case, that the loans to such 

persons: 

i. Were made in the ordinary course of 

business; 

ii. Were made on substantially the same 

terms, including interest rates and collateral, 

as those prevailing at the time for comparable 

loans with persons not related to the lender; 

and 

iii. Did not involve more than the normal 

risk of collectibility or present other 

unfavorable features. 

5.a. Disclosure of an employment 

relationship or transaction involving an 

executive officer and any related 

compensation solely resulting from that 

employment relationship or transaction need 

not be provided pursuant to paragraph (a) of 

this Item if: 

i. The compensation arising from the 

relationship or transaction is reported 

pursuant to Item 402 (§ 228.402); or 

ii. The executive officer is not an 

immediate family member (as specified in 

Instruction 1 to paragraph (a) of this Item) 

and such compensation would have been 

reported under Item 402 (§ 228.402) as 

compensation earned for services to the small 

business issuer if the executive officer was a 

named executive officer as that term is 

defined in Item 402(a)(2) (§ 228.402(a)(2)), 

and such compensation had been approved, 

or recommended to the board of directors of 

the small business issuer for approval, by the 

compensation committee of the board of 

directors (or group of independent directors 

performing a similar function) of the small 

business issuer. 

b. Disclosure of compensation to a director 

need not be provided pursuant to paragraph 

(a) of this Item if the compensation is 

reported pursuant to Item 402(f) 

(§ 228.402(f)). 

6. A person who has a position or 

relationship with a firm, corporation, or other 

entity that engages in a transaction with the 

small business issuer shall not be deemed to 

have an indirect material interest within the 

meaning of paragraph (a) of this Item where: 

a. The interest arises only: 

i. From such person’s position as a director 

of another corporation or organization that is 

a party to the transaction; or 

ii. From the direct or indirect ownership by 

such person and all other persons specified 

in Instruction 1 to paragraph (a) of this Item, 

in the aggregate, of less than a ten percent 

equity interest in another person (other than 

a partnership) which is a party to the 

transaction; or 

iii. From both such position and 

ownership; or 

b. The interest arises only from such 

person’s position as a limited partner in a 

partnership in which the person and all other 

persons specified in Instruction 1 to 

paragraph (a) of this Item, have an interest of 

less than ten percent, and the person is not 

a general partner of and does not hold 

another position in the partnership. 

7. Disclosure need not be provided 

pursuant to paragraph (a) of this Item if: 

a. The transaction is one where the rates 

or charges involved in the transaction are 

determined by competitive bids, or the 

transaction involves the rendering of services 

as a common or contract carrier, or public 

utility, at rates or charges fixed in conformity 

with law or governmental authority; 

b. The transaction involves services as a 

bank depositary of funds, transfer agent, 

registrar, trustee under a trust indenture, or 

similar services; or 

c. The interest of the related person arises 

solely from the ownership of a class of equity 

securities of the small business issuer and all 

holders of that class of equity securities of 

the small business issuer received the same 

benefit on a pro rata basis. 

8. Include information for any material 

underwriting discounts and commissions 

upon the sale of securities by the small 

business issuer where any of the specified 

persons was or is to be a principal 

underwriter or is a controlling person or 

member of a firm that was or is to be a 

principal underwriter. 

9. Information shall be given for the period 

specified in paragraph (a) of this Item and, 

in addition, for the fiscal year preceding the 

small business issuer’s last fiscal year. 

(b) Parents. List 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 its immediate 

parent, if any. 

(c) Promoters and control persons. (1) 

Small business issuers that had a 

promoter at any time during the past 

five fiscal years shall: 

(i) State the names of the promoter(s), 

the nature and amount of anything of 

value (including money, property, 

contracts, options or rights of any kind) 

received or to be received by each 

promoter, directly or indirectly, from 

the small business issuer and the nature 

and amount of any assets, services or 

other consideration therefore received 

or to be received by the small business 

issuer; and 

(ii) As to any assets acquired or to be 

acquired by the small business issuer 

from a promoter, state the amount at 

which the assets were acquired or are to 

be acquired and the principle followed 

or to be followed in determining such 

amount, and identify the persons 

making the determination and their 

relationship, if any, with the small 

business issuer or any promoter. If the 

assets were acquired by the promoter 

within two years prior to their transfer 

to the small business issuer, also state 

the cost thereof to the promoter. 

(2) Small business issuers shall 

provide the disclosure required by 

paragraphs (c)(1)(i) and (c)(1)(ii) of this 

Item as to any person who acquired 

control of a small business issuer that is 

a shell company, or any person that is 

part of a group, consisting of two or 

more persons that agree to act together 

for the purpose of acquiring, holding, 

voting or disposing of equity securities 

of a small business issuer, that acquired 

control of a small business issuer that is 

a shell company. For purposes of this 

Item, shell company has the same 

meaning as in Rule 405 under the 

Securities Act (17 CFR 230.405) and 

Rule 12b–2 under the Exchange Act (17 

CFR 240.12b–2). 

■ 8. Add § 228.407 to read as follows: 

§ 228.407 (Item 407) Corporate 

governance. 

(a) Director independence. Identify 

each director and, when the disclosure 

called for by this paragraph is being 

presented in a proxy or information 

statement relating to the election of 

directors, each nominee for director, 

that is independent under the 

independence standards applicable to 

the small business issuer under 

paragraph (a)(1) of this Item. In 

addition, if such independence 

standards contain independence 


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requirements for committees of the 

board of directors, identify each director 

that is a member of the compensation, 

nominating or audit committee that is 

not independent under such committee 

independence standards. If the small 

business issuer does not have a 

separately designated audit, nominating 

or compensation committee or 

committee performing similar functions, 

the small business issuer must provide 

the disclosure of directors that are not 

independent with respect to all 

members of the board of directors 

applying such committee independence 

standards. 

(1) In determining whether or not the 

director or nominee for director is 

independent for the purposes of 

paragraph (a) of this Item, the small 

business issuer shall use the applicable 

definition of independence, as follows: 

(i) If the small business issuer is a 

listed issuer whose securities are listed 

on a national securities exchange or in 

an inter-dealer quotation system which 

has requirements that a majority of the 

board of directors be independent, the 

small business issuer’s definition of 

independence that it uses for 

determining if a majority of the board of 

directors is independent in compliance 

with the listing standards applicable to 

the small business issuer. When 

determining whether the members of a 

committee of the board of directors are 

independent, the small business issuer’s 

definition of independence that it uses 

for determining if the members of that 

specific committee are independent in 

compliance with the independence 

standards applicable for the members of 

the specific committee in the listing 

standards of the national securities 

exchange or inter-dealer quotation 

system that the small business issuer 

uses for determining if a majority of the 

board of directors are independent. If 

the small business issuer does not have 

independence standards for a 

committee, the independence standards 

for that specific committee in the listing 

standards of the national securities 

exchange or inter-dealer quotation 

system that the small business issuer 

uses for determining if a majority of the 

board of directors are independent. 

(ii) If the small business issuer is not 

a listed issuer, a definition of 

independence of a national securities 

exchange or of an inter-dealer quotation 

system which has requirements that a 

majority of the board of directors be 

independent, and state which definition 

is used. Whatever such definition the 

small business issuer chooses, it must 

use the same definition with respect to 

all directors and nominees for director. 

When determining whether the 

members of a specific committee of the 

board of directors are independent, if 

the national securities exchange or 

national securities association whose 

standards are used has independence 

standards for the members of a specific 

committee, use those committee specific 

standards. 

(iii) If the information called for by 

paragraph (a) of this Item is being 

presented in a registration statement on 

Form S–1 (§ 239.11 of this chapter) or 

Form SB–2 (§ 239.10 of this chapter) 

under the Securities Act or on a Form 

10 (§ 249.210 of this chapter) or Form 

10–SB (§ 249.210b of this chapter) under 

the Exchange Act where the small 

business issuer has applied for listing 

with a national securities exchange or in 

an inter-dealer quotation system which 

has requirements that a majority of the 

board of directors be independent, the 

definition of independence that the 

small business issuer uses for 

determining if a majority of the board of 

directors is independent, and the 

definition of independence that the 

small business issuer uses for 

determining if members of the specific 

committee of the board of directors are 

independent, that is in compliance with 

the independence listing standards of 

the national securities exchange or 

inter-dealer quotation system on which 

it has applied for listing, or if the small 

business issuer has not adopted such 

definitions, the independence standards 

for determining if the majority of the 

board of directors is independent and if 

members of the committee of the board 

of directors are independent of that 

national securities exchange or interdealer quotation system. 

(2) If the small business issuer uses its 

own definitions for determining 

whether its directors and nominees for 

director, and members of specific 

committees of the board of directors, are 

independent, disclose whether these 

definitions are available to security 

holders on the small business issuer’s 

Web site. If so, provide the small 

business issuer’s Web site address. If 

not, include a copy of these policies in 

an appendix to the small business 

issuer’s proxy statement or information 

statement that is provided to security 

holders at least once every three fiscal 

years or if the policies have been 

materially amended since the beginning 

of the small business issuer’s last fiscal 

year. If a current copy of the policies is 

not available to security holders on the 

small business issuer’s Web site, and is 

not included as an appendix to the 

small business issuer’s proxy statement 

or information statement, identify the 

most recent fiscal year in which the 

policies were so included in satisfaction 

of this requirement. 

(3) For each director and nominee for 

director that is identified as 

independent, describe, by specific 

category or type, any transactions, 

relationships or arrangements not 

disclosed pursuant to Item 404(a) 

(§ 228.404(a)) that were considered by 

the board of directors under the 

applicable independence definitions in 

determining that the director is 

independent. 

Instructions to Item 407(a). 

1. If the small business issuer is a listed 

issuer whose securities are listed on a 

national securities exchange or in an interdealer quotation system which has 

requirements that a majority of the board of 

directors be independent, and also has 

exemptions to those requirements (for 

independence of a majority of the board of 

directors or committee member 

independence) upon which the small 

business issuer relied, disclose the 

exemption relied upon and explain the basis 

for the small business issuer’s conclusion 

that such exemption is applicable. The same 

disclosure should be provided if the small 

business issuer is not a listed issuer and the 

national securities exchange or inter-dealer 

quotation system selected by the small 

business issuer has exemptions that are 

applicable to the small business issuer. Any 

national securities exchange or inter-dealer 

quotation system which has requirements 

that at least 50 percent of the members of a 

small business issuer’s board of directors 

must be independent shall be considered a 

national securities exchange or inter-dealer 

quotation system which has requirements 

that a majority of the board of directors be 

independent for the purposes of the 

disclosure required by paragraph (a) of this 

Item. 

2. Small business issuers shall provide the 

disclosure required by paragraph (a) of this 

Item for any person who served as a director 

during any part of the last completed fiscal 

year, except that no information called for by 

paragraph (a) of this Item need be given in 

a registration statement filed at a time when 

the small business issuer is not subject to the 

reporting requirements of section 13(a) or 

15(d) of the Exchange Act (15 U.S.C. 78m(a), 

or 78o(d)) respecting any director who is no 

longer a director at the time of effectiveness 

of the registration statement. 

3. The description of the specific categories 

or types of transactions, relationships or 

arrangements required by paragraph (a)(3) of 

this Item must be provided in such detail as 

is necessary to fully describe the nature of 

the transactions, relationships or 

arrangements. 

(b) Board meetings and committees; 

annual meeting attendance. (1) State the 

total number of meetings of the board of 

directors (including regularly scheduled 

and special meetings) which were held 

during the last full fiscal year. Name 

each incumbent director who during the 


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last full fiscal year attended fewer than 

75 percent of the aggregate of: 

(i) The total number of meetings of the 

board of directors (held during the 

period for which he has been a director); 

and 

(ii) The total number of meetings held 

by all committees of the board on which 

he served (during the periods that he 

served). 

(2) Describe the small business 

issuer’s policy, if any, with regard to 

board members’ attendance at annual 

meetings of security holders and state 

the number of board members who 

attended the prior year’s annual 

meeting. 

Instruction to Item 407(b)(2). 

In lieu of providing the information 

required by paragraph (b)(2) of this Item in 

the proxy statement, the small business 

issuer may instead provide the small 

business issuer’s Web site address where 

such information appears. 

(3) State whether or not the small 

business issuer has standing audit, 

nominating and compensation 

committees of the board of directors, or 

committees performing similar 

functions. If the small business issuer 

has such committees, however 

designated, identify each committee 

member, state the number of committee 

meetings held by each such committee 

during the last fiscal year and describe 

briefly the functions performed by each 

such committee. Such disclosure need 

not be provided to the extent it is 

duplicative of disclosure provided in 

accordance with paragraph (c), (d) or (e) 

of this Item. 

(c) Nominating committee. (1) If the 

small business issuer does not have a 

standing nominating committee or 

committee performing similar functions, 

state the basis for the view of the board 

of directors that it is appropriate for the 

small business issuer not to have such 

a committee and identify each director 

who participates in the consideration of 

director nominees. 

(2) Provide the following information 

regarding the small business issuer’s 

director nomination process: 

(i) State whether or not the 

nominating committee has a charter. If 

the nominating committee has a charter, 

provide the disclosure required by 

Instruction 2 to this Item regarding the 

nominating committee charter; 

(ii) If the nominating committee has a 

policy with regard to the consideration 

of any director candidates 

recommended by security holders, 

provide a description of the material 

elements of that policy, which shall 

include, but need not be limited to, a 

statement as to whether the committee 

will consider director candidates 

recommended by security holders; 

(iii) If the nominating committee does 

not have a policy with regard to the 

consideration of any director candidates 

recommended by security holders, state 

that fact and state the basis for the view 

of the board of directors that it is 

appropriate for the small business issuer 

not to have such a policy; 

(iv) If the nominating committee will 

consider candidates recommended by 

security holders, describe the 

procedures to be followed by security 

holders in submitting such 

recommendations; 

(v) Describe any specific minimum 

qualifications that the nominating 

committee believes must be met by a 

nominating committee-recommended 

nominee for a position on the small 

business issuer’s board of directors, and 

describe any specific qualities or skills 

that the nominating committee believes 

are necessary for one or more of the 

small business issuer’s directors to 

possess; 

(vi) Describe the nominating 

committee’s process for identifying and 

evaluating nominees for director, 

including nominees recommended by 

security holders, and any differences in 

the manner in which the nominating 

committee evaluates nominees for 

director based on whether the nominee 

is recommended by a security holder; 

(vii) With regard to each nominee 

approved by the nominating committee 

for inclusion on the small business 

issuer’s proxy card (other than 

nominees who are executive officers or 

who are directors standing for reelection), state which one or more of the 

following categories of persons or 

entities recommended that nominee: 

Security holder, non-management 

director, chief executive officer, other 

executive officer, third-party search 

firm, or other specified source; 

(viii) If the small business issuer pays 

a fee to any third party or parties to 

identify or evaluate or assist in 

identifying or evaluating potential 

nominees, disclose the function 

performed by each such third party; and 

(ix) If the small business issuer’s 

nominating committee received, by a 

date not later than the 120th calendar 

day before the date of the small business 

issuer’s proxy statement released to 

security holders in connection with the 

previous year’s annual meeting, a 

recommended nominee from a security 

holder that beneficially owned more 

than 5% of the small business issuer’s 

voting common stock for at least one 

year as of the date the recommendation 

was made, or from a group of security 

holders that beneficially owned, in the 

aggregate, more than 5% of the small 

business issuer’s voting common stock, 

with each of the securities used to 

calculate that ownership held for at 

least one year as of the date the 

recommendation was made, identify the 

candidate and the security holder or 

security holder group that 

recommended the candidate and 

disclose whether the nominating 

committee chose to nominate the 

candidate, provided, however, that no 

such identification or disclosure is 

required without the written consent of 

both the security holder or security 

holder group and the candidate to be so 

identified. 

Instructions to Item 407(c)(2)(ix). 

1. For purposes of paragraph (c)(2)(ix) of 

this Item, the percentage of securities held by 

a nominating security holder may be 

determined using information set forth in the 

small business issuer’s most recent quarterly 

or annual report, and any current report 

subsequent thereto, filed with the 

Commission pursuant to the Exchange Act, 

unless the party relying on such report 

knows or has reason to believe that the 

information contained therein is inaccurate. 

2. For purposes of the small business 

issuer’s obligation to provide the disclosure 

specified in paragraph (c)(2)(ix) of this Item, 

where the date of the annual meeting has 

been changed by more than 30 days from the 

date of the previous year’s meeting, the 

obligation under that Item will arise where 

the small business issuer receives the 

security holder recommendation a reasonable 

time before the small business issuer begins 

to print and mail its proxy materials. 

3. For purposes of paragraph (c)(2)(ix) of 

this Item, the percentage of securities held by 

a recommending security holder, as well as 

the holding period of those securities, may be 

determined by the small business issuer if 

the security holder is the registered holder of 

the securities. If the security holder is not the 

registered owner of the securities, he or she 

can submit one of the following to the small 

business issuer to evidence the required 

ownership percentage and holding period: 

a. A written statement from the ‘‘record’’

holder of the securities (usually a broker or 

bank) verifying that, at the time the security 

holder made the recommendation, he or she 

had held the required securities for at least 

one year; or 

b. If the security holder has filed a 

Schedule 13D (§ 240.13d-101 of this chapter), 

Schedule 13G (§ 240.13d-102 of this chapter), 

Form 3 (§ 249.103 of this chapter), Form 4 

(§ 249.104 of this chapter), and/or Form 5 

(§ 249.105 of this chapter), or amendments to 

those documents or updated forms, reflecting 

ownership of the securities as of or before the 

date of the recommendation, a copy of the 

schedule and/or form, and any subsequent 

amendments reporting a change in 

ownership level, as well as a written 

statement that the security holder 

continuously held the securities for the oneyear period as of the date of the 

recommendation. 


jlentini on PROD1PC65 with RULES2
53238 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

1Available at http://www.pcaobus.org/standards/ 

interim_standards/auditing_standards/ 

index_au.asp?series=300§ion=300. 

2Available at http://www.pcaobus.org/Standards/ 

Interim_Standards/Independence_Standards/ 

ISB1.pdf. 

4. For purposes of the small business 

issuer’s obligation to provide the disclosure 

specified in paragraph (c)(2)(ix) of this Item, 

the security holder or group must have 

provided to the small business issuer, at the 

time of the recommendation, the written 

consent of all parties to be identified and, 

where the security holder or group members 

are not registered holders, proof that the 

security holder or group satisfied the 

required ownership percentage and holding 

period as of the date of the recommendation. 

Instruction to Item 407(c)(2). 

For purposes of paragraph (c)(2) of this 

Item, the term nominating committee refers 

not only to nominating committees and 

committees performing similar functions, but 

also to groups of directors fulfilling the role 

of a nominating committee, including the 

entire board of directors. 

(3) Describe any material changes to 

the procedures by which security 

holders may recommend nominees to 

the small business issuer’s board of 

directors, where those changes were 

implemented after the small business 

issuer last provided disclosure in 

response to the requirements of 

paragraph (c)(2)(iv) of this Item, or 

paragraph (c)(3) of this Item. 

Instructions to Item 407(c)(3). 

1. The disclosure required in paragraph 

(c)(3) of this Item need only be provided in 

a small business issuer’s quarterly or annual 

reports. 

2. For purposes of paragraph (c)(3) of this 

Item, adoption of procedures by which 

security holders may recommend nominees 

to the small business issuer’s board of 

directors, where the small business issuer’s 

most recent disclosure in response to the 

requirements of paragraph (c)(2)(iv) of this 

Item, or paragraph (c)(3) of this Item, 

indicated that the small business issuer did 

not have in place such procedures, will 

constitute a material change. 

(d) Audit committee. (1) State whether 

or not the audit committee has a charter. 

If the audit committee has a charter, 

provide the disclosure required by 

Instruction 2 to this Item regarding the 

audit committee charter. 

(2) If a listed issuer’s board of 

directors determines, in accordance 

with the listing standards applicable to 

the issuer, to appoint a director to the 

audit committee who is not 

independent (apart from the 

requirements in § 240.10A–3 of this 

chapter), including as a result of 

exceptional or limited or similar 

circumstances, disclose the nature of the 

relationship that makes that individual 

not independent and the reasons for the 

board of directors’ determination. 

(3)(i) The audit committee must state 

whether: 

(A) The audit committee has reviewed 

and discussed the audited financial 

statements with management; 

(B) The audit committee has 

discussed with the independent 

auditors the matters required to be 

discussed by the statement on Auditing 

Standards No. 61, as amended (AICPA, 

Professional Standards, Vol. 1, AU 

section 380),1 as adopted by the Public 

Company Accounting Oversight Board 

in Rule 3200T; 

(C) The audit committee has received 

the written disclosures and the letter 

from the independent accountants 

required by Independence Standards 

Board Standard No. 1 (Independence 

Standards Board Standard No. 1, 

Independence Discussions with Audit 

Committees),2 as adopted by the Public 

Company Accounting Oversight Board 

in Rule 3600T, and has discussed with 

the independent accountant the 

independent accountant’s 

independence; and 

(D) Based on the review and 

discussions referred to in paragraphs 

(d)(3)(i)(A) through (d)(3)(i)(C) of this 

Item, the audit committee recommended 

to the board of directors that the audited 

financial statements be included in the 

company’s annual report on Form 10–

KSB (17 CFR 249.310b) for the last fiscal 

year for filing with the Commission. 

(ii) The name of each member of the 

company’s audit committee (or, in the 

absence of an audit committee, the 

board committee performing equivalent 

functions or the entire board of 

directors) must appear below the 

disclosure required by paragraph 

(d)(3)(i) of this Item. 

(4)(i) If the small business issuer 

meets the following requirements, 

provide the disclosure in paragraph 

(d)(4)(ii) of this Item: 

(A) The small business issuer is a 

listed issuer, as defined in § 240.10A–3 

of this chapter; 

(B) The small business issuer is filing 

either an annual report on Form 10–KSB 

(17 CFR 249.310b), or a proxy statement 

or information statement pursuant to the 

Exchange Act (15 U.S.C. 78a et seq.) if 

action is to be taken with respect to the 

election of directors; and 

(C) The small business issuer is 

neither: 

(1) A subsidiary of another listed 

issuer that is relying on the exemption 

in § 240.10A–3(c)(2) of this chapter; nor 

(2) Relying on any of the exemptions 

in § 240.10A–3(c)(4) through (c)(7) of 

this chapter. 

(ii)(A) State whether or not the small 

business issuer has a separatelydesignated standing audit committee 

established in accordance with section 

3(a)(58)(A) of the Exchange Act (15 

U.S.C. 78c(a)(58)(A)), or a committee 

performing similar functions. If the 

small business issuer has such a 

committee, however designated, 

identify each committee member. If the 

entire board of directors is acting as the 

small business issuer’s audit committee 

as specified in section 3(a)(58)(B) of the 

Exchange Act (15 U.S.C. 78c(a)(58)(B)), 

so state. 

(B) If applicable, provide the 

disclosure required by § 240.10A–3(d) of 

this chapter regarding an exemption 

from the listing standards for audit 

committees. 

(5) Audit committee financial expert. 

(i)(A) Disclose that the small business 

issuer’s board of directors has 

determined that the small business 

issuer either: 

(1) Has at least one audit committee 

financial expert serving on its audit 

committee; or 

(2) Does not have an audit committee 

financial expert serving on its audit 

committee. 

(B) If the small business issuer 

provides the disclosure required by 

paragraph (d)(5)(i)(A)(1) of this Item, it 

must disclose the name of the audit 

committee financial expert and whether 

that person is independent, as 

independence for audit committee 

members is defined in the listing 

standards applicable to the listed issuer. 

(C) If the small business issuer 

provides the disclosure required by 

paragraph (d)(5)(i)(A)(2) of this Item, it 

must explain why it does not have an 

audit committee financial expert. 

Instruction to Item 407(d)(5)(i). 

If the small business issuer’s board of 

directors has determined that the small 

business issuer has more than one audit 

committee financial expert serving on its 

audit committee, the small business issuer 

may, but is not required to, disclose the 

names of those additional persons. A small 

business issuer choosing to identify such 

persons must indicate whether they are 

independent pursuant to paragraph 

(d)(5)(i)(B) of this Item. 

(ii) For purposes of this Item, an audit 

committee financial expert means a 

person who has the following attributes: 

(A) An understanding of generally 

accepted accounting principles and 

financial statements; 

(B) The ability to assess the general 

application of such principles in 

connection with the accounting for 

estimates, accruals and reserves; 

(C) Experience preparing, auditing, 

analyzing or evaluating financial 

statements that present a breadth and 

level of complexity of accounting issues 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53239 

that are generally comparable to the 

breadth and complexity of issues that 

can reasonably be expected to be raised 

by the small business issuer’s financial 

statements, or experience actively 

supervising one or more persons 

engaged in such activities; 

(D) An understanding of internal 

control over financial reporting; and 

(E) An understanding of audit 

committee functions. 

(iii) A person shall have acquired 

such attributes through: 

(A) Education and experience as a 

principal financial officer, principal 

accounting officer, controller, public 

accountant or auditor or experience in 

one or more positions that involve the 

performance of similar functions; 

(B) Experience actively supervising a 

principal financial officer, principal 

accounting officer, controller, public 

accountant, auditor or person 

performing similar functions; 

(C) Experience overseeing or assessing 

the performance of companies or public 

accountants with respect to the 

preparation, auditing or evaluation of 

financial statements; or 

(D) Other relevant experience. 

(iv) Safe harbor. (A) A person who is 

determined to be an audit committee 

financial expert will not be deemed an 

expert for any purpose, including 

without limitation for purposes of 

section 11 of the Securities Act (15 

U.S.C. 77k), as a result of being 

designated or identified as an audit 

committee financial expert pursuant to 

this Item 407. 

(B) The designation or identification 

of a person as an audit committee 

financial expert pursuant to this Item 

407 does not impose on such person any 

duties, obligations or liability that are 

greater than the duties, obligations and 

liability imposed on such person as a 

member of the audit committee and 

board of directors in the absence of such 

designation or identification. 

(C) The designation or identification 

of a person as an audit committee 

financial expert pursuant to this Item 

does not affect the duties, obligations or 

liability of any other member of the 

audit committee or board of directors. 

Instructions to Item 407(d)(5). 

1. The disclosure under paragraph (d)(5) of 

this Item is required only in a small business 

issuer’s annual report. The small business 

issuer need not provide the disclosure 

required by paragraph (d)(5) of this Item in 

a proxy or information statement unless that 

small business issuer is electing to 

incorporate this information by reference 

from the proxy or information statement into 

its annual report pursuant to General 

Instruction E(3) to Form 10–KSB (17 CFR 

249.310b). 

2. If a person qualifies as an audit 

committee financial expert by means of 

having held a position described in 

paragraph (d)(5)(iii)(D) of this Item, the small 

business issuer shall provide a brief listing of 

that person’s relevant experience. Such 

disclosure may be made by reference to 

disclosures required under Item 401(a)(4) 

(§ 228.401(a)(4)). 

3. In the case of a foreign private issuer 

with a two-tier board of directors, for 

purposes of paragraph (d)(5) of this Item, the 

term board of directors means the 

supervisory or non-management board. Also, 

in the case of a foreign private issuer, the 

term generally accepted accounting 

principles in paragraph (d)(5)(ii)(A) of this 

Item means the body of generally accepted 

accounting principles used by that issuer in 

its primary financial statements filed with 

the Commission. 

4. Following the effective date of the first 

registration statement filed under the 

Securities Act (15 U.S.C. 77a et seq.) or 

Exchange Act (15 U.S.C. 78a et seq.) by a 

small business issuer, the small business 

issuer or successor issuer need not make the 

disclosures required by this Item in its first 

annual report filed pursuant to section 13(a) 

or 15(d) (15 U.S.C. 78m(a) or 78o(d)) of the 

Exchange Act after effectiveness. 

Instructions to Item 407(d). 

1. The information required by paragraphs 

(d)(1)–(3) of this Item shall not be deemed to 

be ‘‘soliciting material,’’ or to be ‘‘filed’’ with 

the Commission or subject to Regulation 14A 

or 14C (17 CFR 240.14a–1 through 240.14b–

2 or 240.14c–1 through 240.14c–101), other 

than as provided in this Item, or to the 

liabilities of section 18 of the Exchange Act 

(15 U.S.C. 78r), except to the extent that the 

small business issuer specifically requests 

that the information be treated as soliciting 

material or specifically incorporates it by 

reference into a document filed under the 

Securities Act or the Exchange Act. Such 

information will not be deemed to be 

incorporated by reference into any filing 

under the Securities Act or the Exchange Act, 

except to the extent that the small business 

issuer specifically incorporates it by 

reference. 

2. The disclosure required by paragraphs 

(d)(1)–(3) of this Item need only be provided 

one time during any fiscal year. 

3. The disclosure required by paragraph 

(d)(3) of this Item need not be provided in 

any filings other than a small business 

issuer’s 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). 

(e) Compensation committee. (1) If the 

small business issuer does not have a 

standing compensation committee or 

committee performing similar functions, 

state the basis for the view of the board 

of directors that it is appropriate for the 

small business issuer not to have such 

a committee and identify each director 

who participates in the consideration of 

executive officer and director 

compensation. 

(2) State whether or not the 

compensation committee has a charter. 

If the compensation committee has a 

charter, provide the disclosure required 

by Instruction 2 to this Item regarding 

the compensation committee charter. 

(3) Provide a narrative description of 

the small business issuer’s processes 

and procedures for the consideration 

and determination of executive and 

director compensation, including: 

(i) (A) The scope of authority of the 

compensation committee (or persons 

performing the equivalent functions); 

and 

(B) The extent to which the 

compensation committee (or persons 

performing the equivalent functions) 

may delegate any authority described in 

paragraph (e)(3)(i)(A) of this Item to 

other persons, specifying what authority 

may be so delegated and to whom; 

(ii) Any role of executive officers in 

determining or recommending the 

amount or form of executive and 

director compensation; and 

(iii) Any role of compensation 

consultants in determining or 

recommending the amount or form of 

executive and director compensation, 

identifying such consultants, stating 

whether such consultants are engaged 

directly by the compensation committee 

(or persons performing the equivalent 

functions) or any other person, 

describing the nature and scope of their 

assignment, and the material elements 

of the instructions or directions given to 

the consultants with respect to the 

performance of their duties under the 

engagement. 

(f) Shareholder communications. (1) 

State whether or not the small business 

issuer’s board of directors provides a 

process for security holders to send 

communications to the board of 

directors and, if the small business 

issuer does not have such a process for 

security holders to send 

communications to the board of 

directors, state the basis for the view of 

the board of directors that it is 

appropriate for the small business issuer 

not to have such a process. 

(2) If the small business issuer has a 

process for security holders to send 

communications to the board of 

directors: 

(i) Describe the manner in which 

security holders can send 

communications to the board and, if 

applicable, to specified individual 

directors; and 

(ii) If all security holder 

communications are not sent directly to 

board members, describe the small 

business issuer’s process for 

determining which communications 

will be relayed to board members. 


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53240 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

Instructions to Item 407(f). 

1. In lieu of providing the information 

required by paragraph (f)(2) of this Item in 

the proxy statement, the small business 

issuer may instead provide the small 

business issuer’s Web site address where 

such information appears. 

2. For purposes of the disclosure required 

by paragraph (f)(2)(ii) of this Item, a small 

business issuer’s process for collecting and 

organizing security holder communications, 

as well as similar or related activities, need 

not be disclosed provided that the small 

business issuer’s process is approved by a 

majority of the independent directors. 

3. For purposes of this paragraph, 

communications from an officer or director of 

the small business issuer will not be viewed 

as ‘‘security holder communications.’’

Communications from an employee or agent 

of the small business issuer will be viewed 

as ‘‘security holder communications’’ for 

purposes of this paragraph only if those 

communications are made solely in such 

employee’s or agent’s capacity as a security 

holder. 

4. For purposes of this paragraph, security 

holder proposals submitted pursuant to 

§ 240.14a–8 of this chapter, and 

communications made in connection with 

such proposals, will not be viewed as 

‘‘security holder communications.’’

Instructions to Item 407. 

1. For purposes of this Item: 

a. Listed issuer means a listed issuer as 

defined in § 240.10A–3 of this chapter; 

b. National securities exchange means a 

national securities exchange registered 

pursuant to section 6(a) of the Exchange Act 

(15 U.S.C. 78f(a)); 

c. Inter-dealer quotation system means an 

automated inter-dealer quotation system of a 

national securities association registered 

pursuant to section 15A(a) of the Exchange 

Act (15 U.S.C. 78o–3(a)); and 

d. National securities association means a 

national securities association registered 

pursuant to section 15A(a) of the Exchange 

Act (15 U.S.C. 78o–3(a)) that has been 

approved by the Commission (as that 

definition may be modified or 

supplemented). 

2. With respect to paragraphs (c)(2)(i), 

(d)(1) and (e)(2) of this Item, disclose whether 

a current copy of the applicable committee 

charter is available to security holders on the 

small business issuer’s Web site, and if so, 

provide the small business issuer’s Web site 

address. If a current copy of the charter is not 

available to security holders on the small 

business issuer’s Web site, include a copy of 

the charter in an appendix to the small 

business issuer’s proxy or information 

statement that is provided to security holders 

at least once every three fiscal years, or if the 

charter has been materially amended since 

the beginning of the small business issuer’s 

last fiscal year. If a current copy of the 

charter is not available to security holders on 

the small business issuer’s Web site, and is 

not included as an appendix to the small 

business issuer’s proxy or information 

statement, identify in which of the prior 

fiscal years the charter was so included in 

satisfaction of this requirement. 

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975—

REGULATION S–K 

■ 9. The authority citation for part 229 

continues to read in part as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 

78o, 78u-5, 78w, 78ll, 78mm, 79e, 79j, 79n, 

79t, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 

7201 et seq.; and 18 U.S.C. 1350, unless 

otherwise noted. 

* * * * * 

■ 10. Amend § 229.201 by revising 

Instruction 2 to paragraph (d) and 

adding paragraph (e) before the 

Instructions to Item 201 to read as 

follows: 

§ 229.201 (Item 201) Market price of and 

dividends on the registrant’s common 

equity and related stockholder matters. 

* * * * * 

Instructions to paragraph (d). 

1. * * * 

2. For purposes of this paragraph, an 

‘‘individual compensation arrangement’’

includes, but is not limited to, the following: 

a written compensation contract within the 

meaning of ‘‘employee benefit plan’’ under 

§ 230.405 of this chapter and a plan (whether 

or not set forth in any formal document) 

applicable to one person as provided under 

Item 402(a)(6)(ii) of Regulation S–K 

(§ 229.402(a)(6)(ii)). 

* * * * * 

(e) Performance graph. (1) Provide a 

line graph comparing the yearly 

percentage change in the registrant’s 

cumulative total shareholder return on a 

class of common stock registered under 

section 12 of the Exchange Act (as 

measured by dividing the sum of the 

cumulative amount of dividends for the 

measurement period, assuming 

dividend reinvestment, and the 

difference between the registrant’s share 

price at the end and the beginning of the 

measurement period; by the share price 

at the beginning of the measurement 

period) with: 

(i) The cumulative total return of a 

broad equity market index assuming 

reinvestment of dividends, that includes 

companies whose equity securities are 

traded on the same exchange or are of 

comparable market capitalization; 

provided, however, that if the registrant 

is a company within the Standard & 

Poor’s 500 Stock Index, the registrant 

must use that index; and 

(ii) The cumulative total return, 

assuming reinvestment of dividends, of: 

(A) A published industry or line-ofbusiness index; 

(B) Peer issuer(s) selected in good 

faith. If the registrant does not select its 

peer issuer(s) on an industry or line-ofbusiness basis, the registrant shall 

disclose the basis for its selection; or 

(C) Issuer(s) with similar market 

capitalization(s), but only if the 

registrant does not use a published 

industry or line-of-business index and 

does not believe it can reasonably 

identify a peer group. If the registrant 

uses this alternative, the graph shall be 

accompanied by a statement of the 

reasons for this selection. 

(2) For purposes of paragraph (e)(1) of 

this Item, the term ‘‘measurement 

period’’ shall be the period beginning at 

the ‘‘measurement point’’ established by 

the market close on the last trading day 

before the beginning of the registrant’s 

fifth preceding fiscal year, through and 

including the end of the registrant’s last 

completed fiscal year. If the class of 

securities has been registered under 

section 12 of the Exchange Act (15 

U.S.C. 78l) for a shorter period of time, 

the period covered by the comparison 

may correspond to that time period. 

(3) For purposes of paragraph 

(e)(1)(ii)(A) of this Item, the term 

‘‘published industry or line-of-business 

index’’ means any index that is 

prepared by a party other than the 

registrant or an affiliate and is accessible 

to the registrant’s security holders; 

provided, however, that registrants may 

use an index prepared by the registrant 

or affiliate if such index is widely 

recognized and used. 

(4) If the registrant selects a different 

index from an index used for the 

immediately preceding fiscal year, 

explain the reason(s) for this change and 

also compare the registrant’s total return 

with that of both the newly selected 

index and the index used in the 

immediately preceding fiscal year. 

Instructions to Item 201(e): 

1. In preparing the required graphic 

comparisons, the registrant should: 

a. Use, to the extent feasible, comparable 

methods of presentation and assumptions for 

the total return calculations required by 

paragraph (e)(1) of this Item; provided, 

however, that if the registrant constructs its 

own peer group index under paragraph 

(e)(1)(ii)(B), the same methodology must be 

used in calculating both the registrant’s total 

return and that on the peer group index; and 

b. Assume the reinvestment of dividends 

into additional shares of the same class of 

equity securities at the frequency with which 

dividends are paid on such securities during 

the applicable fiscal year. 

2. In constructing the graph: 

a. The closing price at the measurement 

point must be converted into a fixed 

investment, stated in dollars, in the 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53241 

registrant’s stock (or in the stocks represented 

by a given index) with cumulative returns for 

each subsequent fiscal year measured as a 

change from that investment; and 

b. Each fiscal year should be plotted with 

points showing the cumulative total return as 

of that point. The value of the investment as 

of each point plotted on a given return line 

is the number of shares held at that point 

multiplied by the then-prevailing share price. 

3. The registrant is required to present 

information for the registrant’s last five fiscal 

years, and may choose to graph a longer 

period; but the measurement point, however, 

shall remain the same. 

4. Registrants may include comparisons 

using performance measures in addition to 

total return, such as return on average 

common shareholders’ equity. 

5. If the registrant uses a peer issuer(s) 

comparison or comparison with issuer(s) 

with similar market capitalizations, the 

identity of those issuers must be disclosed 

and the returns of each component issuer of 

the group must be weighted according to the 

respective issuer’s stock market 

capitalization at the beginning of each period 

for which a return is indicated. 

6. A registrant that qualifies as a ‘‘small 

business issuer,’’ as defined by Item 10(a)(1) 

of Regulation S–B (17 CFR 228.10(a)(1)) is 

not required to provide the information 

required by paragraph (e) of this Item. 

7. The information required by paragraph 

(e) of this Item need not be provided in any 

filings other than an annual report to security 

holders required by Exchange Act Rule 14a3 (17 CFR 240.14a-3) or Exchange Act Rule 

14c-3 (17 CFR 240.14c-3) that precedes or 

accompanies a registrant’s 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). 

Such information will not be deemed to be 

incorporated by reference into any filing 

under the Securities Act or the Exchange Act, 

except to the extent that the registrant 

specifically incorporates it by reference. 

8. The information required by paragraph 

(e) of this Item shall not be deemed to be 

‘‘soliciting material’’ or to be ‘‘filed’’ with the 

Commission or subject to Regulation 14A or 

14C (17 CFR 240.14a-1–240.14a-104 or 

240.14c-1–240.14c-101), other than as 

provided in this item, or to the liabilities of 

section 18 of the Exchange Act (15 U.S.C. 

78r), except to the extent that the registrant 

specifically requests that such information be 

treated as soliciting material or specifically 

incorporates it by reference into a filing 

under the Securities Act or the Exchange Act. 

* * * * * 

§ 229.306 [Removed and Reserved] 

■ 11. Remove and reserve § 229.306. 

■ 12. Amend § 229.401 by removing 

paragraphs (h), (i) and (j) and by 

revising paragraph (g)(1) to read as 

follows: 

§ 229.401 (Item 401) Directors, executive 

officers, promoters and control persons. 

* * * * * 

(g) Promoters and control persons. (1) 

Registrants, which have not been subject 

to the reporting requirements of section 

13(a) or 15(d) of the Exchange Act (15 

U.S.C. 78m(a) or 78o(d)) for the twelve 

months immediately prior to the filing 

of the registration statement, report, or 

statement to which this Item is 

applicable, and which had a promoter at 

any time during the past five fiscal 

years, shall describe with respect to any 

promoter, any of the events enumerated 

in paragraphs (f)(1) through (f)(6) of this 

Item that occurred during the past five 

years and that are material to a voting 

or investment decision. 

* * * * * 

■ 13. Revise § 229.402 to read as 

follows: 

§ 229.402 (Item 402) Executive 

compensation. 

(a) General—(1) Treatment of foreign 

private issuers. A foreign private issuer 

will be deemed to comply with this Item 

if it provides the information required 

by Items 6.B and 6.E.2 of Form 20–F (17 

CFR 249.220f), with more detailed 

information provided if otherwise made 

publicly available or required to be 

disclosed by the issuer’s home 

jurisdiction or a market in which its 

securities are listed or traded. 

(2) All compensation covered. This 

Item requires clear, concise and 

understandable disclosure of all plan 

and non-plan compensation awarded to, 

earned by, or paid to the named 

executive officers designated under 

paragraph (a)(3) of this Item, and 

directors covered by paragraph (k) of 

this Item, by any person for all services 

rendered in all capacities to the 

registrant and its subsidiaries, unless 

otherwise specifically excluded from 

disclosure in this Item. All such 

compensation shall be reported 

pursuant to this Item, even if also called 

for by another requirement, including 

transactions between the registrant and 

a third party where a purpose of the 

transaction is to furnish compensation 

to any such named executive officer or 

director. No amount reported as 

compensation for one fiscal year need 

be reported in the same manner as 

compensation for a subsequent fiscal 

year; amounts reported as compensation 

for one fiscal year may be required to be 

reported in a different manner pursuant 

to this Item. 

(3) Persons covered. Disclosure shall 

be provided pursuant to this Item for 

each of the following (the ‘‘named 

executive officers’’): 

(i) All individuals serving as the 

registrant’s principal executive officer or 

acting in a similar capacity during the 

last completed fiscal year (‘‘PEO’’), 

regardless of compensation level; 

(ii) All individuals serving as the 

registrant’s principal financial officer or 

acting in a similar capacity during the 

last completed fiscal year (‘‘PFO’’), 

regardless of compensation level; 

(iii) The registrant’s three most highly 

compensated executive officers other 

than the PEO and PFO who were 

serving as executive officers at the end 

of the last completed fiscal year; and 

(iv) Up to two additional individuals 

for whom disclosure would have been 

provided pursuant to paragraph 

(a)(3)(iii) of this Item but for the fact that 

the individual was not serving as an 

executive officer of the registrant at the 

end of the last completed fiscal year. 

Instructions to Item 402(a)(3). 

1. Determination of most highly 

compensated executive officers. The 

determination as to which executive officers 

are most highly compensated shall be made 

by reference to total compensation for the last 

completed fiscal year (as required to be 

disclosed pursuant to paragraph (c)(2)(x) of 

this Item) reduced by the amount required to 

be disclosed pursuant to paragraph (c)(2)(viii) 

of this Item, provided, however, that no 

disclosure need be provided for any 

executive officer, other than the PEO and 

PFO, whose total compensation, as so 

reduced, does not exceed $100,000. 

2. Inclusion of executive officer of 

subsidiary. It may be appropriate for a 

registrant to include as named executive 

officers one or more executive officers or 

other employees of subsidiaries in the 

disclosure required by this Item. See Rule 

3b–7 under the Exchange Act (17 CFR 

240.3b–7). 

3. Exclusion of executive officer due to 

overseas compensation. It may be 

appropriate in limited circumstances for a 

registrant not to include in the disclosure 

required by this Item an individual, other 

than its PEO or PFO, who is one of the 

registrant’s most highly compensated 

executive officers due to the payment of 

amounts of cash compensation relating to 

overseas assignments attributed 

predominantly to such assignments. 

(4) Information for full fiscal year. If the 

PEO or PFO served in that capacity during 

any part of a fiscal year with respect to which 

information is required, information should 

be provided as to all of his or her 

compensation for the full fiscal year. If a 

named executive officer (other than the PEO 

or PFO) served as an executive officer of the 

registrant (whether or not in the same 

position) during any part of the fiscal year 

with respect to which information is 

required, information shall be provided as to 

all compensation of that individual for the 

full fiscal year. 

(5) Omission of table or column. A table or 

column may be omitted if there has been no 

compensation awarded to, earned by, or paid 

to any of the named executive officers or 

directors required to be reported in that table 

or column in any fiscal year covered by that 

table. 


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(6) Definitions. For purposes of this Item: 

(i) The term stock means instruments such 

as common stock, restricted stock, restricted 

stock units, phantom stock, phantom stock 

units, common stock equivalent units or any 

similar instruments that do not have optionlike features, and the term option means 

instruments such as stock options, stock 

appreciation rights and similar instruments 

with option-like features. The term stock 

appreciation rights (‘‘SARs’’) refers to SARs 

payable in cash or stock, including SARs 

payable in cash or stock at the election of the 

registrant or a named executive officer. The 

term equity is used to refer generally to stock 

and/or options. 

(ii) The term plan includes, but is not 

limited to, the following: Any plan, contract, 

authorization or arrangement, whether or not 

set forth in any formal document, pursuant 

to which cash, securities, similar 

instruments, or any other property may be 

received. A plan may be applicable to one 

person. Registrants may omit information 

regarding group life, health, hospitalization, 

or medical reimbursement plans that do not 

discriminate in scope, terms or operation, in 

favor of executive officers or directors of the 

registrant and that are available generally to 

all salaried employees. 

(iii) The term incentive plan means any 

plan providing compensation intended to 

serve as incentive for performance to occur 

over a specified period, whether such 

performance is measured by reference to 

financial performance of the registrant or an 

affiliate, the registrant’s stock price, or any 

other performance measure. An equity 

incentive plan is an incentive plan or portion 

of an incentive plan under which awards are 

granted that fall within the scope of Financial 

Accounting Standards Board Statement of 

Financial Accounting Standards No. 123 

(revised 2004), Share-Based Payment, as 

modified or supplemented (‘‘FAS 123R’’). A 

non-equity incentive plan is an incentive 

plan or portion of an incentive plan that is 

not an equity incentive plan. The term 

incentive plan award means an award 

provided under an incentive plan. 

(iv) The terms date of grant or grant date 

refer to the grant date determined for 

financial statement reporting purposes 

pursuant to FAS 123R. 

(v) Closing market price is defined as the 

price at which the registrant’s security was 

last sold in the principal United States 

market for such security as of the date for 

which the closing market price is 

determined. 

(b) Compensation discussion and analysis. 

(1) Discuss the compensation awarded to, 

earned by, or paid to the named executive 

officers. The discussion shall explain all 

material elements of the registrant’s 

compensation of the named executive 

officers. The discussion shall describe the 

following: 

(i) The objectives of the registrant’s 

compensation programs; 

(ii) What the compensation program is 

designed to reward; 

(iii) Each element of compensation; 

(iv) Why the registrant chooses to pay each 

element; 

(v) How the registrant determines the 

amount (and, where applicable, the formula) 

for each element to pay; and 

(vi) How each compensation element and 

the registrant’s decisions regarding that 

element fit into the registrant’s overall 

compensation objectives and affect decisions 

regarding other elements. 

(2) While the material information to be 

disclosed under Compensation Discussion 

and Analysis will vary depending upon the 

facts and circumstances, examples of such 

information may include, in a given case, 

among other things, the following: 

(i) The policies for allocating between longterm and currently paid out compensation; 

(ii) The policies for allocating between 

cash and non-cash compensation, and among 

different forms of non-cash compensation; 

(iii) For long-term compensation, the basis 

for allocating compensation to each different 

form of award (such as relationship of the 

award to the achievement of the registrant’s 

long-term goals, management’s exposure to 

downside equity performance risk, 

correlation between cost to registrant and 

expected benefits to the registrant); 

(iv) How the determination is made as to 

when awards are granted, including awards 

of equity-based compensation such as 

options; 

(v) What specific items of corporate 

performance are taken into account in setting 

compensation policies and making 

compensation decisions; 

(vi) How specific forms of compensation 

are structured and implemented to reflect 

these items of the registrant’s performance, 

including whether discretion can be or has 

been 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), 

identifying any particular exercise of 

discretion, and stating whether it applied to 

one or more specified named executive 

officers or to all compensation subject to the 

relevant performance goal(s); 

(vii) How specific forms of compensation 

are structured and implemented to reflect the 

named executive officer’s individual 

performance and/or individual contribution 

to these items of the registrant’s performance, 

describing the elements of individual 

performance and/or contribution that are 

taken into account; 

(viii) Registrant policies and decisions 

regarding the adjustment or recovery of 

awards or payments if the relevant registrant 

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; 

(ix) The factors considered in decisions to 

increase or decrease compensation 

materially; 

(x) 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); 

(xi) With respect to any contract, 

agreement, plan or arrangement, whether 

written or unwritten, that provides for 

payment(s) at, following, or in connection 

with any termination or change-in-control, 

the basis for selecting particular events as 

triggering payment (e.g., the rationale for 

providing a single trigger for payment in the 

event of a change-in-control); 

(xii) The impact of the accounting and tax 

treatments of the particular form of 

compensation; 

(xiii) The registrant’s equity or other 

security ownership requirements or 

guidelines (specifying applicable amounts 

and forms of ownership), and any registrant 

policies regarding hedging the economic risk 

of such ownership; 

(xiv) Whether the registrant 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 

(xv) The role of executive officers in 

determining executive compensation. 

Instructions to Item 402(b). 

1. The purpose of the Compensation 

Discussion and Analysis is to provide to 

investors material information that is 

necessary to an understanding of the 

registrant’s compensation policies and 

decisions regarding the named executive 

officers. 

2. The Compensation Discussion and 

Analysis should be of the information 

contained in the tables and otherwise 

disclosed pursuant to this Item. The 

Compensation Discussion and Analysis 

should also cover actions regarding executive 

compensation that were taken after the 

registrant’s last fiscal year’s 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 officer’s 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. 

3. The Compensation Discussion and 

Analysis should focus on the material 

principles underlying the registrant’s 

executive compensation policies and 

decisions and the most important factors 

relevant to analysis of those policies and 

decisions. The Compensation Discussion and 

Analysis shall reflect the individual 

circumstances of the registrant and shall 

avoid boilerplate language and repetition of 

the more detailed information set forth in the 

tables and narrative disclosures that follow. 

4. Registrants are not required to disclose 

target levels with respect to specific 

quantitative or qualitative performancerelated 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 for the registrant. 

The standard to use when determining 

whether disclosure would cause competitive 

harm for the registrant is the same standard 

that would apply when a registrant requests 

confidential treatment of confidential trade 


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secrets or confidential commercial or 

financial information pursuant to Securities 

Act Rule 406 (17 CFR 230.406) and Exchange 

Act Rule 24b–2 (17 CFR 240.24b–2), each of 

which incorporates the criteria for nondisclosure when relying upon Exemption 4 of 

the Freedom of Information Act (5 U.S.C. 

552(b)(4)) and Rule 80(b)(4) (17 CFR 

200.80(b)(4)) thereunder. A registrant is not 

required to seek confidential treatment under 

the procedures in Securities Act Rule 406 

and Exchange Act Rule 24b-2 if it determines 

that the disclosure would cause competitive 

harm in reliance on this instruction; 

however, in that case, the registrant must 

discuss how difficult it will be for the 

executive or how likely it will be for the 

registrant to achieve the undisclosed target 

levels or other factors. 

5. Disclosure of target levels that are nonGAAP financial measures will not be subject 

to Regulation G (17 CFR 244.100—102) and 

Item 10(e) (§ 229.10(e)); however, disclosure 

must be provided as to how the number is 

calculated from the registrant’s audited 

financial statements. 

(c) Summary compensation table—(1) 

General. Provide the information 

specified in paragraph (c)(2) of this 

Item, concerning the compensation of 

the named executive officers for each of 

the registrant’s last three completed 

fiscal years, in a Summary 

Compensation Table in the tabular 

format specified below. 

SUMMARY COMPENSATION TABLE

Name and principal position Year Salary 

($) 

Bonus 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-equity 

incentive 

plan compensation 

($) 

Change 

in pension value 

and nonqualified 

deferred 

compensation 

earnings 

($) 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

PEO.

PFO.

A.

B.

C.

(2) The Table shall include: 

(i) The name and principal position of 

the named executive officer (column 

(a)); 

(ii) The fiscal year covered (column 

(b)); 

(iii) The dollar value of base salary 

(cash and non-cash) earned by the 

named executive officer during the 

fiscal year covered (column (c)); 

(iv) The dollar value of bonus (cash 

and non-cash) earned by the named 

executive officer during the fiscal year 

covered (column (d)); 

Instructions to Item 402(c)(2)(iii) and (iv). 

1. If the amount of salary or bonus earned 

in a given fiscal year is not calculable 

through the latest practicable date, a footnote 

shall be included disclosing that the amount 

of salary or bonus is not calculable through 

the latest practicable date and providing the 

date that the amount of salary or bonus is 

expected to be determined, and such amount 

must then be disclosed in a filing under Item 

5.02(f) of Form 8–K (17 CFR 249.308). 

2. Registrants need not include in the 

salary column (column (c)) or bonus column 

(column (d)) any amount of salary or bonus 

forgone at the election of a named executive 

officer pursuant to a registrant’s program 

under which stock, equity-based or other 

forms of non-cash compensation may be 

received by a named executive officer instead 

of a portion of annual compensation earned 

in a covered fiscal year. However, the receipt 

of any such form of non-cash compensation 

instead of salary or bonus earned for a 

covered fiscal year must be disclosed in the 

appropriate column of the Summary 

Compensation Table corresponding to that 

fiscal year (e.g., stock awards (column (e)); 

option awards (column (f)); all other 

compensation (column (i))), or, if made 

pursuant to a non-equity incentive plan and 

therefore not reportable in the Summary 

Compensation Table when granted, a 

footnote must be added to the salary or bonus 

column so disclosing and referring to the 

Grants of Plan-Based Awards Table (required 

by paragraph (d) of this Item) where the 

award is reported. 

(v) For awards of stock, the aggregate 

grant date fair value computed in 

accordance with FAS 123R (column (e)); 

(vi) For awards of options, with or 

without tandem SARs (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R (column (f)); 

Instructions to Item 402(c)(2)(v) and (vi). 

1. For awards reported in columns (e) and 

(f), include a footnote disclosing all 

assumptions made in the valuation by 

reference to a discussion of those 

assumptions in the registrant’s financial 

statements, footnotes to the financial 

statements, or discussion in the 

Management’s Discussion and Analysis. The 

sections so referenced are deemed part of the 

disclosure provided pursuant to this Item. 

2. If at any time during the last completed 

fiscal year, the registrant has adjusted or 

amended the exercise price of options or 

SARs previously awarded to a named 

executive officer, whether through 

amendment, cancellation or replacement 


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grants, or any other means (‘‘repriced’’), or 

otherwise has materially modified such 

awards, the registrant shall include, as 

awards required to be reported in column (f), 

the incremental fair value, computed as of 

the repricing or modification date in 

accordance with FAS 123R, with respect to 

that repriced or modified award. 

(vii) The dollar value of all earnings 

for services performed during the fiscal 

year pursuant to awards under nonequity incentive plans as defined in 

paragraph (a)(6)(iii) of this Item, and all 

earnings on any outstanding awards 

(column (g)); 

Instructions to Item 402(c)(2)(vii). 

1. If the relevant performance measure is 

satisfied during the fiscal year (including for 

a single year in a plan with a multi-year 

performance measure), the earnings are 

reportable for that fiscal year, even if not 

payable until a later date, and are not 

reportable again in the fiscal year when 

amounts are paid to the named executive 

officer. 

2. All earnings on non-equity incentive 

plan compensation must be identified and 

quantified in a footnote to column (g), 

whether the earnings were paid during the 

fiscal year, payable during the period but 

deferred at the election of the named 

executive officer, or payable by their terms at 

a later date. 

(viii) The sum of the amounts 

specified in paragraphs (c)(2)(viii)(A) 

and (B) of this Item (column (h)) as 

follows: 

(A) The aggregate change in the 

actuarial present value of the named 

executive officer’s accumulated benefit 

under all defined benefit and actuarial 

pension plans (including supplemental 

plans) from the pension plan 

measurement date used for financial 

statement reporting purposes with 

respect to the registrant’s audited 

financial statements for the prior 

completed fiscal year to the pension 

plan measurement date used for 

financial statement reporting purposes 

with respect to the registrant’s audited 

financial statements for the covered 

fiscal year; and 

(B) Above-market or preferential 

earnings on compensation that is 

deferred on a basis that is not taxqualified, including such earnings on 

nonqualified defined contribution 

plans; 

Instructions to Item 402(c)(2)(viii). 

1. The disclosure required pursuant to 

paragraph (c)(2)(viii)(A) of this Item applies 

to each plan that provides for the payment 

of retirement benefits, or benefits that will be 

paid primarily following retirement, 

including but not limited to tax-qualified 

defined benefit plans and supplemental 

executive retirement plans, but excluding 

tax-qualified defined contribution plans and 

nonqualified defined contribution plans. For 

purposes of this disclosure, the registrant 

should use the same amounts required to be 

disclosed pursuant to paragraph (h)(2)(iv) of 

this Item for the covered fiscal year and the 

amounts that were or would have been 

required to be reported for the executive 

officer pursuant to paragraph (h)(2)(iv) of this 

Item for the prior completed fiscal year. 

2. Regarding paragraph (c)(2)(viii)(B) of this 

Item, interest on deferred compensation is 

above-market only if the rate of interest 

exceeds 120% of the applicable federal longterm rate, with compounding (as prescribed 

under section 1274(d) of the Internal 

Revenue Code, (26 U.S.C. 1274(d))) at the rate 

that corresponds most closely to the rate 

under the registrant’s plan at the time the 

interest rate or formula is set. In the event of 

a discretionary reset of the interest rate, the 

requisite calculation must be made on the 

basis of the interest rate at the time of such 

reset, rather than when originally 

established. Only the above-market portion of 

the interest must be included. If the 

applicable interest rates vary depending 

upon conditions such as a minimum period 

of continued service, the reported amount 

should be calculated assuming satisfaction of 

all conditions to receiving interest at the 

highest rate. Dividends (and dividend 

equivalents) on deferred compensation 

denominated in the registrant’s stock 

(‘‘deferred stock’’) are preferential only if 

earned at a rate higher than dividends on the 

registrant’s common stock. Only the 

preferential portion of the dividends or 

equivalents must be included. Footnote or 

narrative disclosure may be provided 

explaining the registrant’s criteria for 

determining any portion considered to be 

above-market. 

3. The registrant shall identify and quantify 

by footnote the separate amounts attributable 

to each of paragraphs (c)(2)(viii)(A) and (B) 

of this Item. Where such amount pursuant to 

paragraph (c)(2)(viii)(A) is negative, it should 

be disclosed by footnote but should not be 

reflected in the sum reported in column (h). 

(ix) All other compensation for the 

covered fiscal year that the registrant 

could not properly report in any other 

column of the Summary Compensation 

Table (column (i)). Each compensation 

item that is not properly reportable in 

columns (c)–(h), regardless of the 

amount of the compensation item, must 

be included in column (i). Such 

compensation must include, but is not 

limited to: 

(A) Perquisites and other personal 

benefits, or property, unless the 

aggregate amount of such compensation 

is less than $10,000; 

(B) All ‘‘gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 

(C) For any security of the registrant 

or its subsidiaries purchased from the 

registrant or its subsidiaries (through 

deferral of salary or bonus, or otherwise) 

at a discount from the market price of 

such security at the date of purchase, 

unless that discount is available 

generally, either to all security holders 

or to all salaried employees of the 

registrant, the compensation cost, if any, 

computed in accordance with FAS 

123R; 

(D) The amount paid or accrued to 

any named executive officer pursuant to 

a plan or arrangement in connection 

with: 

(1) Any termination, including 

without limitation through retirement, 

resignation, severance or constructive 

termination (including a change in 

responsibilities) of such executive 

officer’s employment with the registrant 

and its subsidiaries; or 

(2) A change in control of the 

registrant; 

(E) Registrant contributions or other 

allocations to vested and unvested 

defined contribution plans; 

(F) The dollar value of any insurance 

premiums paid by, or on behalf of, the 

registrant during the covered fiscal year 

with respect to life insurance for the 

benefit of a named executive officer; and 

(G) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 

were not factored into the grant date fair 

value required to be reported for the 

stock or option award in columns (e) or 

(f); and 

Instructions to Item 402(c)(2)(ix). 

1. Non-equity incentive plan awards and 

earnings and earnings on stock and options, 

except as specified in paragraph (c)(2)(ix)(G) 

of this Item, are required to be reported 

elsewhere as provided in this Item and are 

not reportable as All Other Compensation in 

column (i). 

2. Benefits paid pursuant to defined benefit 

and actuarial plans are not reportable as All 

Other Compensation in column (i) unless 

accelerated pursuant to a change in control; 

information concerning these plans is 

reportable pursuant to paragraphs 

(c)(2)(viii)(A) and (h) of this Item. 

3. Any item reported for a named executive 

officer pursuant to paragraph (c)(2)(ix) of this 

Item that is not a perquisite or personal 

benefit and whose value exceeds $10,000 

must be identified and quantified in a 

footnote to column (i). This requirement 

applies only to compensation for the last 

fiscal year. All items of compensation are 

required to be included in the Summary 

Compensation Table without regard to 

whether such items are required to be 

identified other than as specifically noted in 

this Item. 

4. Perquisites and personal benefits may be 

excluded as long as the total value of all 

perquisites and personal benefits for a named 

executive officer is less than $10,000. If the 

total value of all perquisites and personal 

benefits is $10,000 or more for any named 

executive officer, then each perquisite or 

personal benefit, regardless of its amount, 

must be identified by type. If perquisites and 

personal benefits are required to be reported 

for a named executive officer pursuant to this 

rule, then each perquisite or personal benefit 


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that exceeds the greater of $25,000 or 10% of 

the total amount of perquisites and personal 

benefits for that officer must be quantified 

and disclosed in a footnote. The 

requirements for identification and 

quantification apply only to compensation 

for the last fiscal year. Perquisites and other 

personal benefits shall be valued on the basis 

of the aggregate incremental cost to the 

registrant. With respect to the perquisite or 

other personal benefit for which footnote 

quantification is required, the registrant shall 

describe in the footnote its methodology for 

computing the aggregate incremental cost. 

Reimbursements of taxes owed with respect 

to perquisites or other personal benefits must 

be included in column (i) and are subject to 

separate quantification and identification as 

tax reimbursements (paragraph (c)(2)(ix)(B) of 

this Item) even if the associated perquisites 

or other personal benefits are not required to 

be included because the total amount of all 

perquisites or personal benefits for an 

individual named executive officer is less 

than $10,000 or are required to be identified 

but are not required to be separately 

quantified. 

5. For purposes of paragraph (c)(2)(ix)(D) of 

this Item, an accrued amount is an amount 

for which payment has become due. 

(x) The dollar value of total 

compensation for the covered fiscal year 

(column (j)). With respect to each 

named executive officer, disclose the 

sum of all amounts reported in columns 

(c) through (i). 

Instructions to Item 402(c). 

1. Information with respect to fiscal years 

prior to the last completed fiscal year will not 

be required if the registrant was not a 

reporting company pursuant to section 13(a) 

or 15(d) of the Exchange Act (15 U.S.C. 

78m(a) or 78o(d)) at any time during that 

year, except that the registrant will be 

required to provide information for any such 

year if that information previously was 

required to be provided in response to a 

Commission filing requirement. 

2. All compensation values reported in the 

Summary Compensation Table must be 

reported in dollars and rounded to the 

nearest dollar. Reported compensation values 

must be reported numerically, providing a 

single numerical value for each grid in the 

table. Where compensation was paid to or 

received by a named executive officer in a 

different currency, a footnote must be 

provided to identify that currency and 

describe the rate and methodology used to 

convert the payment amounts to dollars. 

3. If a named executive officer is also a 

director who receives compensation for his 

or her services as a director, reflect that 

compensation in the Summary Compensation 

Table and provide a footnote identifying and 

itemizing such compensation and amounts. 

Use the categories in the Director 

Compensation Table required pursuant to 

paragraph (k) of this Item. 

4. Any amounts deferred, whether 

pursuant to a plan established under section 

401(k) of the Internal Revenue Code (26 

U.S.C. 401(k)), or otherwise, shall be 

included in the appropriate column for the 

fiscal year in which earned. 

(d) Grants of plan-based awards table. 

(1) Provide the information specified in 

paragraph (d)(2) of this Item, concerning 

each grant of an award made to a named 

executive officer in the last completed 

fiscal year under any plan, including 

awards that subsequently have been 

transferred, in the following tabular 

format: 

GRANTS OF PLAN-BASED AWARDS

Name Grant 

date 

Estimated future payouts under 

Non-equity incentive plan awards 

Estimated future payouts under 

equity incentive plan awards All other 

stock 

awards: 

number of 

shares of 

stock or 

units 

(#) 

All other 

option 

awards: 

number of 

securities 

underlying options 

(#) 

Exercise 

or base 

price of 

option 

awards 

($/Sh) 

Threshold 

($) 

Target 

($) 

Maximum 

($) 

Threshold 

(#) 

Target 

(#) 

Maximum 

(#) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) 

PEO 

PFO 

A 

B 

C 

(2) The Table shall include: 

(i) The name of the named executive 

officer (column (a)); 

(ii) The grant date for equity-based 

awards reported in the table (column 

(b)). If such grant date is different than 

the date on which the compensation 

committee (or a committee of the board 

of directors performing a similar 

function or the full board of directors) 

takes action or is deemed to take action 

to grant such awards, a separate, 

adjoining column shall be added 

between columns (b) and (c) showing 

such date; 

(iii) The dollar value of the estimated 

future payout upon satisfaction of the 

conditions in question under non-equity 

incentive plan awards granted in the 

fiscal year, or the applicable range of 

estimated payouts denominated in 

dollars (threshold, target and maximum 

amount) (columns (c) through (e)). 

(iv) The number of shares of stock, or 

the number of shares underlying options 

to be paid out or vested upon 

satisfaction of the conditions in 

question under equity incentive plan 

awards granted in the fiscal year, or the 

applicable range of estimated payouts 

denominated in the number of shares of 

stock, or the number of shares 

underlying options under the award 

(threshold, target and maximum 

amount) (columns (f) through (h)). 

(v) The number of shares of stock 

granted in the fiscal year that are not 

required to be disclosed in columns (f) 

through (h) (column (i)); 

(vi) The number of securities 

underlying options granted in the fiscal 


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year that are not required to be 

disclosed in columns (f) through (h) 

(column (j)); and 

(vii) The per-share exercise or base 

price of the options granted in the fiscal 

year (column (k)). If such exercise or 

base price is less than the closing 

market price of the underlying security 

on the date of the grant, a separate, 

adjoining column showing the closing 

market price on the date of the grant 

shall be added after column (k). 

Instructions to Item 402(d). 

1. Disclosure on a separate line shall be 

provided in the Table for each grant of an 

award made to a named executive officer 

during the fiscal year. If grants of awards 

were made to a named executive officer 

during the fiscal year under more than one 

plan, identify the particular plan under 

which each such grant was made. 

2. For grants of incentive plan awards, 

provide the information called for by 

columns (c), (d) and (e), or (f), (g) and (h), as 

applicable. For columns (c) and (f), threshold 

refers to the minimum amount payable for a 

certain level of performance under the plan. 

For columns (d) and (g), target refers to the 

amount payable if the specified performance 

target(s) are reached. For columns (e) and (h), 

maximum refers to the maximum payout 

possible under the plan. If the award 

provides only for a single estimated payout, 

that amount must be reported as the target in 

columns (d) and (g). In columns (d) and (g), 

registrants must provide a representative 

amount based on the previous fiscal year’s 

performance if the target amount is not 

determinable. 

3. In determining if the exercise or base 

price of an option is less than the closing 

market price of the underlying security on 

the date of the grant, the registrant may use 

either the closing market price as specified in 

paragraph (a)(6)(v) of this Item, or if no 

market exists, any other formula prescribed 

for the security. Whenever the exercise or 

base price reported in column (k) is not the 

closing market price, describe the 

methodology for determining the exercise or 

base price either by a footnote or 

accompanying textual narrative. 

4. A tandem grant of two instruments, only 

one of which is granted under an incentive 

plan, such as an option granted in tandem 

with a performance share, need be reported 

only in column (i) or (j), as applicable. For 

example, an option granted in tandem with 

a performance share would be reported only 

as an option grant in column (j), with the 

tandem feature noted either by a footnote or 

accompanying textual narrative. 

5. Disclose the dollar amount of 

consideration, if any, paid by the executive 

officer for the award in a footnote to the 

appropriate column. 

6. If non-equity incentive plan awards are 

denominated in units or other rights, a 

separate, adjoining column between columns 

(b) and (c) shall be added quantifying the 

units or other rights awarded. 

(e) Narrative disclosure to summary 

compensation table and grants of planbased awards table. (1) Provide a 

narrative description of any material 

factors necessary to an understanding of 

the information disclosed in the tables 

required by paragraphs (c) and (d) of 

this Item. Examples of such factors may 

include, in given cases, among other 

things: 

(i) The material terms of each named 

executive officer’s employment 

agreement or arrangement, whether 

written or unwritten; 

(ii) If at any time during the last fiscal 

year, any outstanding option or other 

equity-based award was repriced or 

otherwise materially modified (such as 

by extension of exercise periods, the 

change of vesting or forfeiture 

conditions, the change or elimination of 

applicable performance criteria, or the 

change of the bases upon which returns 

are determined), a description of each 

such repricing or other material 

modification; 

(iii) The material terms of any award 

reported in response to paragraph (d) of 

this Item, including a general 

description of the formula or criteria to 

be applied in determining the amounts 

payable, and the vesting schedule. For 

example, state where applicable that 

dividends will be paid on stock, and if 

so, the applicable dividend rate and 

whether that rate is preferential. 

Describe any performance-based 

conditions, and any other material 

conditions, that are applicable to the 

award. For purposes of the Table 

required by paragraph (d) of this Item 

and the narrative disclosure required by 

paragraph (e) of this Item, performancebased conditions include both 

performance conditions and market 

conditions, as those terms are defined in 

FAS 123R; and 

(iv) An explanation of the amount of 

salary and bonus in proportion to total 

compensation. 

Instructions to Item 402(e)(1). 

1. The disclosure required by paragraph 

(e)(1)(ii) of this Item would not apply to any 

repricing that occurs through a pre-existing 

formula or mechanism in the plan or award 

that results in the periodic adjustment of the 

option or SAR exercise or base price, an 

antidilution provision in a plan or award, or 

a recapitalization or similar transaction 

equally affecting all holders of the class of 

securities underlying the options or SARs. 

2. Instructions 4 and 5 to Item 402(b) apply 

regarding disclosure pursuant to paragraph 

(e)(1) of this Item of 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 for the registrant. 

(2) [Reserved] 

(f) Outstanding equity awards at fiscal 

year-end table. (1) Provide the 

information specified in paragraph (f)(2) 

of this Item, concerning unexercised 

options; stock that has not vested; and 

equity incentive plan awards for each 

named executive officer outstanding as 

of the end of the registrant’s last 

completed fiscal year in the following 

tabular format: 


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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name 

Option awards Stock awards 

Number of 

securities 

underlying 

unexercised 

options 

(#) exercisable 

Number of 

securities underlying 

unexercised 

options 

(#) 

unexercisable 

Equity incentive plan 

awards: 

number of 

securities 

underlying 

unexercised 

unearned 

options 

(#) 

Option 

exercise 

price 

($) 

Option 

expiration 

date 

Number 

of shares 

or units of 

stock that 

have not 

vested 

(#) 

Market 

value of 

shares or 

units of 

stock that 

have not 

vested 

(#) 

Equity incentive 

plan 

awards: 

number of 

unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

(#) 

Equity incentive 

plan 

awards: 

market or 

payout 

value of 

unearned 

shares, 

units or 

other 

rights that 

have not 

vested 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 

PEO 

PFO 

A 

B 

C 

(2) The Table shall include: 

(i) The name of the named executive 

officer (column (a)); 

(ii) On an award-by-award basis, the 

number of securities underlying 

unexercised options, including awards 

that have been transferred other than for 

value, that are exercisable and that are 

not reported in column (d) (column (b)); 

(iii) On an award-by-award basis, the 

number of securities underlying 

unexercised options, including awards 

that have been transferred other than for 

value, that are unexercisable and that 

are not reported in column (d) (column 

(c)); 

(iv) On an award-by-award basis, the 

total number of shares underlying 

unexercised options awarded under any 

equity incentive plan that have not been 

earned (column (d)); 

(v) For each instrument reported in 

columns (b), (c) and (d), as applicable, 

the exercise or base price (column (e)); 

(vi) For each instrument reported in 

columns (b), (c) and (d), as applicable, 

the expiration date (column (f)); 

(vii) The total number of shares of 

stock that have not vested and that are 

not reported in column (i) (column (g)); 

(viii) The aggregate market value of 

shares of stock that have not vested and 

that are not reported in column (j) 

(column (h)); 

(ix) The total number of shares of 

stock, units or other rights awarded 

under any equity incentive plan that 

have not vested and that have not been 

earned, and, if applicable the number of 

shares underlying any such unit or right 

(column (i)); and 

(x) The aggregate market or payout 

value of shares of stock, units or other 

rights awarded under any equity 

incentive plan that have not vested and 

that have not been earned (column (j)). 

Instructions to Item 402(f)(2). 

1. Identify by footnote any award that has 

been transferred other than for value, 

disclosing the nature of the transfer. 

2. The vesting dates of options, shares of 

stock and equity incentive plan awards held 

at fiscal-year end must be disclosed by 

footnote to the applicable column where the 

outstanding award is reported. 

3. Compute the market value of stock 

reported in column (h) and equity incentive 

plan awards of stock reported in column (j) 

by multiplying the closing market price of 

the registrant’s stock at the end of the last 

completed fiscal year by the number of 

shares or units of stock or the amount of 

equity incentive plan awards, respectively. 

The number of shares or units reported in 

columns (d) or (i), and the payout value 

reported in column (j), shall be based on 

achieving threshold performance goals, 

except that if the previous fiscal year’s 

performance has exceeded the threshold, the 

disclosure shall be based on the next higher 

performance measure (target or maximum) 

that exceeds the previous fiscal year’s 

performance. If the award provides only for 

a single estimated payout, that amount 

should be reported. If the target amount is 

not determinable, registrants must provide a 

representative amount based on the previous 

fiscal year’s performance. 

4. Multiple awards may be aggregated 

where the expiration date and the exercise 

and/or base price of the instruments is 

identical. A single award consisting of a 

combination of options, SARs and/or similar 

option-like instruments shall be reported as 

separate awards with respect to each tranche 

with a different exercise and/or base price or 

expiration date. 

5. Options or stock awarded under an 

equity incentive plan are reported in 

columns (d) or (i) and (j), respectively, until 

the relevant performance condition has been 

satisfied. Once the relevant performance 

condition has been satisfied, even if the 

option or stock award is subject to forfeiture 

conditions, options are reported in column 

(b) or (c), as appropriate, until they are 

exercised or expire, or stock is reported in 

columns (g) and (h) until it vests. 

(g) Option exercises and stock vested 

table. (1) Provide the information 

specified in paragraph (g)(2) of this 

Item, concerning each exercise of stock 

options, SARs and similar instruments, 

and each vesting of stock, including 

restricted stock, restricted stock units 

and similar instruments, during the last 

completed fiscal year for each of the 

named executive officers on an 

aggregated basis in the following tabular 

format: 


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OPTION EXERCISES AND STOCK VESTED

Name 

Option awards Stock awards 

Number of 

shares 

acquired on 

exercise 

(#) 

Value 

realized on 

exercise 

($) 

Number of 

shares 

acquired on 

vesting 

(#) 

Value 

realized on 

vesting 

($) 

(a) (b) (c) (d) (e) 

PEO 

PFO 

A 

B 

C 

(2) The Table shall include: 

(i) The name of the executive officer 

(column (a)); 

(ii) The number of securities for 

which the options were exercised 

(column (b)); 

(iii) The aggregate dollar value 

realized upon exercise of options, or 

upon the transfer of an award for value 

(column (c)); 

(iv) The number of shares of stock that 

have vested (column (d)); and 

(v) The aggregate dollar value realized 

upon vesting of stock, or upon the 

transfer of an award for value (column 

(e)). 

Instruction to Item 402(g)(2). 

Report in column (c) the aggregate dollar 

amount realized by the named executive 

officer upon exercise of the options or upon 

the transfer of such instruments for value. 

Compute the dollar amount realized upon 

exercise by determining the difference 

between the market price of the underlying 

securities at exercise and the exercise or base 

price of the options. Do not include the value 

of any related payment or other consideration 

provided (or to be provided) by the registrant 

to or on behalf of a named executive officer, 

whether in payment of the exercise price or 

related taxes. (Any such payment or other 

consideration provided by the registrant is 

required to be disclosed in accordance with 

paragraph (c)(2)(ix) of this Item.) Report in 

column (e) the aggregate dollar amount 

realized by the named executive officer upon 

the vesting of stock or the transfer of such 

instruments for value. Compute the aggregate 

dollar amount realized upon vesting by 

multiplying the number of shares of stock or 

units by the market value of the underlying 

shares on the vesting date. For any amount 

realized upon exercise or vesting for which 

receipt has been deferred, provide a footnote 

quantifying the amount and disclosing the 

terms of the deferral. 

(h) Pension benefits. (1) Provide the 

information specified in paragraph 

(h)(2) of this Item with respect to each 

plan that provides for payments or other 

benefits at, following, or in connection 

with retirement, in the following tabular 

format: 

PENSION BENEFITS

Name Plan name 

Number of 

years credited service 

(#) 

Present 

value of 

accumulated 

benefit 

($) 

Payments 

during last 

fiscal year 

($) 

(a) (b) (c) (d) (e) 

PEO 

PFO 

A 

B 

C 

(2) The Table shall include: (i) The name of the executive officer 

(column (a)); 

(ii) The name of the plan (column (b)); 


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(iii) The number of years of service 

credited to the named executive officer 

under the plan, computed as of the same 

pension plan measurement date used for 

financial statement reporting purposes 

with respect to the registrant’s audited 

financial statements for the last 

completed fiscal year (column (c)); 

(iv) The actuarial present value of the 

named executive officer’s accumulated 

benefit under the plan, computed as of 

the same pension plan measurement 

date used for financial statement 

reporting purposes with respect to the 

registrant’s audited financial statements 

for the last completed fiscal year 

(column (d)); and 

(v) The dollar amount of any 

payments and benefits paid to the 

named executive officer during the 

registrant’s last completed fiscal year 

(column (e)). 

Instructions to Item 402(h)(2). 

1. The disclosure required pursuant to this 

Table applies to each plan that provides for 

specified retirement payments and benefits, 

or payments and benefits that will be 

provided primarily following retirement, 

including but not limited to tax-qualified 

defined benefit plans and supplemental 

executive retirement plans, but excluding 

tax-qualified defined contribution plans and 

nonqualified defined contribution plans. 

Provide a separate row for each such plan in 

which the named executive officer 

participates. 

2. For purposes of the amount(s) reported 

in column (d), the registrant must use the 

same assumptions used for financial 

reporting purposes under generally accepted 

accounting principles, except that retirement 

age shall be assumed to be the normal 

retirement age as defined in the plan, or if 

not so defined, the earliest time at which a 

participant may retire under the plan without 

any benefit reduction due to age. The 

registrant must disclose in the accompanying 

textual narrative the valuation method and 

all material assumptions applied in 

quantifying the present value of the current 

accrued benefit. A benefit specified in the 

plan document or the executive’s contract 

itself is not an assumption. Registrants may 

satisfy all or part of this disclosure by 

reference to a discussion of those 

assumptions in the registrant’s financial 

statements, footnotes to the financial 

statements, or discussion in the 

Management’s Discussion and Analysis. The 

sections so referenced are deemed part of the 

disclosure provided pursuant to this Item. 

3. For purposes of allocating the current 

accrued benefit between tax qualified defined 

benefit plans and related supplemental plans, 

apply the limitations applicable to tax 

qualified defined benefit plans established by 

the Internal Revenue Code and the 

regulations thereunder that applied as of the 

pension plan measurement date. 

4. If a named executive officer’s number of 

years of credited service with respect to any 

plan is different from the named executive 

officer’s number of actual years of service 

with the registrant, provide footnote 

disclosure quantifying the difference and any 

resulting benefit augmentation. 

(3) Provide a succinct narrative 

description of any material factors 

necessary to an understanding of each 

plan covered by the tabular disclosure 

required by this paragraph. While 

material factors will vary depending 

upon the facts, examples of such factors 

may include, in given cases, among 

other things: 

(i) The material terms and conditions 

of payments and benefits available 

under the plan, including the plan’s 

normal retirement payment and benefit 

formula and eligibility standards, and 

the effect of the form of benefit elected 

on the amount of annual benefits. For 

this purpose, normal retirement means 

retirement at the normal retirement age 

as defined in the plan, or if not so 

defined, the earliest time at which a 

participant may retire under the plan 

without any benefit reduction due to 

age; 

(ii) If any named executive officer is 

currently eligible for early retirement 

under any plan, identify that named 

executive officer and the plan, and 

describe the plan’s early retirement 

payment and benefit formula and 

eligibility standards. For this purpose, 

early retirement means retirement at the 

early retirement age as defined in the 

plan, or otherwise available to the 

executive under the plan; 

(iii) The specific elements of 

compensation (e.g., salary, bonus, etc.) 

included in applying the payment and 

benefit formula, identifying each such 

element; 

(iv) With respect to named executive 

officers’ participation in multiple plans, 

the different purposes for each plan; and 

(v) Registrant policies with regard to 

such matters as granting extra years of 

credited service. 

(i) Nonqualified defined contribution 

and other nonqualified deferred 

compensation plans. (1) Provide the 

information specified in paragraph (i)(2) 

of this Item with respect to each defined 

contribution or other plan that provides 

for the deferral of compensation on a 

basis that is not tax-qualified in the 

following tabular format: 

NONQUALIFIED DEFERRED COMPENSATION

Name 

Executive 

contributions 

in last FY 

($) 

Registrant 

contributions 

in ast FY 

($) 

Aggregate 

earnings in 

last FY 

($) 

Aggregate 

withdrawals/ 

distributions 

($) 

Aggregate 

balance at 

last FYE 

($) 

(a) (b) (c) (d) (e) (f) 

PEO 

PFO 

A 

B 

C 

(2) The Table shall include: 

(i) The name of the executive officer 

(column (a)); 

(ii) The dollar amount of aggregate 

executive contributions during the 

registrant’s last fiscal year (column (b)); 

(iii) The dollar amount of aggregate 

registrant contributions during the 

registrant’s last fiscal year (column (c)); 


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(iv) The dollar amount of aggregate 

interest or other earnings accrued 

during the registrant’s last fiscal year 

(column (d)); 

(v) The aggregate dollar amount of all 

withdrawals by and distributions to the 

executive during the registrant’s last 

fiscal year (column (e)); and 

(vi) The dollar amount of total balance 

of the executive’s account as of the end 

of the registrant’s last fiscal year 

(column (f)). 

Instruction to Item 402(i)(2). 

Provide a footnote quantifying the extent to 

which amounts reported in the contributions 

and earnings columns are reported as 

compensation in the last completed fiscal 

year in the registrant’s Summary 

Compensation Table and amounts reported 

in the aggregate balance at last fiscal year end 

(column (f)) previously were reported as 

compensation to the named executive officer 

in the registrant’s Summary Compensation 

Table for previous years. 

(3) Provide a succinct narrative 

description of any material factors 

necessary to an understanding of each 

plan covered by tabular disclosure 

required by this paragraph. While 

material factors will vary depending 

upon the facts, examples of such factors 

may include, in given cases, among 

other things: 

(i) The type(s) of compensation 

permitted to be deferred, and any 

limitations (by percentage of 

compensation or otherwise) on the 

extent to which deferral is permitted; 

(ii) The measures for calculating 

interest or other plan earnings 

(including whether such measure(s) are 

selected by the executive or the 

registrant and the frequency and manner 

in which selections may be changed), 

quantifying interest rates and other 

earnings measures applicable during the 

registrant’s last fiscal year; and 

(iii) Material terms with respect to 

payouts, withdrawals and other 

distributions. 

(j) Potential payments upon 

termination or change-in-control. 

Regarding each contract, agreement, 

plan or arrangement, whether written or 

unwritten, that provides for payment(s) 

to a named executive officer at, 

following, or in connection with any 

termination, including without 

limitation resignation, severance, 

retirement or a constructive termination 

of a named executive officer, or a 

change in control of the registrant or a 

change in the named executive officer’s 

responsibilities, with respect to each 

named executive officer: 

(1) Describe and explain the specific 

circumstances that would trigger 

payment(s) or the provision of other 

benefits, including perquisites and 

health care benefits; 

(2) Describe and quantify the 

estimated payments and benefits that 

would be provided in each covered 

circumstance, whether they would or 

could be lump sum, or annual, 

disclosing the duration, and by whom 

they would be provided; 

(3) Describe and explain how the 

appropriate payment and benefit levels 

are determined under the various 

circumstances that trigger payments or 

provision of benefits; 

(4) Describe and explain any material 

conditions or obligations applicable to 

the receipt of payments or benefits, 

including but not limited to noncompete, non-solicitation, nondisparagement or confidentiality 

agreements, including the duration of 

such agreements and provisions 

regarding waiver of breach of such 

agreements; and 

(5) Describe any other material factors 

regarding each such contract, 

agreement, plan or arrangement. 

Instructions to Item 402(j). 

1. The registrant must provide quantitative 

disclosure under these requirements, 

applying the assumptions that the triggering 

event took place on the last business day of 

the registrant’s last completed fiscal year, and 

the price per share of the registrant’s 

securities is the closing market price as of 

that date. In the event that uncertainties exist 

as to the provision of payments and benefits 

or the amounts involved, the registrant is 

required to make a reasonable estimate (or a 

reasonable estimated range of amounts) 

applicable to the payment or benefit and 

disclose material assumptions underlying 

such estimates or estimated ranges in its 

disclosure. In such event, the disclosure 

would require forward-looking information 

as appropriate. 

2. Perquisites and other personal benefits 

or property may be excluded only if the 

aggregate amount of such compensation will 

be less than $10,000. Individual perquisites 

and personal benefits shall be identified and 

quantified as required by Instruction 4 to 

paragraph (c)(2)(ix) of this Item. For purposes 

of quantifying health care benefits, the 

registrant must use the assumptions used for 

financial reporting purposes under generally 

accepted accounting principles. 

3. To the extent that the form and amount 

of any payment or benefit that would be 

provided in connection with any triggering 

event is fully disclosed pursuant to 

paragraph (h) or (i) of this Item, reference 

may be made to that disclosure. However, to 

the extent that the form or amount of any 

such payment or benefit would be enhanced 

or its vesting or other provisions accelerated 

in connection with any triggering event, such 

enhancement or acceleration must be 

disclosed pursuant to this paragraph. 

4. Where a triggering event has actually 

occurred for a named executive officer and 

that individual was not serving as a named 

executive officer of the registrant at the end 

of the last completed fiscal year, the 

disclosure required by this paragraph for that 

named executive officer shall apply only to 

that triggering event. 

5. The registrant need not provide 

information with respect to contracts, 

agreements, plans or arrangements to the 

extent they do not discriminate in scope, 

terms or operation, in favor of executive 

officers of the registrant and that are available 

generally to all salaried employees. 

(k) Compensation of directors. (1) 

Provide the information specified in 

paragraph (k)(2) of this Item, concerning 

the compensation of the directors for the 

registrant’s last completed fiscal year, in 

the following tabular format: 

DIRECTOR COMPENSATION

Name 

Fees earned 

or paid in 

cash 

($) 

Stock awards 

($) 

Option 

awards 

($) 

Non-equity 

incentive 

plan compensation 

($) 

Change in 

pension 

value and 

nonqualified 

deferred 

compensation earnings 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) 

A 

B 


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DIRECTOR COMPENSATION—Continued 

Name 

Fees earned 

or paid in 

cash 

($) 

Stock awards 

($) 

Option 

awards 

($) 

Non-equity 

incentive 

plan compensation 

($) 

Change in 

pension 

value and 

nonqualified 

deferred 

compensation earnings 

All other 

compensation 

($) 

Total 

($) 

(a) (b) (c) (d) (e) (f) (g) (h) 

C 

D 

E 

(2) The Table shall include: 

(i) The name of each director unless 

such director is also a named executive 

officer under paragraph (a) of this Item 

and his or her compensation for service 

as a director is fully reflected in the 

Summary Compensation Table pursuant 

to paragraph (c) of this Item and 

otherwise as required pursuant to 

paragraphs (d) through (j) of this Item 

(column (a)); 

(ii) The aggregate dollar amount of all 

fees earned or paid in cash for services 

as a director, including annual retainer 

fees, committee and/or chairmanship 

fees, and meeting fees (column (b)); 

(iii) For awards of stock, the aggregate 

grant date fair value computed in 

accordance with FAS 123R (column (c)); 

(iv) For awards of stock options, with 

or without tandem SARs (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R (column (d)); 

Instruction to Item 402(k)(2)(iii) and (iv). 

For each director, disclose by footnote to 

the appropriate column, the aggregate 

number of stock awards and the aggregate 

number of option awards outstanding at 

fiscal year end. 

(v) The dollar value of all earnings for 

services performed during the fiscal year 

pursuant to non-equity incentive plans as 

defined in paragraph (a)(6)(iii) of this Item, 

and all earnings on any outstanding awards 

(column (e)); 

(vi) The sum of the amounts specified in 

paragraphs (k)(2)(vi)(A) and (B) of this Item 

(column (f)) as follows: 

(A) The aggregate change in the actuarial 

present value of the director’s accumulated 

benefit under all defined benefit and 

actuarial pension plans (including 

supplemental plans) from the pension plan 

measurement date used for financial 

statement reporting purposes with respect to 

the registrant’s audited financial statements 

for the prior completed fiscal year to the 

pension plan measurement date used for 

financial statement reporting purposes with 

respect to the registrant’s audited financial 

statements for the covered fiscal year; and 

(B) Above-market or preferential earnings 

on compensation that is deferred on a basis 

that is not tax-qualified, including such 

earnings on nonqualified defined 

contribution plans; 

(vii) All other compensation for the 

covered fiscal year that the registrant could 

not properly report in any other column of 

the Director Compensation Table (column 

(g)). Each compensation item that is not 

properly reportable in columns (b)–(f), 

regardless of the amount of the compensation 

item, must be included in column (g). Such 

compensation must include, but is not 

limited to: 

(A) Perquisites and other personal benefits, 

or property, unless the aggregate amount of 

such compensation is less than $10,000; 

(B) All ‘‘gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 

(C) For any security of the registrant or its 

subsidiaries purchased from the registrant or 

its subsidiaries (through deferral of salary or 

bonus, or otherwise) at a discount from the 

market price of such security at the date of 

purchase, unless that discount is available 

generally, either to all security holders or to 

all salaried employees of the registrant, the 

compensation cost, if any, computed in 

accordance with FAS 123R; 

(D) The amount paid or accrued to any 

director pursuant to a plan or arrangement in 

connection with: 

(1) The resignation, retirement or any other 

termination of such director; or 

(2) A change in control of the registrant; 

(E) Registrant contributions or other 

allocations to vested and unvested defined 

contribution plans; 

(F) Consulting fees earned from, or paid or 

payable by the registrant and/or its 

subsidiaries (including joint ventures); 

(G) The annual costs of payments and 

promises of payments pursuant to director 

legacy programs and similar charitable award 

programs; 

(H) The dollar value of any insurance 

premiums paid by, or on behalf of, the 

registrant during the covered fiscal year with 

respect to life insurance for the benefit of a 

director; and 

(I) The dollar value of any dividends or 

other earnings paid on stock or option 

awards, when those amounts were not 

factored into the grant date fair value 

required to be reported for the stock or option 

award in column (c) or (d); and 

Instructions to Item 402(k)(2)(vii). 

1. Programs in which registrants agree to 

make donations to one or more charitable 

institutions in a director’s name, payable by 

the registrant currently or upon a designated 

event, such as the retirement or death of the 

director, are charitable awards programs or 

director legacy programs for purposes of the 

disclosure required by paragraph 

(k)(2)(vii)(G) of this Item. Provide footnote 

disclosure of the total dollar amount payable 

under the program and other material terms 

of each such program for which tabular 

disclosure is provided. 

2. Any item reported for a director 

pursuant to paragraph (k)(2)(vii) of this Item 

that is not a perquisite or personal benefit 

and whose value exceeds $10,000 must be 

identified and quantified in a footnote to 

column (g). All items of compensation are 

required to be included in the Director 

Compensation Table without regard to 

whether such items are required to be 

identified other than as specifically noted in 

this Item. 

3. Perquisites and personal benefits may be 

excluded as long as the total value of all 

perquisites and personal benefits for a 

director is less than $10,000. If the total value 

of all perquisites and personal benefits is 

$10,000 or more for any director, then each 

perquisite or personal benefit, regardless of 

its amount, must be identified by type. If 

perquisites and personal benefits are required 

to be reported for a director pursuant to this 

rule, then each perquisite or personal benefit 

that exceeds the greater of $25,000 or 10% of 

the total amount of perquisites and personal 

benefits for that director must be quantified 

and disclosed in a footnote. Perquisites and 

other personal benefits shall be valued on the 

basis of the aggregate incremental cost to the 

registrant. With respect to the perquisite or 

other personal benefit for which footnote 

quantification is required, the registrant shall 

describe in the footnote its methodology for 

computing the aggregate incremental cost. 

Reimbursements of taxes owed with respect 

to perquisites or other personal benefits must 


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be included in column (g) and are subject to 

separate quantification and identification as 

tax reimbursements (paragraph (k)(2)(vii)(B) 

of this Item) even if the associated perquisites 

or other personal benefits are not required to 

be included because the total amount of all 

perquisites or personal benefits for an 

individual director is less than $10,000 or are 

required to be identified but are not required 

to be separately quantified. 

(viii) The dollar value of total 

compensation for the covered fiscal year 

(column (h)). With respect to each 

director, disclose the sum of all amounts 

reported in columns (b) through (g). 

Instruction to Item 402(k)(2). 

Two or more directors may be grouped in 

a single row in the Table if all elements of 

their compensation are identical. The names 

of the directors for whom disclosure is 

presented on a group basis should be clear 

from the Table. 

(3) Narrative to director compensation 

table. Provide a narrative description of 

any material factors necessary to an 

understanding of the director 

compensation disclosed in this Table. 

While material factors will vary 

depending upon the facts, examples of 

such factors may include, in given 

cases, among other things: 

(i) A description of standard 

compensation arrangements (such as 

fees for retainer, committee service, 

service as chairman of the board or a 

committee, and meeting attendance); 

and 

(ii) Whether any director has a 

different compensation arrangement, 

identifying that director and describing 

the terms of that arrangement. 

Instruction to Item 402(k). 

In addition to the Instructions to paragraph 

(k)(2)(vii) of this Item, the following apply 

equally to paragraph (k) of this Item: 

Instructions 2 and 4 to paragraph (c) of this 

Item; Instructions to paragraphs (c)(2)(iii) and 

(iv) of this Item; Instructions to paragraphs 

(c)(2)(v) and (vi) of this Item; Instructions to 

paragraph (c)(2)(vii) of this Item; and 

Instructions to paragraph (c)(2)(viii) of this 

Item. These Instructions apply to the 

columns in the Director Compensation Table 

that are analogous to the columns in the 

Summary Compensation Table to which they 

refer and to disclosures under paragraph (k) 

of this Item that correspond to analogous 

disclosures provided for in paragraph (c) of 

this Item to which they refer. 

Instruction to Item 402. Specify the 

applicable fiscal year in the title to each table 

required under this Item which calls for 

disclosure as of or for a completed fiscal year. 

■ 14. Amend § 229.403 by revising 

paragraph (b) to read as follows: 

§ 229.403 (Item 403) Security ownership of 

certain beneficial owners and management. 

* * * * * 

(b) Security ownership of 

management. Furnish the following 

information, as of the most recent 

practicable date, in substantially the 

tabular form indicated, as to each class 

of equity securities of the registrant or 

any of its parents or subsidiaries, 

including directors’ qualifying shares, 

beneficially owned by all directors and 

nominees, naming them, each of the 

named executive officers as defined in 

Item 402(a)(3) (§ 229.402(a)(3)), and 

directors and executive officers of the 

registrant as a group, without naming 

them. Show in column (3) the total 

number of shares beneficially owned 

and in column (4) the percent of the 

class so owned. Of the number of shares 

shown in column (3), indicate, by 

footnote or otherwise, the amount of 

shares that are pledged as security and 

the amount of shares with respect to 

which such persons have the right to 

acquire beneficial ownership as 

specified in § 240.13d–3(d)(1) of this 

chapter. 

(1) 

Title of 

class 

(2) 

Name of 

beneficial 

owner 

(3) 

Amount 

and nature of 

beneficial 

ownership 

(4) 

Percent 

of class 

* * * * * 

■ 15. Revise § 229.404 to read as 

follows: 

§ 229.404 (Item 404) Transactions with 

related persons, promoters and certain 

control persons. 

(a) Transactions with related persons. 

Describe any transaction, since the 

beginning of the registrant’s last fiscal 

year, or any currently proposed 

transaction, in which the registrant was 

or is to be a participant and the amount 

involved exceeds $120,000, and in 

which any related person had or will 

have a direct or indirect material 

interest. Disclose the following 

information regarding the tranaction: 

(1) The name of the related person 

and the basis on which the person is a 

related person. 

(2) The related person’s interest in the 

transaction with the registrant, 

including the related person’s 

position(s) or relationship(s) with, or 

ownership in, a firm, corporation, or 

other entity that is a party to, or has an 

interest in, the transaction. 

(3) The approximate dollar value of 

the amount involved in the transaction. 

(4) The approximate dollar value of 

the amount of the related person’s 

interest in the transaction, which shall 

be computed without regard to the 

amount of profit or loss. 

(5) In the case of indebtedness, 

disclosure of the amount involved in the 

transaction shall include the largest 

aggregate amount of principal 

outstanding during the period for which 

disclosure is provided, the amount 

thereof outstanding as of the latest 

practicable date, the amount of 

principal paid during the periods for 

which disclosure is provided, the 

amount of interest paid during the 

period for which disclosure is provided, 

and the rate or amount of interest 

payable on the indebtedness. 

(6) Any other information regarding 

the transaction or the related person in 

the context of the transaction that is 

material to investors in light of the 

circumstances of the particular 

transaction. 

Instructions to Item 404(a). 

1. For the purposes of paragraph (a) of this 

Item, the term related person means: 

a. Any person who was in any of the 

following categories at any time during the 

specified period for which disclosure under 

paragraph (a) of this Item is required: 

i. Any director or executive officer of the 

registrant; 

ii. Any nominee for director, when the 

information called for by paragraph (a) of this 

Item is being presented in a proxy or 

information statement relating to the election 

of that nominee for director; or 

iii. Any immediate family member of a 

director or executive officer of the registrant, 

or of any nominee for director when the 

information called for by paragraph (a) of this 

Item is being presented in a proxy or 

information statement relating to the election 

of that nominee for director, which means 

any child, stepchild, parent, stepparent, 

spouse, sibling, mother-in-law, father-in-law, 

son-in-law, daughter-in-law, brother-in-law, 

or sister-in-law of such director, executive 

officer or nominee for director, and any 

person (other than a tenant or employee) 

sharing the household of such director, 

executive officer or nominee for director; and 

b. Any person who was in any of the 

following categories when a transaction in 

which such person had a direct or indirect 

material interest occurred or existed: 

i. A security holder covered by Item 403(a) 

(§ 229.403(a)); or 

ii. Any immediate family member of any 

such security holder, which means any child, 

stepchild, parent, stepparent, spouse, sibling, 

mother-in-law, father-in-law, son-in-law, 

daughter-in-law, brother-in-law, or sister-inlaw of such security holder, and any person 

(other than a tenant or employee) sharing the 

household of such security holder. 

2. For purposes of paragraph (a) of this 

Item, a transaction includes, but is not 

limited to, any financial transaction, 

arrangement or relationship (including any 

indebtedness or guarantee of indebtedness) 

or any series of similar transactions, 

arrangements or relationships. 

3. The amount involved in the transaction 

shall be computed by determining the dollar 

value of the amount involved in the 

transaction in question, which shall include: 


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a. In the case of any lease or other 

transaction providing for periodic payments 

or installments, the aggregate amount of all 

periodic payments or installments due on or 

after the beginning of the registrant’s last 

fiscal year, including any required or 

optional payments due during or at the 

conclusion of the lease or other transaction 

providing for periodic payments or 

installments; and 

b. In the case of indebtedness, the largest 

aggregate amount of all indebtedness 

outstanding at any time since the beginning 

of the registrant’s last fiscal year and all 

amounts of interest payable on it during the 

last fiscal year. 

4. In the case of a transaction involving 

indebtedness: 

a. The following items of indebtedness may 

be excluded from the calculation of the 

amount of indebtedness and need not be 

disclosed: Amounts due from the related 

person for purchases of goods and services 

subject to usual trade terms, for ordinary 

business travel and expense payments and 

for other transactions in the ordinary course 

of business; 

b. Disclosure need not be provided of any 

indebtedness transaction for the related 

persons specified in Instruction 1.b. to 

paragraph (a) of this Item; and 

c. If the lender is a bank, savings and loan 

association, or broker-dealer extending credit 

under Federal Reserve Regulation T (12 CFR 

part 220) and the loans are not disclosed as 

nonaccrual, past due, restructured or 

potential problems (see Item III.C.1. and 2. of 

Industry Guide 3, Statistical Disclosure by 

Bank Holding Companies (17 CFR 

229.802(c))), disclosure under paragraph (a) 

of this Item may consist of a statement, if 

such is the case, that the loans to such 

persons: 

i. Were made in the ordinary course of 

business; 

ii. Were made on substantially the same 

terms, including interest rates and collateral, 

as those prevailing at the time for comparable 

loans with persons not related to the lender; 

and 

iii. Did not involve more than the normal 

risk of collectibility or present other 

unfavorable features. 

5.a. Disclosure of an employment 

relationship or transaction involving an 

executive officer and any related 

compensation solely resulting from that 

employment relationship or transaction need 

not be provided pursuant to paragraph (a) of 

this Item if: 

i. The compensation arising from the 

relationship or transaction is reported 

pursuant to Item 402 (§ 229.402); or 

ii. The executive officer is not an 

immediate family member (as specified in 

Instruction 1 to paragraph (a) of this Item) 

and such compensation would have been 

reported under Item 402 (§ 229.402) as 

compensation earned for services to the 

registrant if the executive officer was a 

named executive officer as that term is 

defined in Item 402(a)(3) (§ 229.402(a)(3)), 

and such compensation had been approved, 

or recommended to the board of directors of 

the registrant for approval, by the 

compensation committee of the board of 

directors (or group of independent directors 

performing a similar function) of the 

registrant. 

b. Disclosure of compensation to a director 

need not be provided pursuant to paragraph 

(a) of this Item if the compensation is 

reported pursuant to Item 402(k) 

(§ 229.402(k)). 

6. A person who has a position or 

relationship with a firm, corporation, or other 

entity that engages in a transaction with the 

registrant shall not be deemed to have an 

indirect material interest within the meaning 

of paragraph (a) of this Item where: 

a. The interest arises only: 

i. From such person’s position as a director 

of another corporation or organization that is 

a party to the transaction; or 

ii. From the direct or indirect ownership by 

such person and all other persons specified 

in Instruction 1 to paragraph (a) of this Item, 

in the aggregate, of less than a ten percent 

equity interest in another person (other than 

a partnership) which is a party to the 

transaction; or 

iii. From both such position and 

ownership; or 

b. The interest arises only from such 

person’s position as a limited partner in a 

partnership in which the person and all other 

persons specified in Instruction 1 to 

paragraph (a) of this Item, have an interest of 

less than ten percent, and the person is not 

a general partner of and does not hold 

another position in the partnership. 

7. Disclosure need not be provided 

pursuant to paragraph (a) of this Item if: 

a. The transaction is one where the rates 

or charges involved in the transaction are 

determined by competitive bids, or the 

transaction involves the rendering of services 

as a common or contract carrier, or public 

utility, at rates or charges fixed in conformity 

with law or governmental authority; 

b. The transaction involves services as a 

bank depositary of funds, transfer agent, 

registrar, trustee under a trust indenture, or 

similar services; or 

c. The interest of the related person arises 

solely from the ownership of a class of equity 

securities of the registrant and all holders of 

that class of equity securities of the registrant 

received the same benefit on a pro rata basis. 

(b) Review, approval or ratification of 

transactions with related persons. (1) 

Describe the registrant’s policies and 

procedures for the review, approval, or 

ratification of any transaction required 

to be reported under paragraph (a) of 

this Item. While the material features of 

such policies and procedures will vary 

depending on the particular 

circumstances, examples of such 

features may include, in given cases, 

among other things: 

(i) The types of transactions that are 

covered by such policies and 

procedures; 

(ii) The standards to be applied 

pursuant to such policies and 

procedures; 

(iii) The persons or groups of persons 

on the board of directors or otherwise 

who are responsible for applying such 

policies and procedures; and 

(iv) A statement of whether such 

policies and procedures are in writing 

and, if not, how such policies and 

procedures are evidenced. 

(2) Identify any transaction required 

to be reported under paragraph (a) of 

this Item since the beginning of the 

registrant’s last fiscal year where such 

policies and procedures did not require 

review, approval or ratification or where 

such policies and procedures were not 

followed. 

Instruction to Item 404(b). 

Disclosure need not be provided pursuant 

to this paragraph regarding any transaction 

that occurred at a time before the related 

person became one of the enumerated 

persons in Instruction 1.a.i., ii., or iii. to Item 

404(a) if such transaction did not continue 

after the related person became one of the 

enumerated persons in Instruction 1.a.i., ii., 

or iii. to Item 404(a). 

(c) Promoters and certain control 

persons. (1) Registrants that are filing a 

registration statement on Form S–1 or 

Form SB–2 under the Securities Act 

(§ 239.11 or § 239.10 of this chapter) or 

on Form 10 or Form 10–SB under the 

Exchange Act (§ 249.210 or § 249.210b 

of this chapter) and that had a promoter 

at any time during the past five fiscal 

years shall: 

(i) State the names of the promoter(s), 

the nature and amount of anything of 

value (including money, property, 

contracts, options or rights of any kind) 

received or to be received by each 

promoter, directly or indirectly, from 

the registrant and the nature and 

amount of any assets, services or other 

consideration therefore received or to be 

received by the registrant; and 

(ii) As to any assets acquired or to be 

acquired by the registrant from a 

promoter, state the amount at which the 

assets were acquired or are to be 

acquired and the principle followed or 

to be followed in determining such 

amount, and identify the persons 

making the determination and their 

relationship, if any, with the registrant 

or any promoter. If the assets were 

acquired by the promoter within two 

years prior to their transfer to the 

registrant, also state the cost thereof to 

the promoter. 

(2) Registrants shall provide the 

disclosure required by paragraphs 

(c)(1)(i) and (c)(1)(ii) of this Item as to 

any person who acquired control of a 

registrant that is a shell company, or any 

person that is part of a group, consisting 

of two or more persons that agree to act 

together for the purpose of acquiring, 

holding, voting or disposing of equity 

securities of a registrant, that acquired 

control of a registrant that is a shell 


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company. For purposes of this Item, 

shell company has the same meaning as 

in Rule 405 under the Securities Act (17 

CFR 230.405) and Rule 12b–2 under the 

Exchange Act (17 CFR 240.12b–2). 

Instructions to Item 404. 

1. If the information called for by this Item 

is being presented in a registration statement 

filed pursuant to the Securities Act or the 

Exchange Act, information shall be given for 

the periods specified in the Item and, in 

addition, for the two fiscal years preceding 

the registrant’s last fiscal year, unless the 

information is being incorporated by 

reference into a registration statement on 

Form S–4 (17 CFR 239.25), in which case, 

information shall be given for the periods 

specified in the Item. 

2. A foreign private issuer will be deemed 

to comply with this Item if it provides the 

information required by Item 7.B. of Form 

20–F (17 CFR 249.220f) with more detailed 

information provided if otherwise made 

publicly available or required to be disclosed 

by the issuer’s home jurisdiction or a market 

in which its securities are listed or traded. 

■ 16. Add § 229.407 to read as follows: 

§ 229.407 (Item 407) Corporate 

governance. 

(a) Director independence. Identify 

each director and, when the disclosure 

called for by this paragraph is being 

presented in a proxy or information 

statement relating to the election of 

directors, each nominee for director, 

that is independent under the 

independence standards applicable to 

the registrant under paragraph (a)(1) of 

this Item. In addition, if such 

independence standards contain 

independence requirements for 

committees of the board of directors, 

identify each director that is a member 

of the compensation, nominating or 

audit committee that is not independent 

under such committee independence 

standards. If the registrant does not have 

a separately designated audit, 

nominating or compensation committee 

or committee performing similar 

functions, the registrant must provide 

the disclosure of directors that are not 

independent with respect to all 

members of the board of directors 

applying such committee independence 

standards. 

(1) In determining whether or not the 

director or nominee for director is 

independent for the purposes of 

paragraph (a) of this Item, the registrant 

shall use the applicable definition of 

independence, as follows: 

(i) If the registrant is a listed issuer 

whose securities are listed on a national 

securities exchange or in an inter-dealer 

quotation system which has 

requirements that a majority of the 

board of directors be independent, the 

registrant’s definition of independence 

that it uses for determining if a majority 

of the board of directors is independent 

in compliance with the listing standards 

applicable to the registrant. When 

determining whether the members of a 

committee of the board of directors are 

independent, the registrant’s definition 

of independence that it uses for 

determining if the members of that 

specific committee are independent in 

compliance with the independence 

standards applicable for the members of 

the specific committee in the listing 

standards of the national securities 

exchange or inter-dealer quotation 

system that the registrant uses for 

determining if a majority of the board of 

directors are independent. If the 

registrant does not have independence 

standards for a committee, the 

independence standards for that specific 

committee in the listing standards of the 

national securities exchange or interdealer quotation system that the 

registrant uses for determining if a 

majority of the board of directors are 

independent. 

(ii) If the registrant is not a listed 

issuer, a definition of independence of 

a national securities exchange or of an 

inter-dealer quotation system which has 

requirements that a majority of the 

board of directors be independent, and 

state which definition is used. Whatever 

such definition the registrant chooses, it 

must use the same definition with 

respect to all directors and nominees for 

director. When determining whether the 

members of a specific committee of the 

board of directors are independent, if 

the national securities exchange or 

national securities association whose 

standards are used has independence 

standards for the members of a specific 

committee, use those committee specific 

standards. 

(iii) If the information called for by 

paragraph (a) of this Item is being 

presented in a registration statement on 

Form S–1 (§ 239.11 of this chapter) or 

Form SB–2 (§ 239.10 of this chapter) 

under the Securities Act or on a Form 

10 (§ 249.210 of this chapter) or Form 

10–SB (§ 249.210b of this chapter) under 

the Exchange Act where the registrant 

has applied for listing with a national 

securities exchange or in an inter-dealer 

quotation system which has 

requirements that a majority of the 

board of directors be independent, the 

definition of independence that the 

registrant uses for determining if a 

majority of the board of directors is 

independent, and the definition of 

independence that the registrant uses 

for determining if members of the 

specific committee of the board of 

directors are independent, that is in 

compliance with the independence 

listing standards of the national 

securities exchange or inter-dealer 

quotation system on which it has 

applied for listing, or if the registrant 

has not adopted such definitions, the 

independence standards for determining 

if the majority of the board of directors 

is independent and if members of the 

committee of the board of directors are 

independent of that national securities 

exchange or inter-dealer quotation 

system. 

(2) If the registrant uses its own 

definitions for determining whether its 

directors and nominees for director, and 

members of specific committees of the 

board of directors, are independent, 

disclose whether these definitions are 

available to security holders on the 

registrant’s Web site. If so, provide the 

registrant’s Web site address. If not, 

include a copy of these policies in an 

appendix to the registrant’s proxy 

statement or information statement that 

is provided to security holders at least 

once every three fiscal years or if the 

policies have been materially amended 

since the beginning of the registrant’s 

last fiscal year. If a current copy of the 

policies is not available to security 

holders on the registrant’s Web site, and 

is not included as an appendix to the 

registrant’s proxy statement or 

information statement, identify the most 

recent fiscal year in which the policies 

were so included in satisfaction of this 

requirement. 

(3) For each director and nominee for 

director that is identified as 

independent, describe, by specific 

category or type, any transactions, 

relationships or arrangements not 

disclosed pursuant to Item 404(a) 

(§ 229.404(a)), or for investment 

companies, Item 22(b) of Schedule 14A 

(§ 240.14a–101 of this chapter), that 

were considered by the board of 

directors under the applicable 

independence definitions in 

determining that the director is 

independent. 

Instructions to Item 407(a). 

1. If the registrant is a listed issuer whose 

securities are listed on a national securities 

exchange or in an inter-dealer quotation 

system which has requirements that a 

majority of the board of directors be 

independent, and also has exemptions to 

those requirements (for independence of a 

majority of the board of directors or 

committee member independence) upon 

which the registrant relied, disclose the 

exemption relied upon and explain the basis 

for the registrant’s conclusion that such 

exemption is applicable. The same disclosure 

should be provided if the registrant is not a 

listed issuer and the national securities 

exchange or inter-dealer quotation system 

selected by the registrant has exemptions that 

are applicable to the registrant. Any national 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53255 

securities exchange or inter-dealer quotation 

system which has requirements that at least 

50 percent of the members of a small 

business issuer’s board of directors must be 

independent shall be considered a national 

securities exchange or inter-dealer quotation 

system which has requirements that a 

majority of the board of directors be 

independent for the purposes of the 

disclosure required by paragraph (a) of this 

Item. 

2. Registrants shall provide the disclosure 

required by paragraph (a) of this Item for any 

person who served as a director during any 

part of the last completed fiscal year, except 

that no information called for by paragraph 

(a) of this Item need be given in a registration 

statement filed at a time when the registrant 

is not subject to the reporting requirements 

of section 13(a) or 15(d) of the Exchange Act 

(15 U.S.C. 78m(a) or 78o(d)) respecting any 

director who is no longer a director at the 

time of effectiveness of the registration 

statement. 

3. The description of the specific categories 

or types of transactions, relationships or 

arrangements required by paragraph (a)(3) of 

this Item must be provided in such detail as 

is necessary to fully describe the nature of 

the transactions, relationships or 

arrangements. 

(b) Board meetings and committees; 

annual meeting attendance. (1) State the 

total number of meetings of the board of 

directors (including regularly scheduled 

and special meetings) which were held 

during the last full fiscal year. Name 

each incumbent director who during the 

last full fiscal year attended fewer than 

75 percent of the aggregate of: 

(i) The total number of meetings of the 

board of directors (held during the 

period for which he has been a director); 

and 

(ii) The total number of meetings held 

by all committees of the board on which 

he served (during the periods that he 

served). 

(2) Describe the registrant’s policy, if 

any, with regard to board members’

attendance at annual meetings of 

security holders and state the number of 

board members who attended the prior 

year’s annual meeting. 

Instruction to Item 407(b)(2). 

In lieu of providing the information 

required by paragraph (b)(2) of this Item in 

the proxy statement, the registrant may 

instead provide the registrant’s Web site 

address where such information appears. 

(3) State whether or not the registrant 

has standing audit, nominating and 

compensation committees of the board 

of directors, or committees performing 

similar functions. If the registrant has 

such committees, however designated, 

identify each committee member, state 

the number of committee meetings held 

by each such committee during the last 

fiscal year and describe briefly the 

functions performed by each such 

committee. Such disclosure need not be 

provided to the extent it is duplicative 

of disclosure provided in accordance 

with paragraph (c), (d) or (e) of this 

Item. 

(c) Nominating committee. (1) If the 

registrant does not have a standing 

nominating committee or committee 

performing similar functions, state the 

basis for the view of the board of 

directors that it is appropriate for the 

registrant not to have such a committee 

and identify each director who 

participates in the consideration of 

director nominees. 

(2) Provide the following information 

regarding the registrant’s director 

nomination process: 

(i) State whether or not the 

nominating committee has a charter. If 

the nominating committee has a charter, 

provide the disclosure required by 

Instruction 2 to this Item regarding the 

nominating committee charter; 

(ii) If the nominating committee has a 

policy with regard to the consideration 

of any director candidates 

recommended by security holders, 

provide a description of the material 

elements of that policy, which shall 

include, but need not be limited to, a 

statement as to whether the committee 

will consider director candidates 

recommended by security holders; 

(iii) If the nominating committee does 

not have a policy with regard to the 

consideration of any director candidates 

recommended by security holders, state 

that fact and state the basis for the view 

of the board of directors that it is 

appropriate for the registrant not to have 

such a policy; 

(iv) If the nominating committee will 

consider candidates recommended by 

security holders, describe the 

procedures to be followed by security 

holders in submitting such 

recommendations; 

(v) Describe any specific minimum 

qualifications that the nominating 

committee believes must be met by a 

nominating committee-recommended 

nominee for a position on the 

registrant’s board of directors, and 

describe any specific qualities or skills 

that the nominating committee believes 

are necessary for one or more of the 

registrant’s directors to possess; 

(vi) Describe the nominating 

committee’s process for identifying and 

evaluating nominees for director, 

including nominees recommended by 

security holders, and any differences in 

the manner in which the nominating 

committee evaluates nominees for 

director based on whether the nominee 

is recommended by a security holder; 

(vii) With regard to each nominee 

approved by the nominating committee 

for inclusion on the registrant’s proxy 

card (other than nominees who are 

executive officers or who are directors 

standing for re-election), state which 

one or more of the following categories 

of persons or entities recommended that 

nominee: Security holder, nonmanagement director, chief executive 

officer, other executive officer, thirdparty search firm, or other specified 

source. With regard to each such 

nominee approved by a nominating 

committee of an investment company, 

state which one or more of the following 

additional categories of persons or 

entities recommended that nominee: 

Security holder, director, chief 

executive officer, other executive 

officer, or employee of the investment 

company’s investment adviser, 

principal underwriter, or any affiliated 

person of the investment adviser or 

principal underwriter; 

(viii) If the registrant pays a fee to any 

third party or parties to identify or 

evaluate or assist in identifying or 

evaluating potential nominees, disclose 

the function performed by each such 

third party; and 

(ix) If the registrant’s nominating 

committee received, by a date not later 

than the 120th calendar day before the 

date of the registrant’s proxy statement 

released to security holders in 

connection with the previous year’s 

annual meeting, a recommended 

nominee from a security holder that 

beneficially owned more than 5% of the 

registrant’s voting common stock for at 

least one year as of the date the 

recommendation was made, or from a 

group of security holders that 

beneficially owned, in the aggregate, 

more than 5% of the registrant’s voting 

common stock, with each of the 

securities used to calculate that 

ownership held for at least one year as 

of the date the recommendation was 

made, identify the candidate and the 

security holder or security holder group 

that recommended the candidate and 

disclose whether the nominating 

committee chose to nominate the 

candidate, provided, however, that no 

such identification or disclosure is 

required without the written consent of 

both the security holder or security 

holder group and the candidate to be so 

identified. 

Instructions to Item 407(c)(2)(ix). 

1. For purposes of paragraph (c)(2)(ix) of 

this Item, the percentage of securities held by 

a nominating security holder may be 

determined using information set forth in the 

registrant’s most recent quarterly or annual 

report, and any current report subsequent 

thereto, filed with the Commission pursuant 

to the Exchange Act (or, in the case of a 

registrant that is an investment company 


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53256 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

1Available at http://www.pcaobus.org/standards/ 

interim_standards/auditing_standards/

index_au.asp?series=300§ion=300. 

2Available at http://www.pcaobus.org/Standards/ 

Interim_Standards/Independence_Standards/ 

ISB1.pdf. 

registered under the Investment Company 

Act of 1940, the registrant’s most recent 

report on Form N–CSR (§§ 249.331 and 

274.128 of this chapter)), unless the party 

relying on such report knows or has reason 

to believe that the information contained 

therein is inaccurate. 

2. For purposes of the registrant’s 

obligation to provide the disclosure specified 

in paragraph (c)(2)(ix) of this Item, where the 

date of the annual meeting has been changed 

by more than 30 days from the date of the 

previous year’s meeting, the obligation under 

that Item will arise where the registrant 

receives the security holder recommendation 

a reasonable time before the registrant begins 

to print and mail its proxy materials. 

3. For purposes of paragraph (c)(2)(ix) of 

this Item, the percentage of securities held by 

a recommending security holder, as well as 

the holding period of those securities, may be 

determined by the registrant if the security 

holder is the registered holder of the 

securities. If the security holder is not the 

registered owner of the securities, he or she 

can submit one of the following to the 

registrant to evidence the required ownership 

percentage and holding period: 

a. A written statement from the ‘‘record’’

holder of the securities (usually a broker or 

bank) verifying that, at the time the security 

holder made the recommendation, he or she 

had held the required securities for at least 

one year; or 

b. If the security holder has filed a 

Schedule 13D (§ 240.13d–101 of this 

chapter), Schedule 13G (§ 240.13d–102 of 

this chapter), Form 3 (§ 249.103 of this 

chapter), Form 4 (§ 249.104 of this chapter), 

and/or Form 5 (§ 249.105 of this chapter), or 

amendments to those documents or updated 

forms, reflecting ownership of the securities 

as of or before the date of the 

recommendation, a copy of the schedule and/ 

or form, and any subsequent amendments 

reporting a change in ownership level, as 

well as a written statement that the security 

holder continuously held the securities for 

the one-year period as of the date of the 

recommendation. 

4. For purposes of the registrant’s 

obligation to provide the disclosure specified 

in paragraph (c)(2)(ix) of this Item, the 

security holder or group must have provided 

to the registrant, at the time of the 

recommendation, the written consent of all 

parties to be identified and, where the 

security holder or group members are not 

registered holders, proof that the security 

holder or group satisfied the required 

ownership percentage and holding period as 

of the date of the recommendation. 

Instruction to Item 407(c)(2). 

For purposes of paragraph (c)(2) of this 

Item, the term nominating committee refers 

not only to nominating committees and 

committees performing similar functions, but 

also to groups of directors fulfilling the role 

of a nominating committee, including the 

entire board of directors. 

(3) Describe any material changes to 

the procedures by which security 

holders may recommend nominees to 

the registrant’s board of directors, where 

those changes were implemented after 

the registrant last provided disclosure in 

response to the requirements of 

paragraph (c)(2)(iv) of this Item, or 

paragraph (c)(3) of this Item. 

Instructions to Item 407(c)(3). 

1. The disclosure required in paragraph 

(c)(3) of this Item need only be provided in 

a registrant’s quarterly or annual reports. 

2. For purposes of paragraph (c)(3) of this 

Item, adoption of procedures by which 

security holders may recommend nominees 

to the registrant’s board of directors, where 

the registrant’s most recent disclosure in 

response to the requirements of paragraph 

(c)(2)(iv) of this Item, or paragraph (c)(3) of 

this Item, indicated that the registrant did not 

have in place such procedures, will 

constitute a material change. 

(d) Audit committee. (1) State whether 

or not the audit committee has a charter. 

If the audit committee has a charter, 

provide the disclosure required by 

Instruction 2 to this Item regarding the 

audit committee charter. 

(2) If a listed issuer’s board of 

directors determines, in accordance 

with the listing standards applicable to 

the issuer, to appoint a director to the 

audit committee who is not 

independent (apart from the 

requirements in § 240.10A–3 of this 

chapter), including as a result of 

exceptional or limited or similar 

circumstances, disclose the nature of the 

relationship that makes that individual 

not independent and the reasons for the 

board of directors’ determination. 

(3)(i) The audit committee must state 

whether: 

(A) The audit committee has reviewed 

and discussed the audited financial 

statements with management; 

(B) The audit committee has 

discussed with the independent 

auditors the matters required to be 

discussed by the statement on Auditing 

Standards No. 61, as amended (AICPA, 

Professional Standards, Vol. 1. AU 

section 380),1 as adopted by the Public 

Company Accounting Oversight Board 

in Rule 3200T; 

(C) The audit committee has received 

the written disclosures and the letter 

from the independent accountants 

required by Independence Standards 

Board Standard No. 1 (Independence 

Standards Board Standard No. 1, 

Independence Discussions with Audit 

Committees),2 as adopted by the Public 

Company Accounting Oversight Board 

in Rule 3600T, and has discussed with 

the independent accountant the 

independent accountant’s 

independence; and 

(D) Based on the review and 

discussions referred to in paragraphs 

(d)(3)(i)(A) through (d)(3)(i)(C) of this 

Item, the audit committee recommended 

to the board of directors that the audited 

financial statements be included in the 

company’s annual report on Form 10–K 

(17 CFR 249.310) (or, for closed-end 

investment companies registered under 

the Investment Company Act of 1940 

(15 U.S.C. 80a–1 et seq.), the annual 

report to shareholders required by 

section 30(e) of the Investment 

Company Act of 1940 (15 U.S.C. 80a–

29(e)) and Rule 30d–1 (17 CFR 270.30d–

1) thereunder) for the last fiscal year for 

filing with the Commission. 

(ii) The name of each member of the 

company’s audit committee (or, in the 

absence of an audit committee, the 

board committee performing equivalent 

functions or the entire board of 

directors) must appear below the 

disclosure required by paragraph 

(d)(3)(i) of this Item. 

(4)(i) If the registrant meets the 

following requirements, provide the 

disclosure in paragraph (d)(4)(ii) of this 

Item: 

(A) The registrant is a listed issuer, as 

defined in § 240.10A–3 of this chapter; 

(B) The registrant is filing either an 

annual report on Form 10–K or 10–KSB 

(17 CFR 249.310 or 17 CFR 249.310b), 

or a proxy statement or information 

statement pursuant to the Exchange Act 

(15 U.S.C. 78a et seq.) if action is to be 

taken with respect to the election of 

directors; and 

(C) The registrant is neither: 

(1) A subsidiary of another listed 

issuer that is relying on the exemption 

in § 240.10A–3(c)(2) of this chapter; nor 

(2) Relying on any of the exemptions 

in § 240.10A–3(c)(4) through (c)(7) of 

this chapter. 

(ii)(A) State whether or not the 

registrant has a separately-designated 

standing audit committee established in 

accordance with section 3(a)(58)(A) of 

the Exchange Act (15 U.S.C. 

78c(a)(58)(A)), or a committee 

performing similar functions. If the 

registrant has such a committee, 

however designated, identify each 

committee member. If the entire board 

of directors is acting as the registrant’s 

audit committee as specified in section 

3(a)(58)(B) of the Exchange Act (15 

U.S.C. 78c(a)(58)(B)), so state. 

(B) If applicable, provide the 

disclosure required by § 240.10A–3(d) of 

this chapter regarding an exemption 

from the listing standards for audit 

committees. 

(5) Audit committee financial expert. 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53257 

(i)(A) Disclose that the registrant’s 

board of directors has determined that 

the registrant either: 

(1) Has at least one audit committee 

financial expert serving on its audit 

committee; or 

(2) Does not have an audit committee 

financial expert serving on its audit 

committee. 

(B) If the registrant provides the 

disclosure required by paragraph 

(d)(5)(i)(A)(1) of this Item, it must 

disclose the name of the audit 

committee financial expert and whether 

that person is independent, as 

independence for audit committee 

members is defined in the listing 

standards applicable to the listed issuer. 

(C) If the registrant provides the 

disclosure required by paragraph 

(d)(5)(i)(A)(2) of this Item, it must 

explain why it does not have an audit 

committee financial expert. 

Instruction to Item 407(d)(5)(i). 

If the registrant’s board of directors has 

determined that the registrant has more than 

one audit committee financial expert serving 

on its audit committee, the registrant may, 

but is not required to, disclose the names of 

those additional persons. A registrant 

choosing to identify such persons must 

indicate whether they are independent 

pursuant to paragraph (d)(5)(i)(B) of this 

Item. 

(ii) For purposes of this Item, an audit 

committee financial expert means a 

person who has the following attributes: 

(A) An understanding of generally 

accepted accounting principles and 

financial statements; 

(B) The ability to assess the general 

application of such principles in 

connection with the accounting for 

estimates, accruals and reserves; 

(C) Experience preparing, auditing, 

analyzing or evaluating financial 

statements that present a breadth and 

level of complexity of accounting issues 

that are generally comparable to the 

breadth and complexity of issues that 

can reasonably be expected to be raised 

by the registrant’s financial statements, 

or experience actively supervising one 

or more persons engaged in such 

activities; 

(D) An understanding of internal 

control over financial reporting; and 

(E) An understanding of audit 

committee functions. 

(iii) A person shall have acquired 

such attributes through: 

(A) Education and experience as a 

principal financial officer, principal 

accounting officer, controller, public 

accountant or auditor or experience in 

one or more positions that involve the 

performance of similar functions; 

(B) Experience actively supervising a 

principal financial officer, principal 

accounting officer, controller, public 

accountant, auditor or person 

performing similar functions; 

(C) Experience overseeing or assessing 

the performance of companies or public 

accountants with respect to the 

preparation, auditing or evaluation of 

financial statements; or 

(D) Other relevant experience. 

(iv) Safe harbor. (A) A person who is 

determined to be an audit committee 

financial expert will not be deemed an 

expert for any purpose, including 

without limitation for purposes of 

section 11 of the Securities Act (15 

U.S.C. 77k), as a result of being 

designated or identified as an audit 

committee financial expert pursuant to 

this Item 407. 

(B) The designation or identification 

of a person as an audit committee 

financial expert pursuant to this Item 

407 does not impose on such person any 

duties, obligations or liability that are 

greater than the duties, obligations and 

liability imposed on such person as a 

member of the audit committee and 

board of directors in the absence of such 

designation or identification. 

(C) The designation or identification 

of a person as an audit committee 

financial expert pursuant to this Item 

does not affect the duties, obligations or 

liability of any other member of the 

audit committee or board of directors. 

Instructions to Item 407(d)(5). 

1. The disclosure under paragraph (d)(5) of 

this Item is required only in a registrant’s 

annual report. The registrant need not 

provide the disclosure required by paragraph 

(d)(5) of this Item in a proxy or information 

statement unless that registrant is electing to 

incorporate this information by reference 

from the proxy or information statement into 

its annual report pursuant to General 

Instruction G(3) to Form 10–K (17 CFR 

249.310). 

2. If a person qualifies as an audit 

committee financial expert by means of 

having held a position described in 

paragraph (d)(5)(iii)(D) of this Item, the 

registrant shall provide a brief listing of that 

person’s relevant experience. Such disclosure 

may be made by reference to disclosures 

required under Item 401(e) (§ 229.401(e)). 

3. In the case of a foreign private issuer 

with a two-tier board of directors, for 

purposes of paragraph (d)(5) of this Item, the 

term board of directors means the 

supervisory or non-management board. In the 

case of a foreign private issuer meeting the 

requirements of § 240.10A–3(c)(3) of this 

chapter, for purposes of paragraph (d)(5) of 

this Item, the term board of directors means 

the issuer’s board of auditors (or similar 

body) or statutory auditors, as applicable. 

Also, in the case of a foreign private issuer, 

the term generally accepted accounting 

principles in paragraph (d)(5)(ii)(A) of this 

Item means the body of generally accepted 

accounting principles used by that issuer in 

its primary financial statements filed with 

the Commission. 

4. A registrant that is an Asset-Backed 

Issuer (as defined in § 229.1101) is not 

required to disclose the information required 

by paragraph (d)(5) of this Item. 

Instructions to Item 407(d). 

1. The information required by paragraphs 

(d)(1)–(3) of this Item shall not be deemed to 

be ‘‘soliciting material,’’ or to be ‘‘filed’’ with 

the Commission or subject to Regulation 14A 

or 14C (17 CFR 240.14a–1 through 240.14b–

2 or 240.14c–1 through 240.14c–101), other 

than as provided in this Item, or to the 

liabilities of section 18 of the Exchange Act 

(15 U.S.C. 78r), except to the extent that the 

registrant specifically requests that the 

information be treated as soliciting material 

or specifically incorporates it by reference 

into a document filed under the Securities 

Act or the Exchange Act. Such information 

will not be deemed to be incorporated by 

reference into any filing under the Securities 

Act or the Exchange Act, except to the extent 

that the registrant specifically incorporates it 

by reference. 

2. The disclosure required by paragraphs 

(d)(1)–(3) of this Item need only be provided 

one time during any fiscal year. 

3. The disclosure required by paragraph 

(d)(3) of this Item need not be provided in 

any filings other than a registrant’s 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). 

(e) Compensation committee. (1) If the 

registrant does not have a standing 

compensation committee or committee 

performing similar functions, state the 

basis for the view of the board of 

directors that it is appropriate for the 

registrant not to have such a committee 

and identify each director who 

participates in the consideration of 

executive officer and director 

compensation. 

(2) State whether or not the 

compensation committee has a charter. 

If the compensation committee has a 

charter, provide the disclosure required 

by Instruction 2 to this Item regarding 

the compensation committee charter. 

(3) Provide a narrative description of 

the registrant’s processes and 

procedures for the consideration and 

determination of executive and director 

compensation, including: 

(i)(A) The scope of authority of the 

compensation committee (or persons 

performing the equivalent functions); 

and 

(B) The extent to which the 

compensation committee (or persons 

performing the equivalent functions) 

may delegate any authority described in 

paragraph (e)(3)(i)(A) of this Item to 

other persons, specifying what authority 

may be so delegated and to whom; 

(ii) Any role of executive officers in 

determining or recommending the 

amount or form of executive and 

director compensation; and 


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53258 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

(iii) Any role of compensation 

consultants in determining or 

recommending the amount or form of 

executive and director compensation, 

identifying such consultants, stating 

whether such consultants are engaged 

directly by the compensation committee 

(or persons performing the equivalent 

functions) or any other person, 

describing the nature and scope of their 

assignment, and the material elements 

of the instructions or directions given to 

the consultants with respect to the 

performance of their duties under the 

engagement. 

(4) Under the caption ‘‘Compensation 

Committee Interlocks and Insider 

Participation’’: 

(i) Identify each person who served as 

a member of the compensation 

committee of the registrant’s board of 

directors (or board committee 

performing equivalent functions) during 

the last completed fiscal year, indicating 

each committee member who: 

(A) Was, during the fiscal year, an 

officer or employee of the registrant; 

(B) Was formerly an officer of the 

registrant; or 

(C) Had any relationship requiring 

disclosure by the registrant under any 

paragraph of Item 404 (§ 229.404). In 

this event, the disclosure required by 

Item 404 (§ 229.404) shall accompany 

such identification. 

(ii) If the registrant has no 

compensation committee (or other board 

committee performing equivalent 

functions), the registrant shall identify 

each officer and employee of the 

registrant, and any former officer of the 

registrant, who, during the last 

completed fiscal year, participated in 

deliberations of the registrant’s board of 

directors concerning executive officer 

compensation. 

(iii) Describe any of the following 

relationships that existed during the last 

completed fiscal year: 

(A) An executive officer of the 

registrant served as a member of the 

compensation committee (or other board 

committee performing equivalent 

functions or, in the absence of any such 

committee, the entire board of directors) 

of another entity, one of whose 

executive officers served on the 

compensation committee (or other board 

committee performing equivalent 

functions or, in the absence of any such 

committee, the entire board of directors) 

of the registrant; 

(B) An executive officer of the 

registrant served as a director of another 

entity, one of whose executive officers 

served on the compensation committee 

(or other board committee performing 

equivalent functions or, in the absence 

of any such committee, the entire board 

of directors) of the registrant; and 

(C) An executive officer of the 

registrant served as a member of the 

compensation committee (or other board 

committee performing equivalent 

functions or, in the absence of any such 

committee, the entire board of directors) 

of another entity, one of whose 

executive officers served as a director of 

the registrant. 

(iv) Disclosure required under 

paragraph (e)(4)(iii) of this Item 

regarding a compensation committee 

member or other director of the 

registrant who also served as an 

executive officer of another entity shall 

be accompanied by the disclosure called 

for by Item 404 with respect to that 

person. 

Instruction to Item 407(e)(4). 

For purposes of paragraph (e)(4) of this 

Item, the term entity shall not include an 

entity exempt from tax under section 

501(c)(3) of the Internal Revenue Code (26 

U.S.C. 501(c)(3)). 

(5) Under the caption ‘‘Compensation 

Committee Report:’’

(i) The compensation committee (or 

other board committee performing 

equivalent functions or, in the absence 

of any such committee, the entire board 

of directors) must state whether: 

(A) The compensation committee has 

reviewed and discussed the 

Compensation Discussion and Analysis 

required by Item 402(b) (§ 229.402(b)) 

with management; and 

(B) Based on the review and 

discussions referred to in paragraph 

(e)(5)(i)(A) of this Item, the 

compensation committee recommended 

to the board of directors that the 

Compensation Discussion and Analysis 

be included in the registrant’s annual 

report on Form 10–K (§ 249.310 of this 

chapter), proxy statement on Schedule 

14A (§ 240.14a–101 of this chapter) or 

information statement on Schedule 14C 

(§ 240.14c–101 of this chapter). 

(ii) The name of each member of the 

registrant’s compensation committee (or 

other board committee performing 

equivalent functions or, in the absence 

of any such committee, the entire board 

of directors) must appear below the 

disclosure required by paragraph 

(e)(5)(i) of this Item. 

Instructions to Item 407(e)(5). 

1. The information required by paragraph 

(e)(5) of this Item shall not be deemed to be 

‘‘soliciting material,’’ or to be ‘‘filed’’ with 

the Commission or subject to Regulation 14A 

or 14C (17 CFR 240.14a–1 through 240.14b–

2 or 240.14c–1 through 240.14c–101), other 

than as provided in this Item, or to the 

liabilities of section 18 of the Exchange Act 

(15 U.S.C. 78r), except to the extent that the 

registrant specifically requests that the 

information be treated as soliciting material 

or specifically incorporates it by reference 

into a document filed under the Securities 

Act or the Exchange Act. 

2. The disclosure required by paragraph 

(e)(5) of this Item need not be provided in 

any filings other than an annual report on 

Form 10–K (§ 249.310 of this chapter), a 

proxy statement on Schedule 14A (§ 240.14a–

101 of this chapter) or an information 

statement on Schedule 14C (§ 240.14c–101 of 

this chapter). Such information will not be 

deemed to be incorporated by reference into 

any filing under the Securities Act or the 

Exchange Act, except to the extent that the 

registrant specifically incorporates it by 

reference. If the registrant elects to 

incorporate this information by reference 

from the proxy or information statement into 

its annual report on Form 10–K pursuant to 

General Instruction G(3) to Form 10–K, the 

disclosure required by paragraph (e)(5) of this 

Item will be deemed furnished in the annual 

report on Form 10–K and will not be deemed 

incorporated by reference into any filing 

under the Securities Act or the Exchange Act 

as a result as a result of furnishing the 

disclosure in this manner. 

3. The disclosure required by paragraph 

(e)(5) of this Item need only be provided one 

time during any fiscal year. 

(f) Shareholder communications. (1) 

State whether or not the registrant’s 

board of directors provides a process for 

security holders to send 

communications to the board of 

directors and, if the registrant does not 

have such a process for security holders 

to send communications to the board of 

directors, state the basis for the view of 

the board of directors that it is 

appropriate for the registrant not to have 

such a process. 

(2) If the registrant has a process for 

security holders to send 

communications to the board of 

directors: 

(i) Describe the manner in which 

security holders can send 

communications to the board and, if 

applicable, to specified individual 

directors; and 

(ii) If all security holder 

communications are not sent directly to 

board members, describe the registrant’s 

process for determining which 

communications will be relayed to 

board members. 

Instructions to Item 407(f). 

1. In lieu of providing the information 

required by paragraph (f)(2) of this Item in 

the proxy statement, the registrant may 

instead provide the registrant’s Web site 

address where such information appears. 

2. For purposes of the disclosure required 

by paragraph (f)(2)(ii) of this Item, a 

registrant’s process for collecting and 

organizing security holder communications, 

as well as similar or related activities, need 

not be disclosed provided that the registrant’s 

process is approved by a majority of the 

independent directors or, in the case of a 


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registrant that is an investment company, a 

majority of the directors who are not 

‘‘interested persons’’ of the investment 

company as defined in section 2(a)(19) of the 

Investment Company Act of 1940 (15 U.S.C. 

80a–2(a)(19)). 

3. For purposes of this paragraph, 

communications from an officer or director of 

the registrant will not be viewed as ‘‘security 

holder communications.’’ Communications 

from an employee or agent of the registrant 

will be viewed as ‘‘security holder 

communications’’ for purposes of this 

paragraph only if those communications are 

made solely in such employee’s or agent’s 

capacity as a security holder. 

4. For purposes of this paragraph, security 

holder proposals submitted pursuant to 

§ 240.14a–8 of this chapter, and 

communications made in connection with 

such proposals, will not be viewed as 

‘‘security holder communications.’’

Instructions to Item 407. 

1. For purposes of this Item: 

a. Listed issuer means a listed issuer as 

defined in § 240.10A–3 of this chapter; 

b. National securities exchange means a 

national securities exchange registered 

pursuant to section 6(a) of the Exchange Act 

(15 U.S.C. 78f(a)); 

c. Inter-dealer quotation system means an 

automated inter-dealer quotation system of a 

national securities association registered 

pursuant to section 15A(a) of the Exchange 

Act (15 U.S.C. 78o–3(a)); and 

d. National securities association means a 

national securities association registered 

pursuant to section 15A(a) of the Exchange 

Act (15 U.S.C. 78o–3(a)) that has been 

approved by the Commission (as that 

definition may be modified or 

supplemented). 

2. With respect to paragraphs (c)(2)(i), 

(d)(1) and (e)(2) of this Item, disclose whether 

a current copy of the applicable committee 

charter is available to security holders on the 

registrant’s Web site, and if so, provide the 

registrant’s Web site address. If a current 

copy of the charter is not available to security 

holders on the registrant’s Web site, include 

a copy of the charter in an appendix to the 

registrant’s proxy or information statement 

that is provided to security holders at least 

once every three fiscal years, or if the charter 

has been materially amended since the 

beginning of the registrant’s last fiscal year. 

If a current copy of the charter is not 

available to security holders on the 

registrant’s Web site, and is not included as 

an appendix to the registrant’s proxy or 

information statement, identify in which of 

the prior fiscal years the charter was so 

included in satisfaction of this requirement. 

■ 17. Amend § 229.601 to revise 

paragraph (b)(10)(iii)(C)(5) to read as 

follows: 

§ 229.601 (Item 601) Exhibits. 

* * * * * 

(b) * * * 

(10) * * * 

(iii) * * * 

(C) * * * 

(5) Any compensatory plan, contract 

or arrangement if the registrant is a 

foreign private issuer that furnishes 

compensatory information under Item 

402(a)(1) (§ 229.402(a)(1)) and the public 

filing of the plan, contract or 

arrangement, or portion thereof, is not 

required in the registrant’s home 

country and is not otherwise publicly 

disclosed by the registrant. 

* * * * * 

■ 18. Amend § 229.1107 by revising 

paragraph (e) to read as follows: 

§ 229.1107 (Item 1107) Issuing entities. 

* * * * * 

(e) If the issuing entity has executive 

officers, a board of directors or persons 

performing similar functions, provide 

the information required by Items 401, 

402, 403 404 and 407(a), (c)(3), (d)(4), 

(d)(5) and (e)(4) of Regulation S–K 

(§§ 229.401, 229.402, 229.403, 229.404 

and 229.407(a), (c)(3), (d)(4), (d)(5) and 

(e)(4)) for the issuing entity. 

* * * * * 

PART 232—REGULATION S–T—

GENERAL RULES AND REGULATIONS 

FOR ELECTRONIC FILINGS 

■ 19. The authority citation for part 232 

continues to read in part as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 

77s(a), 77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 

78w(a), 78ll(d), 79t(a), 80a–8, 80a–29, 80a–

30, 80a–37, and 7201 et seq.; and 18 U.S.C. 

1350. 

* * * * * 

■ 20. Amend § 232.304 to revise 

paragraphs (d) and (e) to read as follows: 

§ 232.304 Graphic, image, audio and video 

material. 

* * * * * 

(d) For electronically filed ASCII 

documents, the performance graph that 

is to appear in registrant annual reports 

to security holders required by 

Exchange Act Rule 14a-3 (§ 240.14a–3 of 

this chapter) or Exchange Act Rule 14c–

3 (§ 240.14c–3 of this chapter) to 

precede or accompany proxy statements 

or information statements relating to 

annual meetings of security holders at 

which directors are to be elected (or 

special meetings or written consents in 

lieu of such meetings), as required by 

Item 201(e) of Regulation S–K 

(§ 229.201(e) of this chapter), and the 

line graph that is to appear in registrant 

annual reports to security holders, as 

required by paragraph (b)(7)(ii) of Item 

22 of Form N–1A (§ 274.11A of this 

chapter), must be furnished to the 

Commission by presenting the data in 

tabular or chart form within the 

electronic ASCII document, in 

compliance with paragraph (a) of this 

section and the formatting requirements 

of the EDGAR Filer Manual. 

(e) Notwithstanding the provisions of 

paragraphs (a) through (d) of this 

section, electronically filed HTML 

documents must present the following 

information in an HTML graphic or 

image file within the electronic 

submission in compliance with the 

formatting requirements of the EDGAR 

Filer Manual: The performance graph 

that is to appear in registrant annual 

reports to security holders required by 

Exchange Act Rule 14a–3 (§ 240.14a–3 

of this chapter) or Exchange Act Rule 

14c–3 (§ 240.14c–3 of this chapter) to 

precede or accompany registrant proxy 

statements or information statements 

relating to annual meetings of security 

holders at which directors are to be 

elected (or special meetings or written 

consents in lieu of such meetings), as 

required by Item 201(e) of Regulation S–

K (§ 229.201(e) of this chapter); the line 

graph that is to appear in registrant 

annual reports to security holders, as 

required by paragraph (b)(7)(ii) of Item 

22 of Form N–1A (§ 274.11A of this 

chapter); and any other graphic material 

required by rule or form to be filed with 

the Commission. Filers may, but are not 

required to, submit any other graphic 

material in a HTML document by 

presenting the data in an HTML graphic 

or image file within the electronic filing, 

in compliance with the formatting 

requirements of the EDGAR Filer 

Manual. However, filers may not 

present in a graphic or image file 

information such as text or tables that 

users must be able to search and/or 

download into spreadsheet form (e.g., 

financial statements); filers must present 

such material as text in an ASCII 

document or as text or an HTML table 

in an HTML document. 

* * * * * 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

■ 21. The authority citation for part 239 

continues to read in part as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 

78o(d), 78u–5, 78w(a), 78ll(d), 77mm, 79e, 

79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a–

2(a), 80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 

80a–24, 80a–26, 80a–29, 80a–30, and 80a–37, 

unless otherwise noted. 

* * * * * 

■ 22. Amend Form SB–2 (referenced in 

§ 239.10) by revising Item 15 to read as 

follows: 

Note: The text of Form SB–2 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 


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Form SB–2 

Registration Statement Under the 

Securities Act of 1933 

* * * * * 

Item 15. Certain Relationships and 

Transactions and Corporate 

Governance. 

Furnish the information required by 

Item 404 of Regulation S–B and Item 

407(a) of Regulation S–B. 

* * * * * 

■ 23. Amend Form S–1 (referenced in 

§ 239.11) by revising Item 11, 

paragraphs (l) and (n) to read as follows: 

Note: The text of Form S–1 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form S–1 

Registration Statement Under the 

Securities Act of 1933 

* * * * * 

Item 11. Information with Respect to 

the Registrant. 

* * * * * 

(l) Information required by Item 402 

of Regulation S–K (§ 229.402 of this 

chapter), executive compensation, and 

information required by paragraph (e)(4) 

of Item 407 of Regulation S–K (§ 229.407 

of this chapter), corporate governance; 

* * * * * 

(n) Information required by Item 404 

of Regulation S–K (§ 229.404 of this 

chapter), transactions with related 

persons, promoters and certain control 

persons, and Item 407(a) of Regulation 

S–K (§ 229.407(a) of this chapter), 

corporate governance. 

* * * * * 

■ 24. Amend Form S–3 (referenced 

§ 239.13) by revising General Instruction 

I.A.3.(b) and the introductory text of 

General Instruction I.B.4.(c) to read as 

follows: 

Note: The text of Form S–3 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form S–3 

Registration Statement Under the 

Securities Act of 1933 

* * * * * 

General Instructions 

I. Eligibility Requirements for Use of 

Form S–3 * * * 

A. Registrant Requirements. * * * 

3. * * * 

(b) has filed in a timely manner all 

reports required to be filed during the 

twelve calendar months and any portion 

of a month immediately preceding the 

filing of the registration statement, other 

than a report that is required solely 

pursuant to Item 1.01, 1.02, 2.03, 2.04, 

2.05, 2.06, 4.02(a) or 5.02(e) of Form 8–

K (§ 249.308 of this chapter). If the 

registrant has used (during the twelve 

calendar months and any portion of a 

month immediately preceding the filing 

of the registration statement) Rule 12b–

25(b) (§ 240.12b–25(b) of this chapter) 

under the Exchange Act with respect to 

a report or a portion of a report, that 

report or portion thereof has actually 

been filed within the time period 

prescribed by that rule. 

* * * * * 

B. Transaction Requirements. * * * 

4. * * * 

(c) The issuer also must have 

provided, within the twelve calendar 

months immediately before the Form S–

3 registration statement is filed, the 

information required by Items 401, 402, 

403 and 407(c)(3), (d)(4), (d)(5) and 

(e)(4) of Regulation S–K (§ 229.401—

§ 229.403 and § 229.407(c)(3),(d)(4), 

(d)(5) and (e)(4) of this chapter) to: 

* * * * * 

■ 25. Amend Form S–4 (referenced in 

§ 239.25) by revising Items 18(a)(7)(ii) 

and (iii) and 19(a)(7)(ii) and (iii) to read 

as follows: 

Note: The text of Form S–4 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form S–4 

Registration Statement Under the 

Securities Act of 1933 

* * * * * 

Item 18. Information if Proxies, 

Consents or Authorizations are to be 

Solicited. 

(a) * * * 

(7) * * * 

(ii) Item 402 of Regulation S–K 

(§ 229.402 of this chapter), executive 

compensation, and paragraph (e)(4) of 

Item 407 of Regulation S–K 

(§ 229.407(e)(4) of this chapter), 

corporate governance; 

(iii) Item 404 of Regulation S–K 

(§ 229.404 of this chapter), transactions 

with related persons, promoters and 

certain control persons, and Item 407(a) 

of Regulation S–K (§ 229.407(a) of this 

chapter), corporate governance. 

* * * * * 

Item 19. Information if Proxies, 

Consents or Authorizations are not to be 

Solicited or in an Exchange Offer. 

(a) * * * 

(7) * * * 

(ii) Item 402 of Regulation S–K 

(§ 229.402 of this chapter), executive 

compensation, and paragraph (e)(4) of 

Item 407 of Regulation S–K 

(§ 229.407(e)(4) of this chapter), 

corporate governance; 

(iii) Item 404 of Regulation S–K 

(§ 229.404), transactions with related 

persons, promoters and certain controls 

persons, and Item 407(a) of Regulation 

S–K (§ 229.407(a)), corporate 

governance. 

* * * * * 

■ 26. Amend Form S–11 (referenced in 

§ 239.18) by revising Items 22 and 23 to 

read as follows: 

Note: The text of Form S–11 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form S–11 

For Registration Under the Securities 

Act of 1933 of Securities of Certain Real 

Estate Companies 

* * * * * 

Item 22. Executive Compensation. 

Furnish the information required by 

Item 402 of Regulation S–K (§ 229.402 of 

this chapter), and the information 

required by paragraph (e)(4) of Item 407 

of Regulation S–K (§ 229.407(e)(4) of 

this chapter). 

Item 23. Certain Relationships and 

Related Transactions and Director 

Independence. 

Furnish the information required by 

Items 404 and 407(a) of Regulation S–

K (§§ 229.404 and 229.407(a) of this 

chapter). If a transaction involves the 

purchase or sale of assets by or to the 

registrant, otherwise than in the 

ordinary course of business, state the 

cost of the assets to the purchaser and, 

if acquired by the seller within two 

years prior to the transaction, the cost 

thereof to the seller. Furthermore, if the 

assets have been acquired by the seller 

within five years prior to the 

transaction, disclose the aggregate 

depreciation claimed by the seller for 

federal income tax purposes. Indicate 

the principle followed in determining 

the registrant’s purchase or sale price 

and the name of the person making such 

determination. 

* * * * * 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 27. The authority citation for part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 79q, 

79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 

80b–4, 80b–11, and 7201 et seq.; and 18 

U.S.C. 1350, unless otherwise noted. 

* * * * * 

■ 28. Amend § 240.13a–11 by revising 

paragraph (c) to read as follows: 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 53261 

§ 240.13a–11 Current reports on Form 8–K 

(§ 249.308 of this chapter). 

* * * * * 

(c) No failure to file a report on Form 

8–K that is required solely pursuant to 

Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 

4.02(a), 5.02(e) or 6.03 of Form 8–K 

shall be deemed to be a violation of 15 

U.S.C. 78j(b) and § 240.10b–5. 

■ 29. Add § 240.13a–20 to read as 

follows: 

§ 240.13a–20 Plain English presentation of 

specified information. 

(a) Any information included or 

incorporated by reference in a report 

filed under section 13(a) of the Act (15 

U.S.C. 78m(a)) that is required to be 

disclosed pursuant to Item 402, 403, 404 

or 407 of Regulation S–B (§§ 228.402, 

228.403, 228.404 or 228.407 of this 

chapter) or Item 402, 403, 404 or 407 of 

Regulation S–K (§§ 229.402, 229.403, 

229.404 or 229.407 of this chapter) must 

be presented in a clear, concise and 

understandable manner. You must 

prepare the disclosure using the 

following standards: 

(1) Present information in clear, 

concise sections, paragraphs and 

sentences; 

(2) Use short sentences; 

(3) Use definite, concrete, everyday 

words; 

(4) Use the active voice; 

(5) Avoid multiple negatives; 

(6) Use descriptive headings and 

subheadings; 

(7) Use a tabular presentation or bullet 

lists for complex material, wherever 

possible; 

(8) Avoid legal jargon and highly 

technical business and other 

terminology; 

(9) Avoid frequent reliance on 

glossaries or defined terms as the 

primary means of explaining 

information. Define terms in a glossary 

or other section of the document only if 

the meaning is unclear from the context. 

Use a glossary only if it facilitates 

understanding of the disclosure; and 

(10) In designing the presentation of 

the information you may include 

pictures, logos, charts, graphs and other 

design elements so long as the design is 

not misleading and the required 

information is clear. You are encouraged 

to use tables, schedules, charts and 

graphic illustrations that present 

relevant data in an understandable 

manner, so long as such presentations 

are consistent with applicable 

disclosure requirements and consistent 

with other information in the document. 

You must draw graphs and charts to 

scale. Any information you provide 

must not be misleading. 

(b) [Reserved] 

Note to § 240.13a–20. In drafting the 

disclosure to comply with this section, you 

should avoid the following: 

1. Legalistic or overly complex 

presentations that make the substance of the 

disclosure difficult to understand; 

2. Vague ‘‘boilerplate’’ explanations that 

are imprecise and readily subject to different 

interpretations; 

3. Complex information copied directly 

from legal documents without any clear and 

concise explanation of the provision(s); and 

4. Disclosure repeated in different sections 

of the document that increases the size of the 

document but does not enhance the quality 

of the information. 

■ 30. Amend § 240.14a–3 to revise 

paragraph (b)(9) to read as follows: 

§ 240.14a–3 Information to be furnished to 

security holders. 

* * * * * 

(b) * * * 

(9) The report shall contain the 

market price of and dividends on the 

registrant’s common equity and related 

security holder matters required by 

Items 201(a), (b) and (c) of Regulation S–

K (§ 229.201(a), (b) and (c) of this 

chapter). If the report precedes or 

accompanies a proxy statement 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), furnish the 

performance graph required by Item 

201(e) (§ 229.201(e) of this chapter). 

* * * * * 

■ 31. Amend § 240.14a–6 to revise 

paragraph (a)(4) to read as follows: 

§ 240.14a-6 Filing requirements. 

(a) * * * 

(4) The approval or ratification of a 

plan as defined in paragraph (a)(6)(ii) of 

Item 402 of Regulation S–K 

(§ 229.402(a)(6)(ii) of this chapter) or 

amendments to such a plan; 

* * * * * 

■ 32. Amend § 240.14a–101 by: 

■ a. Removing paragraphs (f), (g), and 

(h) of Item 7 and paragraph (b)(13)(iii) 

of Item 22; 

■ b. Revising ‘‘$60,000’’ to read 

‘‘$120,000’’ in the introductory text of 

Items 22(b)(7), (b)(8), and (b)(9); 

Instruction 2 to Item 22(b)(7); and 

Instruction 6 to Item 22(b)(9); 

■ c. Revising Note C, Item 7(b), (c), (d), 

and (e), the introductory text of Item 8, 

the undesignated paragraph following 

Item 8(d), Item 10(b)(1)(ii), the 

Instruction to Item 10(b)(1)(ii), 

Instruction 1 to Item 10, the 

introductory text of Item 22(b), Item 

22(b)(11), the Instruction to paragraph 

(b)(11) of Item 22, and the introductory 

text of Item 22(b)(13); and 

■ d. Adding Items 22(b)(15), (b)(16), and 

(b)(17). 

The revisions and additions read as 

follows: 

§ 240.14a–101 Schedule 14A. Information 

required in proxy statement. 

* * * * * 

Notes. 

* * * * * 

C. Except as otherwise specifically 

provided, where any item calls for 

information for a specified period with 

regard to directors, executive officers, officers 

or other persons holding specified positions 

or relationships, the information shall be 

given with regard to any person who held 

any of the specified positions or relationship 

at any time during the period. Information, 

other than information required by Item 404 

of Regulation S–B (§ 228.404 of this chapter) 

or Item 404 of Regulation S–K (§ 229.404 of 

this chapter), need not be included for any 

portion of the period during which such 

person did not hold any such position or 

relationship, provided a statement to that 

effect is made. 

* * * * * 

Item 7. Directors and executive 

officers. * * * 

(b) The information required by Items 

401, 404(a) and (b), 405 and 407(d)(4) 

and (d)(5) of Regulation S–K (§ 229.401, 

§ 229.404(a) and (b), § 229.405 and 

§ 229.407(d)(4) and (d)(5) of this 

chapter). 

(c) The information required by Item 

407(a) of Regulation S–K (§ 229.407 of 

this chapter). 

(d) The information required by Item 

407(b), (c)(1), (c)(2), (d)(1), (d)(2), (d)(3), 

(e)(1), (e)(2), (e)(3) and (f) of Regulation 

S–K (§ 229.407(b), (c)(1), (c)(2), (d)(1), 

(d)(2), (d)(3), (e)(1), (e)(2), (e)(3) and (f) 

of this chapter). 

(e) In lieu of the information required 

by this Item 7, investment companies 

registered under the Investment 

Company Act of 1940 (15 U.S.C. 80a) 

must furnish the information required 

by Item 22(b) of this Schedule 14A. 

Item 8. Compensation of directors and 

executive officers. 

Furnish the information required by 

Item 402 of Regulation S–K (§ 229.402 of 

this chapter) and paragraphs (e)(4) and 

(e)(5) of Item 407 of Regulation S–K 

(§ 229.407(e)(4) and (e)(5) of this 

chapter) if action is to be taken with 

regard to: 

* * * * * 

(d) * * * 

However, if the solicitation is made 

on behalf of persons other than the 

registrant, the information required 

need be furnished only as to nominees 

of the persons making the solicitation 

and associates of such nominees. In the 

case of investment companies registered 


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under the Investment Company Act of 

1940 (15 U.S.C. 80a), furnish the 

information required by Item 22(b)(13) 

of this Schedule 14A. 

* * * * * 

Item 10. Compensation Plans. * * * 

(b)(1) Additional information 

regarding specified plans subject to 

security holder action. * * * 

(ii) The estimated annual payment to 

be made with respect to current 

services. In the case of a pension or 

retirement plan, information called for 

by paragraph (a)(2) of this Item may be 

furnished in the format specified by 

paragraph (h)(2) of Item 402 of 

Regulation S–K (§ 229.402(h)(2) of this 

chapter). 

Instruction to paragraph (b)(1)(ii). 

In the case of investment companies 

registered under the Investment Company 

Act of 1940 (15 U.S.C. 80a), refer to 

Instruction 4 in Item 22(b)(13)(i) of this 

Schedule in lieu of paragraph (h)(2) of Item 

402 of Regulation S–K (§ 229.402(h)(2) of this 

chapter). 

* * * * * 

Instructions 

1. The term plan as used in this Item 

means any plan as defined in paragraph 

(a)(6)(ii) of Item 402 of Regulation S–K 

(§ 229.402(a)(6)(ii) of this chapter). 

* * * * * 

Item 22. Information required in 

investment company proxy statement. 

* * * * * 

(b) Election of Directors. If action is to 

be taken with respect to the election of 

directors of a Fund, furnish the 

following information in the proxy 

statement in addition to, in the case of 

business development companies, the 

information (and in the format) required 

by Item 7 and Item 8 of this Schedule 

14A. 

* * * * * 

(11) Provide in tabular form, to the 

extent practicable, the information 

required by Items 401(f) and (g), 404(a), 

and 405 of Regulation S–K 

(§§ 229.401(f) and (g), 229.404(a), and 

229.405 of this chapter). 

Instruction to paragraph (b)(11). 

Information provided under paragraph 

(b)(8) of this Item 22 is deemed to satisfy the 

requirements of Item 404(a) of Regulation 

S–K for information about directors, 

nominees for election as directors, and 

Immediate Family Members of directors and 

nominees, and need not be provided under 

this paragraph (b)(11). 

* * * * * 

(13) In the case of a Fund that is an 

investment company registered under 

the Investment Company Act of 1940 

(15 U.S.C. 80a), for all directors, and for 

each of the three highest-paid Officers 

that have aggregate compensation from 

the Fund for the most recently 

completed fiscal year in excess of 

$60,000 (‘‘Compensated Persons’’): 

* * * * * 

(15)(i) Provide the information (and in 

the format) required by Items 407(b)(1), 

(b)(2) and (f) of Regulation S–K 

(§ 229.407(b)(1), (b)(2) and (f) of this 

chapter); and 

(ii) Provide the following regarding 

the requirements for the director 

nomination process: 

(A) The information (and in the 

format) required by Items 407(c)(1) and 

(c)(2) of Regulation S–K (§ 229.407(c)(1) 

and (c)(2) of this chapter); and 

(B) If the Fund is a listed issuer (as 

defined in § 240.10A–3 of this chapter) 

whose securities are listed on a national 

securities exchange registered pursuant 

to section 6(a) of the Act (15 U.S.C. 

78f(a)) or in an automated inter-dealer 

quotation system of a national securities 

association registered pursuant to 

section 15A of the Act (15 U.S.C. 78o–

3(a)) that has independence 

requirements for nominating committee 

members, identify each director that is 

a member of the nominating committee 

that is not independent under the 

independence standards described in 

this paragraph. In determining whether 

the nominating committee members are 

independent, use the Fund’s definition 

of independence that it uses for 

determining if the members of the 

nominating committee are independent 

in compliance with the independence 

standards applicable for the members of 

the nominating committee in the listing 

standards applicable to the Fund. If the 

Fund does not have independence 

standards for the nominating committee, 

use the independence standards for the 

nominating committee in the listing 

standards applicable to the Fund. 

Instruction to paragraph (b)(15)(ii)(B). 

If the national securities exchange or interdealer quotation system on which the Fund’s 

securities are listed has exemptions to the 

independence requirements for nominating 

committee members upon which the Fund 

relied, disclose the exemption relied upon 

and explain the basis for the Fund’s 

conclusion that such exemption is 

applicable. 

(16) In the case of a Fund that is a 

closed-end investment company: 

(i) Provide the information (and in the 

format) required by Item 407(d)(1), 

(d)(2) and (d)(3) of Regulation S–K 

(§229.407(d)(1), (d)(2) and (d)(3) of this 

chapter); and 

(ii) Identify each director that is a 

member of the Fund’s audit committee 

that is not independent under the 

independence standards described in 

this paragraph. If the Fund does not 

have a separately designated audit 

committee, or committee performing 

similar functions, the Fund must 

provide the disclosure with respect to 

all members of its board of directors. 

(A) If the Fund is a listed issuer (as 

defined in § 240.10A–3 of this chapter) 

whose securities are listed on a national 

securities exchange registered pursuant 

to section 6(a) of the Act (15 U.S.C. 

78f(a)) or in an automated inter-dealer 

quotation system of a national securities 

association registered pursuant to 

section 15A of the Act (15 U.S.C. 78o–

3(a)) that has independence 

requirements for audit committee 

members, in determining whether the 

audit committee members are 

independent, use the Fund’s definition 

of independence that it uses for 

determining if the members of the audit 

committee are independent in 

compliance with the independence 

standards applicable for the members of 

the audit committee in the listing 

standards applicable to the Fund. If the 

Fund does not have independence 

standards for the audit committee, use 

the independence standards for the 

audit committee in the listing standards 

applicable to the Fund. 

(B) If the Fund is not a listed issuer 

whose securities are listed on a national 

securities exchange registered pursuant 

to section 6(a) of the Act (15 U.S.C. 

78f(a)) or in an automated inter-dealer 

quotation system of a national securities 

association registered pursuant to 

section 15A of the Act (15 U.S.C. 78o–

3(a)), in determining whether the audit 

committee members are independent, 

use a definition of independence of a 

national securities exchange registered 

pursuant to section 6(a) of the Act (15 

U.S.C. 78f(a)) or an automated interdealer quotation system of a national 

securities association registered 

pursuant to section 15A of the Act (15 

U.S.C. 780–3(a)) which has 

requirements that a majority of the 

board of directors be independent and 

that has been approved by the 

Commission, and state which definition 

is used. Whatever such definition the 

Fund chooses, it must use the same 

definition with respect to all directors 

and nominees for director. If the 

national securities exchange or national 

securities association whose standards 

are used has independence standards 

for the members of the audit committee, 

use those specific standards. 

Instruction to paragraph (b)(16)(ii). 

If the national securities exchange or interdealer quotation system on which the Fund’s 

securities are listed has exemptions to the 

independence requirements for nominating 

committee members upon which the Fund 

relied, disclose the exemption relied upon 

and explain the basis for the Fund’s 


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conclusion that such exemption is 

applicable. The same disclosure should be 

provided if the Fund is not a listed issuer and 

the national securities exchange or interdealer quotation system selected by the Fund 

has exemptions that are applicable to the 

Fund. 

(17) In the case of a Fund that is an 

investment company registered under 

the Investment Company Act of 1940 

(15 U.S.C. 80a), if a director has 

resigned or declined to stand for reelection to the board of directors since 

the date of the last annual meeting of 

security holders because of a 

disagreement with the registrant on any 

matter relating to the registrant’s 

operations, policies or practices, and if 

the director has furnished the registrant 

with a letter describing such 

disagreement and requesting that the 

matter be disclosed, the registrant shall 

state the date of resignation or 

declination to stand for re-election and 

summarize the director’s description of 

the disagreement. If the registrant 

believes that the description provided 

by the director is incorrect or 

incomplete, it may include a brief 

statement presenting its view of the 

disagreement. 

* * * * * 

■ 33. Amend § 240.14c–5 to revise 

paragraph (a)(4) before the undesignated 

paragraph to read as follows: 

§ 240.14c–5 Filing requirements. 

(a) * * * 

(4) The approval or ratification of a 

plan as defined in paragraph (a)(6)(ii) of 

Item 402 of Regulation S–K 

(§ 229.402(a)(6)(ii) of this chapter) or 

amendments to such a plan. 

* * * * * 

■ 34. Amend § 240.15d–11 by revising 

paragraph (c) to read as follows: 

§ 240.15d–11 Current reports on Form 8–K 

(§ 249.308 of this chapter). 

* * * * * 

(c) No failure to file a report on Form 

8–K that is required solely pursuant to 

Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 

4.02(a), 5.02(e) or 6.03 of Form 8-K shall 

be deemed to be a violation of 15 U.S.C. 

78j(b) and § 240.10b–-5. 

■ 35. Add § 240.15d–-20 to read as 

follows: 

§ 240.15d–-20 Plain English presentation 

of specified information. 

(a) Any information included or 

incorporated by reference in a report 

filed under section 15(d) of the Act (15 

U.S.C. 78o(d)) that is required to be 

disclosed pursuant to Item 402, 403, 404 

or 407 of Regulation S–B (§§ 228.402, 

228.403, 228.404 or 228.407 of this 

chapter) or Item 402, 403, 404 or 407 of 

Regulation S–K (§§ 229.402, 229.403, 

229.404 or 229.407 of this chapter) must 

be presented in a clear, concise and 

understandable manner. You must 

prepare the disclosure using the 

following standards: 

(1) Present information in clear, 

concise sections, paragraphs and 

sentences; 

(2) Use short sentences; 

(3) Use definite, concrete, everyday 

words; 

(4) Use the active voice; 

(5) Avoid multiple negatives; 

(6) Use descriptive headings and 

subheadings; 

(7) Use a tabular presentation or bullet 

lists for complex material, wherever 

possible; 

(8) Avoid legal jargon and highly 

technical business and other 

terminology; 

(9) Avoid frequent reliance on 

glossaries or defined terms as the 

primary means of explaining 

information. Define terms in a glossary 

or other section of the document only if 

the meaning is unclear from the context. 

Use a glossary only if it facilitates 

understanding of the disclosure; and 

(10) In designing the presentation of 

the information you may include 

pictures, logos, charts, graphs and other 

design elements so long as the design is 

not misleading and the required 

information is clear. You are encouraged 

to use tables, schedules, charts and 

graphic illustrations that present 

relevant data in an understandable 

manner, so long as such presentations 

are consistent with applicable 

disclosure requirements and consistent 

with other information in the document. 

You must draw graphs and charts to 

scale. Any information you provide 

must not be misleading. 

(b) [Reserved] 

Note to § 240.15d–20. In drafting the 

disclosure to comply with this section, you 

should avoid the following: 

1. Legalistic or overly complex 

presentations that make the substance of the 

disclosure difficult to understand; 

2. Vague ‘‘boilerplate’’ explanations that 

are imprecise and readily subject to different 

interpretations; 

3. Complex information copied directly 

from legal documents without any clear and 

concise explanation of the provision(s); and 

4. Disclosure repeated in different sections 

of the document that increases the size of the 

document but does not enhance the quality 

of the information. 

■ 36. Amend § 240.16b–3 by: 

■ a. Adding ‘‘and’’ at the end of 

paragraph (b)(3)(i)(B); 

■ b. Removing ‘‘; and’’ at the end of 

paragraph (b)(3)(i)(C) and in its place 

adding a period; 

■ c. Removing paragraph (b)(3)(i)(D); 

and 

■ d. Adding Note (4) to read as follows: 

§ 240.16b–3 Transactions between an 

issuer and its officers or directors. 

* * * * * 

Notes to § 240.16b–3: 

* * * * * 

Note (4): For purposes of determining a 

director’s status under those portions of 

paragraph (b)(3)(i) that reference § 229.404(a) 

of this chapter, an issuer may rely on the 

disclosure provided under § 229.404(a) of 

this chapter for the issuer’s most recent fiscal 

year contained in the most recent filing in 

which disclosure required under § 229.404(a) 

is presented. Where a transaction disclosed 

in that filing was terminated before the 

director’s proposed service as a NonEmployee 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 be required to be disclosed under 

§ 229.404(a) of this chapter, 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 be required to be 

disclosed under § 229.404(a) in a future 

filing, the director no longer is eligible to 

serve as a Non-Employee Director; provided, 

however, that 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 this 

note. In making the determinations specified 

in this Note, the issuer may rely on 

information it obtains from the director, for 

example, pursuant to a response to an 

inquiry. 

PART 245—REGULATION BLACKOUT 

TRADING RESTRICTION 

(REGULATION BTR—BLACKOUT 

TRADING RESTRICTION) 

■ 37. The authority citation for Part 245 

continues to read in part as follows: 

Authority: 15 U.S.C. 78w(a), unless 

otherwise noted. 

* * * * * 

§ 245.100 [Amended] 

■ 38. Amend § 245.100, paragraph 

(a)(2), by revising the phrase ‘‘paragraph 

(a) or (b) of Item 404’’ to read 

‘‘paragraph (a) of Item 404’’. 

* * * * * 

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 39. The authority citation for part 249 

continues to read in part as follows: 


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53264 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations 

Authority: 15 U.S.C. 78a et seq. and 7201 

et seq.; and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

■ 40. Amend Form 10 (referenced in 

§ 249.210) by revising Items 6 and 7 to 

read as follows: 

Note: The text of Form 10 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 10 

General Form for Registration of 

Securities Pursuant to Section 12(B) or 

(G) of the Securities Exchange Act of 

1934 

* * * * * 

Item 6. Executive Compensation. 

Furnish the information required by 

Item 402 of Regulation S-K (§ 229.402 of 

this chapter) and paragraph (e)(4) of 

Item 407 of Regulation S-K (§ 229.407 of 

this chapter). 

Item 7. Certain Relationships and 

Related Transactions, and Director 

Independence. 

Furnish the information required by 

Item 404 of Regulation S–K (§ 229.404 of 

this chapter) and Item 407(a) of 

Regulation S–K (§ 229.407(a) of this 

chapter). 

* * * * * 

■ 41. Amend Form 10–SB (referenced in 

§ 249.210b), Information Required in 

Registration Statement, by revising Item 

7 to read as follows: 

Note: The text of Form 10–SB does not, 

and this amendment will not, appear in the 

Code of Federal Regulations. 

Form 10–SB 

General Form for Registration of 

Securities of Small Business Issuers 

* * * * * 

Information Required in Registration 

Statement 

* * * * * 

Item 7. Certain Relationships and 

Related Transactions, and Director 

Independence. 

Furnish the information required by 

Item 404 of Regulation S–B (§ 228.404 of 

this chapter) and Item 407(a) of 

Regulation S–B (§ 228.407(a) of this 

chapter). 

* * * * * 

■ 42. Amend Form 20–F (referenced in 

§ 249.220f) by revising Instruction 

4.(c)(v) to the Instructions as to Exhibits 

to read as follows: 

Note: The text of Form 20–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 20–F 

* * * * * 

Instructions as to Exhibits 

* * * * * 

4.(a) * * * 

(c) * * * 

(v) Public filing of the management 

contract or compensatory plan, contract 

or arrangement, or portion thereof, is 

not required in the company’s home 

country and is not otherwise publicly 

disclosed by the company. 

* * * * * 

■ 43. Form 8–K (referenced in 

§ 249.308) is amended by: 

■ a. Revising General Instruction D; 

■ b. Revising the last sentence of 

Instruction 1 to Item 1.01; 

■ c. Revising the heading of Item 5.02; 

■ d. Revising Item 5.02(b), the 

introductory text of Item 5.02(c), Item 

5.02(c)(2) and (c)(3); 

■ e. Adding Items 5.02(d)(5), (e) and (f); 

and 

■ f. Adding Instructions 3 and 4 to Item 

5.02. 

The revisions and additions read as 

follows: 

Note: The text of Form 8-K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 8–K 

Current Report 

Pursuant to Section 13 or 15(d) of the 

Securities Exchange Act of 1934 

* * * * * 

General Instructions 

* * * * * 

D. Preparation of Report. 

This form is not to be used as a blank 

form to be filled in, but only as a guide 

in the preparation of the report on paper 

meeting the requirements of Rule 12b–

12 (17 CFR 240.12b–12). The report 

shall contain the number and caption of 

the applicable item, but the text of such 

item may be omitted, provided the 

answers thereto are prepared in the 

manner specified in Rule 12b–13 (17 

CFR 240.12b-13). To the extent that Item 

1.01 and one or more other items of the 

form are applicable, registrants need not 

provide the number and caption of Item 

1.01 so long as the substantive 

disclosure required by Item 1.01 is 

disclosed in the report and the number 

and caption of the other applicable 

item(s) are provided. All items that are 

not required to be answered in a 

particular report may be omitted and no 

reference thereto need be made in the 

report. All instructions should also be 

omitted. 

* * * * * 

Item 1.01 Entry into a Material 

Definitive Agreement. 

* * * * * 

Instructions. 

1. * * * An agreement involving the 

subject matter identified in Item 

601(b)(10)(iii)(A) or (B) need not be 

disclosed under this Item. 

* * * * * 

Item 5.02 Departure of Directors or 

Certain Officers; Election of Directors; 

Appointment of Certain Officers; 

Compensatory Arrangements of Certain 

Officers. 

* * * * * 

(b) If the registrant’s principal 

executive officer, president, principal 

financial officer, principal accounting 

officer, principal operating officer, or 

any person performing similar 

functions, or any named executive 

officer, retires, resigns or is terminated 

from that position, or if a director 

retires, resigns, is removed, or refuses to 

stand for re-election (except in 

circumstances described in paragraph 

(a) of this Item 5.02), disclose the fact 

that the event has occurred and the date 

of the event. 

(c) If the registrant appoints a new 

principal executive officer, president, 

principal financial officer, principal 

accounting officer, principal operating 

officer, or person performing similar 

functions, disclose the following 

information with respect to the newly 

appointed officer: 

(1) * * * 

(2) the information required by Items 

401(b), (d), (e) and Item 404(a) of 

Regulation S-K (17 CFR 229.401(b), (d), 

(e) and 229.404(a)), or, in the case of a 

small business issuer, Items 401(a)(4), 

(a)(5), (c), and Item 404(a) of Regulation 

S-B (17 CFR 228.401(a)(4), (a)(5), (c), 

and 228.404(a), respectively); and 

(3) a brief description of any material 

plan, contract or arrangement (whether 

or not written) to which a covered 

officer is a party or in which he or she 

participates that is entered into or 

material amendment in connection with 

the triggering event or any grant or 

award to any such covered person or 

modification thereto, under any such 

plan, contract or arrangement in 

connection with any such event. 

(d) * * * 

(5) a brief description of any material 

plan, contract or arrangement (whether 

or not written) to which the director is 

a party or in which he or she 

participates that is entered into or 

material amendment in connection with 

the triggering event or any grant or 

award to any such covered person or 

modification thereto, under any such 

plan, contract or arrangement in 

connection with any such event. 


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(e) If the registrant enters into, adopts, 

or otherwise commences a material 

compensatory plan, contract or 

arrangement (whether or not written), as 

to which the registrant’s principal 

executive officer, principal financial 

officer, or a named executive officer 

participates or is a party, or such 

compensatory plan, contract or 

arrangement is materially amended or 

modified, or a material grant or award 

under any such plan, contract or 

arrangement to any such person is made 

or materially modified, then the 

registrant shall provide a brief 

description of the terms and conditions 

of the plan, contract or arrangement and 

the amounts payable to the officer 

thereunder. 

Instructions to paragraph (e). 

1. Disclosure under this Item 5.02(e) shall 

be required whether or not the specified 

event is in connection with events otherwise 

triggering disclosure pursuant to this Item 

5.02. 

2. Grants or awards (or modifications 

thereto) made pursuant to a plan, contract or 

arrangement (whether involving cash or 

equity), that are materially consistent with 

the previously disclosed terms of such plan, 

contract or arrangement, need not be 

disclosed under this Item 5.02(e), provided 

the registrant has previously disclosed such 

terms and the grant, award or modification is 

disclosed when Item 402 of Regulation S–K 

(17 CFR 229.402) requires such disclosure. 

(f) If the salary or bonus of a named 

executive officer cannot be calculated as 

of the most recent practicable date and 

is omitted from the Summary 

Compensation Table as specified in 

Instruction 1 to Item 402(b)(2)(iii) and 

(iv) of Regulation S–B or Instruction 1 

to Item 402(c)(2)(iii) and (iv) of 

Regulation S–K, disclose the 

appropriate information under this Item 

5.02(f) when there is a payment, grant, 

award, decision or other occurrence as 

a result of which such amounts become 

calculable in whole or part. Disclosure 

under this Item 5.02(f) shall include a 

new total compensation figure for the 

named executive officer, using the new 

salary or bonus information to 

recalculate the information that was 

previously provided with respect to the 

named executive officer in the 

registrant’s Summary Compensation 

Table for which the salary and bonus 

information was omitted in reliance on 

Instruction 1 to Item 402(b)(2)(iii) and 

(iv) of Regulation S–B (17 CFR 

228.402(b)(2)(iii) and (iv)) or Instruction 

1 to Item 402(c)(2)(iii) and (iv) of 

Regulation S–K (17 CFR 

229.402(c)(2)(iii) and (iv)). 

Instructions to Item 5.02. 

* * * * * 

3. The registrant need not provide 

information with respect to plans, 

contracts, and arrangements to the 

extent they do not discriminate in 

scope, terms or operation, in favor of 

executive officers or directors of the 

registrant and that are available 

generally to all salaried employees. 

4. For purposes of this Item, the term 

‘‘named executive officer’’ shall refer to 

those executive officers for whom 

disclosure was required in the 

registrant’s most recent filing with the 

Commission under the Securities Act 

(15 U.S.C. 77a et seq.) or Exchange Act 

(15 U.S.C. 78a et seq.) that required 

disclosure pursuant to Item 402(c) of 

Regulation S–K (17 CFR 229.402(c)) or 

Item 402(b) of Regulation S–B (17 CFR 

228.402(b)), as applicable. 

* * * * * 

■ 44. Amend Form 10–Q (referenced in 

§ 249.308a) by revising Item 5(b) in Part 

II to read as follows: 

Note: The text of Form 10–Q does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 10–Q 

* * * * * 

Part II—Other Information 

* * * * * 

Item 5. Other Information. 

(a) * * * 

(b) Furnish the information required 

by Item 407(c)(3) of Regulation S–K 

(§ 229.407 of this chapter). 

* * * * * 

■ 45. Amend Form 10–QSB (referenced 

in § 249.308b) by revising Item 5(b) in 

Part II to read as follows: 

Note: The text of Form 10–QSB does not, 

and this amendment will not, appear in the 

Code of Federal Regulations. 

Form 10–QSB 

* * * * * 

Part II—Other Information 

* * * * * 

Item 5. Other Information. 

(a) * * * 

(b) Furnish the information required 

by Item 407(c)(3) of Regulation S–B 

(§ 228.407 of this chapter). 

* * * * * 

■ 46. Amend Form 10–K (referenced in 

§ 249.310) by revising Item 10 before the 

instruction and Items 11 and 13 in Part 

III to read as follows: 

Note: The text of Form 10–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 10–K 

* * * * * 

Part III 

* * * * * 

Item 10. Directors, Executive Officers 

and Corporate Governance. 

Furnish the information required by 

Items 401, 405, 406, and 407(c)(3), (d)(4) 

and (d)(5) of Regulation S–K 

(§§ 229.401, 229.405, 229.406, and 

229.407(c)(3), (d)(4) and (d)(5) of this 

chapter). 

* * * * * 

Item 11. Executive Compensation. 

Furnish the information required by 

Item 402 of Regulation S–K (§ 229.402 of 

this chapter) and paragraphs (e)(4) and 

(e)(5) of Item 407 of Regulation S–K 

(§ 229.407(e)(4) and (e)(5) of this 

chapter). 

* * * * * 

Item 13. Certain Relationships and 

Related Transactions, and Director 

Independence. 

Furnish the information required by 

Item 404 of Regulation S–K (§ 229.404 of 

this chapter) and Item 407(a) of 

Regulation S–K (§ 229.407(a) of this 

chapter). 

* * * * * 

■ 47. Amend Form 10–KSB (referenced 

in § 249.310b) by revising Item 9 before 

the instruction and Item 12 in Part III to 

read as follows: 

Note: The text of Form 10–KSB does not, 

and this amendment will not, appear in the 

Code of Federal Regulations. 

Form 10–KSB 

* * * * * 

Part III 

Item 9. Directors, Executive Officers, 

Promoters, Control Persons and 

Corporate Governance; Compliance 

With Section 16(a) of the Exchange Act. 

Furnish the information required by 

Items 401, 405, 406, and 407(c)(3), (d)(4) 

and (d)(5) of Regulation S–B 

(§§ 228.401, 228.405, 228.406, and 

228.407(c)(3), (d)(4) and (d)(5) of this 

chapter). 

* * * * * 

Item 12. Certain Relationships and 

Related Transactions, and Director 

Independence. 

Furnish the information required by 

Item 404 of Regulation S–B (§ 228.404 of 

this chapter) and Item 407(a) of 

Regulation S–B (§ 228.407(a) of this 

chapter). 

* * * * * 


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PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

■ 48. The authority citation for Part 274 

continues to read in part as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 

80a–26, and 80a–29, unless otherwise noted. 

* * * * * 

■ 49. Amend Form N–1A (referenced in 

§§ 239.15A and 274.11A) by: 

■ a. Revising ‘‘$60,000’’ to read 

‘‘$120,000’’ in the introductory text of 

Items 12(b)(6), (b)(7), and (b)(8); 

Instruction 2 to Item 12(b)(6); and 

Instruction 5 to Item 12(b)(8); and 

■ b. Removing the word ‘‘relocation,’’ in 

the second sentence of Instruction 2 to 

Item 15(b). 

Note: The text of Form N–1A does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

■ 50. Amend Form N–2 (referenced in 

§§ 239.14 and 274.11a–1) by: 

■ a. Revising ‘‘$60,000’’ to read 

‘‘$120,000’’ in the introductory text of 

paragraphs 9, 10, and 11 of Item 18; 

Instruction 2 to paragraph 9 of Item 18; 

and Instruction 5 to paragraph 11 of 

Item 18; 

■ b. Revising the introductory text of 

paragraph 13 of Item 18; 

■ c. Removing paragraph 13(c) of Item 

18; 

■ d. Redesignating paragraphs 14 and 15 

of Item 18 as paragraphs 15 and 16, 

respectively; 

■ e. Adding new paragraph 14 of Item 

18; 

■ f. Removing ‘‘relocation,’’ from the 

second sentence of Instruction 2 to 

paragraph 2 of Item 21; and 

■ g. Revising the cite ‘‘Item 18.15’’ to 

read ‘‘Item 18.16’’ in Instruction 8.a. to 

Item 24. 

The addition and revision read as 

follows: 

Note: The text of Form N–2 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form N–2 

* * * * * 

Item 18. Management. 

* * * * * 

13. In the case of a Registrant that is 

not a business development company, 

provide the following for all directors of 

the Registrant, all members of the 

advisory board of the Registrant, and for 

each of the three highest paid officers or 

any affiliated person of the Registrant 

with aggregate compensation from the 

Registrant for the most recently 

completed fiscal year in excess of 

$60,000 (‘‘Compensated Persons’’). 

* * * * * 

14. In the case of a Registrant that is 

a business development company, 

provide the information required by 

Item 402 of Regulation S–K (17 CFR 

229.402). 

* * * * * 

■ 51. Amend Form N–3 (referenced in 

§§ 239.17a and 274.11b) by: 

■ a. Revising ‘‘$60,000’’ to read 

‘‘$120,000’’ in the introductory text of 

paragraphs (h), (i), and (j) of Item 20; 

Instruction 2 to paragraph (h) of Item 20; 

and Instruction 5 to paragraph (j) of Item 

20; and 

■ b. Removing the word ‘‘relocation,’’ in 

the second sentence of Instruction 2 to 

Item 22(b). 

Note: The text of Form N–3 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

■ 52. Amend Form N–CSR (referenced 

in §§ 249.331 and 274.128) by revising 

Item 10 to read as follows: 

Note: The text of Form N–CSR does not, 

and this amendment will not, appear in the 

Code of Federal Regulations. 

Form N–CSR 

* * * * * 

Item 10. Submission of Matters to a 

Vote of Security Holders. 

Describe any material changes to the 

procedures by which shareholders may 

recommend nominees to the registrant’s 

board of directors, where those changes 

were implemented after the registrant 

last provided disclosure in response to 

the requirements of Item 407(c)(2)(iv) of 

Regulation S–K (17 CFR 229.407) (as 

required by Item 22(b)(15) of Schedule 

14A (17 CFR 240.14a–101)), or this Item. 

Instruction. For purposes of this Item, 

adoption of procedures by which 

shareholders may recommend nominees 

to the registrant’s board of directors, 

where the registrant’s most recent 

disclosure in response to the 

requirements of Item 407(c)(2)(iv) of 

Regulation S–K (17 CFR 229.407) (as 

required by Item 22(b)(15) of Schedule 

14A (17 CFR 240.14a–101)), or this Item, 

indicated that the registrant did not 

have in place such procedures, will 

constitute a material change. 

* * * * * 

Dated: August 29, 2006. 

By the Commission. 

Nancy M. Morris, 

Secretary. 

[FR Doc. 06–6968 Filed 9–7–06; 8:45 am] 

BILLING CODE 8010–01–P 


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