Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Proposed Rules 53267 

1 17 CFR 229.402. 

2 17 CFR 229.10 et seq. 

3Executive Compensation and Related Party 

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

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

4Executive Compensation and Related Party 

Disclosure, Release No. 33–8732A (Aug. 29, 2006) 

(the ‘‘Adopting Release’’) published in this issue of 

the Federal Register. 

5Proposed Item 402(f)(2). 

6See, e.g., letters from the Corporate Library; The 

Greenlining Institute; Institutional Investor Group; 

and State Board of Administration (SBA) of Florida. 

7See, e.g., letters from American Bar Association, 

Committee on Federal Regulation of Securities; 

Chamber of Commerce of the United States of 

America (‘‘Chamber of Commerce’’); Eli Lilly and 

Company (‘‘Eli Lilly’’); Leggett & Platt, Incorporated 

(‘‘Leggett & Platt’’); Nancy Lucke Ludgus; and 

Mercer Human Resource Consulting (‘‘Mercer’’). 

8See, e.g., letters from American Bar Association, 

Joint Committee on Employee Benefits; Business 

Roundtable; 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; Chamber of 

Commerce; Cleary Gottlieb Steen & Hamilton LLP 

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

Networks’’); Compass Bancshares, Inc. (‘‘Compass 

Bancshares’’); Compensia; Cravath, Swaine & Moore 

LLP (‘‘Cravath’’); DreamWorks Animation SKG 

(‘‘DreamWorks’’); Eli Lilly; Emerson Electric Co.; 

Fenwick & West LLP; The Financial Services 

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

dated April 10, 2006; Investment Company Institute 

(‘‘ICI’’); Intel Corporation (‘‘Intel’’); Kellogg 

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

(‘‘Kennedy’’); Mercer; Peabody Energy Corporation 

(‘‘Peabody Energy’’); Pearl Meyer & Partners; 

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

Cromwell LLP; Society of Corporate Secretaries & 

Governance Professionals (‘‘SCSGP’’); and 

WorldatWork. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 229 

[Release Nos. 33–8735; 34–54380; IC– 

27470; File No. S7–03–06] 

RIN 3235–AI80 

Executive Compensation Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Request for additional comment. 

SUMMARY: The Securities and Exchange 

Commission is requesting additional 

comment on a proposed amendment to 

the disclosure requirements for 

executive and director compensation. 

We are requesting comments regarding 

the proposal to require compensation 

disclosure for three additional highly 

compensated employees. 

DATES: Comments should be received on 

or before October 23, 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/proposed.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/proposed/ 

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 solicit 

additional comments on a proposal to 

amend Item 402 1 of Regulation S–K.2

I. Background 

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.3 We received over 

20,000 comment letters in response to 

our proposals. In general, commenters 

supported the proposals and their 

objectives. On July 26, 2006 we adopted 

the rules and amendments substantially 

as proposed, with certain modifications 

to address a number of points that 

commenters raised.4

We did not adopt the proposed 

disclosure requirement regarding the 

total compensation and job description 

of up to an additional three most highly 

compensated employees who are not 

executive officers or directors but who 

earn more than any of the named 

executive officers. Instead we are 

requesting additional comment. 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. 

II. Discussion 

As part of the Item 402 narrative 

disclosure requirements, 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.5 We received 

extensive comment on this proposal. 

Some commenters supported the 

proposal or suggested that it should go 

further.6 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.7 Some commenters expressed 

concern that the proposed disclosure 

would raise privacy issues or negatively 

impact competition for employees.8

While we continue to consider whether 

to adopt such a requirement as part of 

the executive compensation disclosure 

rules, 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 


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53268 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Proposed Rules 

9See, e.g., letters from California State Teachers’

Retirement System; Cleary; CNET Networks; 

Compass Bancshares; DreamWorks; Entertainment 

Industry Group; Fried, Frank, Harris, Shriver & 

Jacobson LLP; FSR; Hewitt Associates LLC; ICI; 

Intel; Kellogg; Kennedy; Leggett & Platt; Peabody 

Energy; Pearl Meyer & Partners; SCSGP; SIA; 

Stradling Yocca Carlson & Rauth; Top Five Data 

Services, Inc.; Towers Perrin, dated April 10, 2006; 

and Walden Asset Management. 

10The 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.’’ Uniform and Integrated 

Reporting Requirements: Management 

Remuneration, Release No. 33–6003 (Dec. 4, 1978) 

[43 FR 58151] (the ‘‘1978 Release’’). See the 

Adopting Release at 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 policy-making role. See, 

e.g., letters from SCSGP and Cravath. 

11See, 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). 

12The term large accelerated filer is defined in 

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

officers.9 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.10 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 

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,’’ 11 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. 

III. 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 

filers 12 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? 


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Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Proposed Rules 53269 

13We 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. 

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? 

• 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 13 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. 

Dated: August 29, 2006. 

By the Commission. 

Nancy M. Morris, 

Secretary. 

[FR Doc. 06–7405 Filed 9–7–06; 8:45 am] 

BILLING CODE 8010–01–P 


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