6542 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

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 245.100. 

13 17 CFR 245.100 et seq. 

14 17 CFR 240.13a–11. 

15 17 CFR 240.14a–6. 

16 17 CFR 240.14c–5. 

17 17 CFR 240.15d–11. 

18 17 CFR 240.16b–3. 

19 15 U.S.C. 78a et seq. 

20 17 CFR 240.14a–101. 

21 17 CFR 249.308. 

22 17 CFR 249.210. 

23 17 CFR 249.210b. 

24 17 CFR 249.308a. 

25 17 CFR 249.308b. 

26 17 CFR 249.310. 

27 17 CFR 249.310b. 

28 17 CFR 249.220f. 

29 17 CFR 239.10. 

30 17 CFR 239.11. 

31 17 CFR 239.13. 

32 17 CFR 239.25. 

33 17 CFR 239.18. 

34 17 CFR 239.15A and 274.11A. 

35 17 CFR 239.14 and 274.11a–1. 

36 17 CFR 239.17a and 274.11b. 

37 15 U.S.C. 80a–1 et seq. 

38 17 CFR 249.331 and 274.128. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 228, 229, 239, 240, 245, 

249 and 274 

[Release Nos. 33–8655; 34–53185; IC– 

27218; File No. S7–03–06] 

RIN 3235–AI80 

Executive Compensation and Related 

Party Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission is proposing amendments 

to the disclosure requirements for 

executive and director compensation, 

related party transactions, director 

independence and other corporate 

governance matters and security 

ownership of officers and directors. 

These amendments would 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 also propose to require that 

disclosure under the amended items 

generally be provided in plain English. 

The proposed amendments are intended 

to make proxy 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. 

DATES: Comments should be received on 

or before April 10, 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 

20549–9303. 

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, Carloyn 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 

propose to amend: 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 and Rule 100 12 of 

Regulation BTR.13 We also propose to 

add new Item 407 to Regulations S–K 

and S–B. In addition, we propose to 

amend Rules 13a–11,14 14a–6,15 14c– 

5,16 15d–11 17 and 16b–3 18 under the 

Securities Exchange Act of 1934.19 We 

propose to add Rules 13a–20 and 15d– 

20 under the Exchange Act. We further 

propose to amend Schedule 14A 20

under the Exchange Act, as well as 

Exchange Act Forms 8–K,21 10,22

10SB,23 10–Q,24 10–QSB,25 10–K,26 10– 

KSB27 and 20–F.28 Finally, we propose 

to amend Forms SB–2,29 S–1,30 S–3,31

S–4 32 and S–11 33 under the Securities 

Act, Forms N–1A,34 N–2,35 and N–3 36

under the Securities Act and the 

Investment Company Act of 1940,37 and 

Form N–CSR38 under the Investment 

Company Act and the Exchange Act. 

Table of Contents 

I. Background and Overview of the Proposals 

II. Executive and Director Compensation 

Disclosure 

A. Compensation Discussion and Analysis 

1. Intent and Operation of the Proposed 

Compensation Discussion and Analysis 

2. Proposed Instructions to Compensation 

Discussion and Analysis 

3. ‘‘Filed’’ Status of Compensation 

Discussion and Analysis 

4. Proposed Elimination of the 

Performance Graph and the 

Compensation Committee Report 

B. 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-Stock Incentive Plan Compensation 

Column 

d. All Other Compensation Column 

i. Earnings on Deferred Compensation 

ii. Increase in Pension Value 

iii. Perquisites and Other Personal Benefits 

iv. Additional All Other Compensation 

Column Items 

e. Captions and Table Layout 

2. Supplemental Annual Compensation 

Tables 

a. Grants of Performance-Based Awards 

Table 

b. Grants of All Other Equity Awards Table 

3. Narrative Disclosure to Summary 

Compensation Table and Supplemental 

Tables 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6543 

39 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, 

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 issuers 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.’’

40 In 1938, the Commission promulgated its first 

executive and director compensation disclosure 

rules for proxy statements. Release No. 34–1823 

(Aug. 11, 1938). 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] (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). 

41Executive Compensation Disclosure, Release 

No. 33–6962 (Oct. 16, 1992) [57 FR 48125] (the 

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

Disclosure; Securityholder Lists and Mailing 

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

FR 63010], at Section II. 

4. Exercises and Holdings of Previously 

Awarded Equity 

a. Outstanding Equity Awards at Fiscal 

Year-End 

b. Option Exercises and Stock Vesting 

5. Post-Employment Compensation 

a. Retirement Plan Potential Annual 

Payments and Benefits Table 

b. Nonqualified Defined Contribution and 

Other Deferred Compensation Plans 

Table 

c. Other Potential Post-Employment 

Payments 

6. Officers Covered 

a. Named Executive Officers 

b. Identification of Most Highly 

Compensated Officers; Dollar Threshold 

for Disclosure 

7. Interplay of Items 402 and 404 

8. Other Proposed Changes 

9. Compensation of Directors 

C. Treatment of Specific Types of Issuers 

1. Small Business Issuers 

2. Foreign Private Issuers 

3. Business Development Companies 

D. Conforming Amendments 

E. General Comment Requests on the Item 

402 Proposals 

III. Proposed Revisions to Form 8–K and the 

Periodic Report Exhibit Requirements 

A. Proposed Revisions to Items 1.01 and 

5.02 of Form 8–K 

B. Proposed 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 that Item 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 

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. Paperwork Reduction Act Burden 

Estimates 

1. Securities Act Registration Statements, 

Exchange Act Registration Statements 

and Exchange Act Annual Reports 

2. Exchange Act Current Reports 

D. Request for Comment 

IX. Cost-Benefit Analysis 

A. Background 

B. Summary of Proposals 

C. Benefits 

D. Costs 

E. Request for Comment 

X. Consideration of Burden on Competition 

and Promotion of Efficiency, 

Competition and Capital Formation 

XI. Initial Regulatory Flexibility Act Analysis 

A. Reasons for the Proposed Action 

B. Objectives 

C. Legal Basis 

D. Small Entities Subject to the Proposed 

Amendments 

E. Reporting, Recordkeeping and Other 

Compliance Requirements 

F. Duplicative, Overlapping or Conflicting 

Federal Rules 

G. Significant Alternatives 

H. Solicitation of Comment 

XII. Small Business Regulatory Enforcement 

Fairness Act 

XIII. Statutory Authority and Text of the 

Proposed Amendments 

I. Background and Overview of the 

Proposals 

We are proposing revisions to our 

rules governing disclosure of executive 

compensation, director compensation, 

related party transactions, director 

independence and other corporate 

governance matters and current 

reporting regarding compensation 

arrangements. The proposed revisions 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 proposing to 

revise our disclosure rules regarding 

related party transactions and director 

independence and board committee 

functions. 

Finally, some compensation 

arrangements must be disclosed under 

our recently revised rules relating to 

current reports on Form 8-K. We 

propose to reorganize and more 

appropriately focus 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,39 the 

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 issuer.40 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.41

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 the current rules 

results 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 proposing an 

approach that builds on the strengths of 


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6544 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

42 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. 

43As discussed in more detail below, this 

narrative disclosure, together with the 

Compensation Discussion and Analysis noted 

above, would replace the currently required 

Compensation Committee Report and the 

Performance Graph. Unlike the current 

requirements under which both the report and the 

graph, although physically included in the proxy 

statement, need only be furnished to the 

Commission, the proposed narrative disclosure, 

along with the rest of the proposed executive officer 

and director compensation, would be company 

disclosure filed with the Commission. 

Current Item 402(a)(9) of Regulation S–K provides 

that the Compensation Committee Report and 

Performance Graph ‘‘shall not be deemed to be 

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

Commission or subject to Regulations 14A or 14C 

[17 CFR 240.14a–1 et seq. or 240.14c–1 et seq.], 

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.’’

44We made similar proposals, 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. 

45 Disclosure of Certain Relationships and 

Transactions Involving Management, Release No. 

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

Release’’). 

the current requirements rather than 

discarding them. However, today’s 

proposals do represent a thorough 

rethinking of our current rules that 

would combine a broader-based tabular 

presentation with improved narrative 

disclosure supplementing the tables. 

This proposed approach would 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 proposals that we publish for 

comment today would require that all 

elements of compensation must be 

disclosed. We also seek to structure the 

revised requirements sufficiently 

broadly so that, if they are adopted, they 

will continue to operate effectively as 

new forms of compensation are 

developed in the future. 

Under our proposals, compensation 

disclosure would 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),42 the proposed 

Compensation Discussion and Analysis 

would call for a discussion and analysis 

of the material factors underlying 

compensation policies and decisions 

reflected in the data presented in the 

tables. This overview would address in 

one place these factors with respect to 

both the separate elements of executive 

compensation and executive 

compensation as a whole. 

Following the Compensation 

Discussion and Analysis, we propose to 

organize 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 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 two 

tables 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 disclosed as current 

compensation for those years) and are 

‘‘at risk,’’ as well as recent realization on 

these interests, such as through vesting 

of restricted stock and similar 

instruments or the exercise of options 

and similar instruments; and 

• Retirement and other postemployment benefits, including 

retirement and defined contribution and 

other deferred compensation plans, 

other retirement benefits and other postemployment benefits, such as those 

payable in the event of a change in 

control. 

We propose to require improved 

tabular disclosure for each of the above 

three categories that would be 

supplemented by appropriate narrative 

that provides material information 

necessary to an understanding of the 

information presented in the individual 

tables.43 We are also proposing a new 

disclosure requirement of 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 the highest paid 

executive officers. 

Finally, we propose a director 

compensation table that is similar to the 

proposed Summary Compensation 

Table.44

We also propose to modify some of 

the recently expanded Form 8–K 

requirements regarding compensation. 

Form 8–K requires disclosure on a 

current basis of the entry into, 

amendment of, and termination of, 

material definitive agreements entered 

into outside the ordinary course of 

business within four business days of 

the triggering event. Under our preexisting definitions of material 

contracts, many agreements regarding 

executive compensation are deemed to 

be material agreements entered into 

outside the ordinary course, and when, 

for purposes of consistency, we adopted 

those definitions for use in the 

expanded Form 8–K requirements, we 

incorporated all of these executive 

compensation agreements into the 

current disclosure requirements. 

Therefore, many agreements regarding 

executive compensation, including 

some not related to named executive 

officers, are required to be disclosed 

within four business days of the 

applicable triggering event. Consistent 

with our intent in adopting the 

expanded Form 8–K to capture only 

events that are unquestionably or 

presumptively material to investors, we 

believe it is appropriate to modify the 

Form 8–K requirements. 

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 

current related party transaction 

disclosure requirements were adopted 

piecemeal over the years and were 

combined into one disclosure 

requirement beginning in 1982.45 In 

light of the 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 

proposals include amendments to 

update, clarify and slightly expand the 

related party transaction disclosure 

requirements. The proposed 

amendments would fold into the 

disclosure requirements for related 

party transactions the currently separate 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6545 

46Related party transactions are currently 

disclosed under Items 404(a) of Regulations S–K 

and S–B. Indebtedness is currently disclosed under 

Item 404(c) of Regulation S–K. 

47See, 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 proposal 

would replace our existing disclosure requirement 

about director relationships that can affect 

independence. 

48Proposed Item 407 of Regulation S–K and 

Regulation S–B. 

49 1992 Release. 

50See, 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). 

51For 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 (October 20, 

2004) (indicating that the explicit language of the 

current rules requires disclosure of such items), 

available at www.sec.gov/news/speech/ 

spch102004alb.htm. 

52The discussion that follows focuses on changes 

to Item 402 of Regulation S–K, with Section II.C.1 

explaining the different modifications proposed for 

Item 402 of Regulation S–B. References throughout 

the following discussion are to current or proposed 

Items of Regulation S–K, unless otherwise 

indicated. 

53Proposed Item 402(b). In addition to the 

narrative Compensation Discussion and Analysis, 

we are proposing revisions to the rules so that, to 

the extent material, additional narrative disclosure 

would be provided following certain tables to 

supplement the disclosure in the table. See, e.g., 

Section II.B.3., discussing the narrative disclosure 

to the Summary Compensation Table and 

supplemental tables. We are also proposing 

disclosure of compensation committee procedures 

and processes as well as information regarding 

compensation committee interlocks and insider 

participation in compensation decisions as part of 

proposed Item 407 of Regulation S–K. See Section 

V.D., below. 

54See Jeffrey N. Gordon, Executive 

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

Remedy? The Case for Compensation Discussion 

and Analysis, 30 J. Corp. L. (forthcoming Spring 

2006) (arguing that the SEC 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). Also available at 

http://papers.ssrn.com/sol3/

papers.cfm?abstract_id=686464. 

disclosure requirement regarding 

indebtedness of management and 

directors.46 Further, we propose a 

requirement that calls for a narrative 

explanation of the independence status 

of directors under a company’s director 

independence policies, consistent with 

recent significant changes to the listing 

standards of the nation’s principal 

securities trading markets.47 We also 

propose to consolidate this and other 

corporate governance disclosure 

requirements regarding director 

independence and board committees 

into a single expanded disclosure 

item.48

In order to ensure that these amended 

requirements result in disclosure that is 

clear, concise and understandable for 

investors, we propose to add 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 proposal would extend the plain 

English requirements currently 

applicable to portions of registration 

statements under the Securities Act to 

the disclosure required under the 

amended items in Exchange Act reports 

and proxy or information statements 

incorporated by reference into those 

reports. 

Finally, we propose to amend our 

beneficial ownership disclosure 

requirements to require disclosure of 

shares pledged by named executive 

officers, directors and director 

nominees, as well as directors’

qualifying shares. 

II. Executive and Director 

Compensation Disclosure 

As discussed above, executive and 

director compensation disclosure has 

been required since 1933, and the 

Commission has had disclosure rules in 

this area since 1938. In 1992, the 

Commission proposed and adopted 

substantially revised rules that embody 

our current requirements.49 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. We believe that while the 

reasoning behind this approach remains 

fundamentally sound, significant 

changes are appropriate. Much of the 

concern with the current tables is also 

their strength: they are highly formatted 

and rigid.50 Thus, information not 

specifically called for in the tables is 

sometimes not provided. For example, 

the highly formatted and specific 

approach has led some to suggest that 

items that do not fit squarely within a 

‘‘box’’ specified by the rules need not be 

disclosed.51 As another example, 

because the tables do not call for a 

single figure for total compensation, that 

information is generally not provided, 

although there is 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 

current approach and build on them, we 

propose several steps: 

• First, retaining the tabular approach 

to provide clarity and comparability 

while improving the tabular disclosure 

requirements; 

• Second, confirming that all 

elements of compensation must be 

included in the tables; 

• Third, providing a format for the 

Summary Compensation Table that 

requires disclosure of a single figure for 

total compensation; and 

• Finally, 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.52

A. Compensation Discussion and 

Analysis 

We propose requiring a new 

Compensation Discussion and Analysis 

section.53 This section would be an 

overview that would provide narrative 

disclosure that puts into context the 

compensation disclosure provided 

elsewhere.54 This overview would 

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 and not 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 does each element and the 

company’s decisions regarding that 

element fit into the company’s overall 

compensation objectives and affect 

decisions regarding other elements? 

1. Intent and Operation of the Proposed 

Compensation Discussion and Analysis 

The purpose of the Compensation 

Discussion and Analysis disclosure 

would be 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. 

The proposed Compensation 

Discussion and Analysis requirement 

would be principles-based, in that it 

identifies the disclosure concept and 

provides several illustrative examples. 

The application of a particular example 

must be tailored to the company. 

However, the scope of the 


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6546 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

55Forward looking information in the 

Compensation Discussion and Analysis would fall 

with the safe harbor for disclosure of such 

information. See Securities Act Section 27A [15 

U.S.C. 77z–2] and Exchange Act Section 21E [15 

U.S.C. 78u–5]). 

56See Securities Act Rule 406 [17 CFR 230.406] 

and Exchange Act Rule 24b–2 [17 CFR 240.24b–2] 

(incorporating the criteria for non-disclosure set 

forth in Exemption 4 of the Freedom of Information 

Act [5 U.S.C. 552(b)(4)] and Exchange Act Rule 

80(b)(4) [17 CFR 200.80(b)(4)]). Today’s proposed 

rules, like the current rules, would not require a 

company to seek confidential treatment under the 

procedures in Securities Act Rule 406 and 

Exchange Act Rule 24b–2. 

57 15 U.S.C. 78r. 

58Exchange 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 note 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’’). 

59 1992 Release, at Section II.H. 

60The Compensation Committee Report is 

currently required by Item 402(k) and the 

Performance Graph is currently required by Item 

402(l). 

Compensation Discussion and Analysis 

is intended to be comprehensive, so that 

it would call for discussion of posttermination as well as in-service 

compensation arrangements.55

Boilerplate disclosure would not 

comply with the proposed item. 

Examples of the issues that would 

potentially be appropriate for the 

company to address in given cases in 

the Compensation Discussion and 

Analysis include the following: 

• 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; 

• For equity-based compensation, 

how the determination is made as to 

when the award is granted; 

• 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 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 (e.g., 

gains from prior option or stock awards) 

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 (specifying applicable 

amounts and forms of ownership), 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. 

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 

could be grouped together. Where, 

however, the policy for an executive 

officer is materially different, for 

example in the case of a principal 

executive officer, his or her 

compensation would be discussed 

separately. 

2. Proposed Instructions to 

Compensation Discussion and Analysis 

We are proposing 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. We also propose 

to include an instruction to make clear, 

as is currently the case, that 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 factors or criteria involving 

confidential commercial or business 

information, the disclosure of which 

would have an adverse effect on the 

company, similar to the instruction with 

respect to the Compensation Committee 

Report today. In applying this 

instruction, we intend the standard for 

companies to use when determining 

whether disclosure would have an 

adverse effect on the company to be the 

same one that would apply when 

companies request confidential 

treatment of confidential trade secrets 

and commercial or financial information 

that otherwise is required to be 

disclosed in registration statements, 

periodic reports and other documents 

filed with us.56 Similarly, to the extent 

a performance target has otherwise been 

disclosed publicly, disclosure under 

Item 402 would be required. 

3. ‘‘Filed’’ Status of Compensation 

Discussion and Analysis 

The Compensation Discussion and 

Analysis will be considered a part of the 

proxy statement and any other filing in 

which it is included. Unlike the current 

Compensation Committee Report and 

Performance Graph, which would be 

eliminated under our proposals, as 

discussed below, the proposed 

Compensation Discussion and Analysis 

would be soliciting material and would 

be filed with the Commission. 

Therefore, it would be subject to 

Regulations 14A or 14C and to the 

liabilities of Section 18 of the Exchange 

Act.57 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 is 

included or incorporated by reference 

into a periodic report, the disclosure 

would be covered by the certifications 

that principal executives officers and 

principal financial officers are required 

to make under the Sarbanes-Oxley Act 

of 2002.58

In adopting the current rules in 1992, 

the Commission took into account 

comments that the Compensation 

Committee Report should be furnished 

rather than filed to allow for a more 

open and robust discussion in the 

reports.59 Little that we see in current 

Compensation Committee Reports 

suggests that this treatment has resulted 

in such discussions, or at least the more 

transparent disclosure that the 

comments suggested would result. 

Further, we believe that it is appropriate 

for companies to take responsibility for 

disclosure involving board matters as 

with other disclosure. 

4. Proposed Elimination of the 

Performance Graph and the 

Compensation Committee Report 

In light of the Compensation 

Discussion and Analysis proposal, we 

propose to eliminate the Performance 

Graph and the Compensation 

Committee Report that currently are 

required by our rules.60 The graph and 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6547 

61See Martin D. Mobley, Compensation 

Committee Reports Post-Sarbanes-Oxley: 

Unimproved Disclosure for Executive 

Compensation Policies and Practices, 2005 Colum. 

Bus. L. Rev. 111 (2005). 

62The tabular disclosure and related narrative 

disclosure under proposed Item 402 would apply, 

as does existing Item 402, to named executive 

officers. As discussed below in Section II.B.6.a., we 

are proposing certain changes to the definition of 

named executive officer. 

63The two tables that would supplement the 

Summary Compensation Table would be the Grants 

of Performance-Based Awards Table, discussed 

below in Section II.B.2.a., and the Grants of All 

Other Equity Awards Table, discussed below in 

Section II.B.2.b. A proposed narrative disclosure 

requirement accompanying these three tables is 

discussed below in Section II.B.3. 

64Under the proposals, these interests would be 

disclosed as current compensation for those prior 

years. 

65 Information regarding holdings of such equitybased interests that relate to compensation would 

be disclosed in the Outstanding Equity Awards at 

Fiscal Year-End Table, discussed below in Section 

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

holdings of equity-related interests would be 

required to be disclosed in the Option Exercises and 

Stock Vested Table discussed below in Section 

II.B.4.b. 

66The proposed disclosure regarding retirement 

and post-employment compensation would be 

required in the Retirement Plan Potential Annual 

Payments and Benefits Table, discussed below in 

Section II.B.5.a., the Nonqualified Defined 

Contribution and Other Deferred Compensation 

Plans Table, discussed below in Section II.B.5.b., 

and the narrative disclosure requirement for other 

potential post-employment payments discussed 

below in Section II.B.5.c. 

67Current Instruction to Item 402(b), permitting 

exclusion of information for fiscal years prior to the 

Continued 

the report were intended to be 

intertwined and their purpose was to 

show the relationship, if any, between 

compensation and corporate 

performance, as reflected by stock price. 

Unfortunately, the Compensation 

Committee Report today often results in 

boilerplate disclosure that is of little 

benefit to investors.61 Further, given the 

widespread availability of stock 

performance information about 

companies, industries and indexes 

through business-related Web sites or 

similar sources, we believe that the 

requirement for the Performance Graph 

is 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. 

Request for Comment 

• Does the proposed Compensation 

Discussion and Analysis provide 

companies with the same flexibility as 

MD&A to provide a clear picture to 

investors? 

• Are there any further changes that 

we can make to avoid boilerplate 

disclosure about executive 

compensation? 

• Is there any significant impact by 

not having the report over the names of 

the compensation committee of the 

board of directors? If so, please explain 

in detail. 

• Would any significant impact result 

from treating the Compensation 

Discussion and Analysis as filed and not 

furnished? A commenter that prefers 

furnishing over filing should describe 

any benefits that would be obtained by 

treating the material as furnished. In 

particular, such a commenter should 

describe those benefits in the context of 

the expected benefits of the 

Commission’s decision in 1992 to treat 

the report of the Compensation 

Committee as furnished and should 

address whether and why those benefits 

were achieved or not achieved. 

• Are there any other specific items 

we should list in the rule as possibly 

material information? Are there any 

items that are listed that should not be? 

• Are there any items that we should 

explicitly mandate be disclosed by 

every issuer? 

• Should performance targets 

continue to be excludable based on the 

potential adverse competitive effect on 

the company of their disclosure? Why or 

why not? If so, what should be the 

standard for exclusion? Are there any 

other items that should be excludable 

based on potential adverse competitive 

effect on the company of their 

disclosure? 

• Should we retain the Performance 

Graph? 

B. Compensation Tables 

We believe that much about the 

tabular approach to eliciting 

compensation disclosure is sound.62 We 

also believe, however, that the tables 

should be reorganized and streamlined 

to provide a clearer and more logical 

picture of total compensation and its 

elements for named executive officers. 

We propose reorganizing the 

compensation tables and their related 

narrative disclosure into 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 two 

tables providing back-up information for 

certain data in the Summary 

Compensation Table; 63

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 64 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; 65 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.66

Reorganizing the tables along these 

themes should help investors 

understand how compensation 

components relate to each other. At the 

same time we would retain the ability 

for investors to use the tables to 

compare compensation from year to 

year and from company to company. 

We note that in 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 risk of ‘‘double 

counting’’ some elements of 

compensation. However, we believe the 

risk inherent in such double disclosure 

is outweighed by the clearer and more 

complete picture it would provide to 

investors. We would 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. 

1. Compensation to Named Executive 

Officers in the Last Three Completed 

Fiscal Years—The Summary 

Compensation Table and Related 

Disclosure 

Under today’s proposals, the 

Summary Compensation Table would 

continue to serve as the principal 

disclosure vehicle regarding executive 

compensation. This table, with the 

proposed revisions, would show the 

named executive officers compensation 

for each of the last three years, whether 

or not actually paid out. Consistent with 

current requirements, the revised 

Summary Compensation Table would 

continue to require disclosure of 

compensation for each of the company’s 

last three completed fiscal years.67


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6548 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

last completed fiscal year if the registrant was not 

a reporting company pursuant to Exchange Act 

Sections 13(a) or 15(d) at any time during that year, 

unless the registrant previously was required to 

provide information for any such year in response 

to a Commission filing requirement, would be 

retained and redesignated as proposed Instruction 

1 to Item 402(c). 

68 ‘‘PEO’’ refers to principal executive officer. See 

Section II.B.6.a. below for a description of the 

proposed named executive officers for whom 

compensation disclosure would be required. 

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

70Proposed Instruction 2 to Item 402(c) (requiring 

all compensation values in the Summary 

Compensation Table to be reported in dollars). 

Currently, some stock-based compensation is 

disclosed in per share increments rather than in 

dollar amounts. The instruction would further 

require, 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. 

71Columns (a) and (b) would, as is currently the 

case, specify the executive officer and the year in 

question. 

However, the proposals would require 

disclosure of a figure representing total 

compensation, as reflected in other 

columns of the Summary Compensation 

Table, and would simplify the 

presentation from that in the current 

table. As described in greater detail 

below, the proposals also provide for 

two supplementary tables disclosing 

additional information about grants of 

performance-based awards and all other 

equity awards, respectively. Narrative 

disclosure would follow the three 

tables, providing disclosure of material 

information necessary to an 

understanding of the information 

disclosed in the tables. 

SUMMARY COMPENSATION TABLE

Name and principal position Year Total 

($) 

Salary 

($) 

Bonus 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

PEO 68 .................................. — 

— 

— 

PFO 69 .................................. — 

— 

— 

A ........................................... — 

— 

— 

B ........................................... — 

— 

— 

C ........................................... — 

— 

— 

Request for Comment 

• Should the Summary Compensation 

Table continue as it currently does to 

require disclosure of compensation for 

each of the company’s last three fiscal 

years, or is only the last completed 

fiscal year necessary in light of the 

availability of historical data on 

compensation through the 

Commission’s EDGAR system and other 

sources? 

• Should we require all of the 

proposed disclosures discussed below 

in addition to those in the Summary 

Compensation Table, or does the 

Summary Compensation Table itself 

provide an adequate picture of 

compensation? Is there some other 

combination of the Summary 

Compensation Table with other 

proposed disclosures that would fulfill 

our objectives? 

a. Total Compensation Column 

We propose to modify the Summary 

Compensation Table to provide a clearer 

picture of total compensation. We 

propose requiring that all compensation 

be disclosed in dollars and that a total 

of all compensation be provided.70 The 

new column disclosing total 

compensation would appear as the first 

column providing compensation 

information—column (c).71 This column 

would aggregate the total dollar value of 

each form of compensation quantified in 

the columns that would follow it 

(columns (d) through (i)). The proposed 

‘‘Total’’ column would respond to 

concerns that investors, analysts and 

other users of Item 402 disclosure 

cannot compute aggregate amounts of 

compensation using current disclosure 

in a manner that is accurate or is 

comparable across years or companies. 

Request for Comment 

• Should we include a requirement to 

disclose a total compensation amount? 

• Will a total compensation number 

provide investors with meaningful 

information about compensation? If not, 

why? Would disclosure of a total 

compensation number result in any 

unintended consequences? If so, how 

can they be mitigated? 

• Should total compensation be 

calculated in a different manner from 

that proposed? For example, with 

respect to stock-based and option-based 

awards, should exercise or vesting date 

valuations be used instead? 

• Is the proposed new instruction 

which would direct that all 

compensation values are to be reported 

in U.S. dollars necessary? Are there 

particular circumstances we should 

address regarding disclosure of 

compensation in foreign currencies? 

b. Salary and Bonus Columns 

The next columns we are proposing 

are the salary and bonus columns 

(columns (d) and (e), respectively), 

which would be retained substantially 

in their current form. However, we 

propose certain changes that should 

give an investor a clearer picture of the 

total amount earned, the amount 

deferred for the year, and the total 

amount of deferred compensation that 

may be paid out at a later date. 

Compensation that is earned, but for 

which payment will be deferred, would 

be included in the salary, bonus or other 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6549 

72This is the case today for salary and bonus. 

This aspect of current Instruction 1 to Item 

402(b)(2)(iii)(A) and (B) will be expanded and 

redesignated as Proposed Instruction 4 to Item 

402(c). 

73Currently, the requirement is triggered only if 

the officer elects the deferral. We propose to revise 

this to cover all deferrals no matter who has 

initiated them. 

74See Section II.B.5.b., describing the 

Nonqualified Defined Contribution and Other 

Deferred Compensation Plans Table. Disclosure of 

these amounts as contributions would be required 

for nonqualified deferred compensation plans. This 

disclosure would 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. 

75Proposed Instruction 3 to Item 5.02(e) of Form 

8–K and proposed Instruction 1 to Item 402(c)(2)(iv) 

and (v). Currently, in the event that such amounts 

are not determinable at the most recent practicable 

date, they are 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 proposing the use of a current report on 

Form 8–K. Proposed Instruction 1 to Item 

402(c)(2)(iv) and (v) would require 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. 

76 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 an 

‘‘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 would be required 

to be included in the Option Awards column. 

Currently, restricted stock awards are 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. 

77These performance-based stock awards can 

currently be reported at the company’s election as 

incentive plan awards. See current Instruction 1 to 

Item 402(b)(2)(iv). Our proposal would eliminate 

this option. See the discussion of what are 

considered performance-based conditions in note 

87, below. 

78A 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 case or in shares. 

79Current Item 402(c)(2)(vi). 

80Proposed Instruction 1 to Item 402(c)(2)(vi) and 

(vii). 

column, as appropriate.72 A new 

instruction, applicable to the entire 

Summary Compensation Table, would 

provide that if receipt of any amount of 

compensation is currently payable 

(which must be included in the 

appropriate column) but has been 

deferred for any reason, the amount so 

deferred must be disclosed in a footnote 

to the applicable column.73 As 

described below, the amount deferred 

would also generally be reflected as a 

contribution in the deferred 

compensation presentation.74 The new 

footnote disclosure of amounts deferred 

would help to clarify the extent to 

which amounts disclosed in the 

proposed Nonqualified Defined 

Contribution and Other Deferred 

Compensation Plans Table described 

below represent compensation already 

reported, rather than additional 

compensation. 

We are also proposing a change 

eliminating the delay that exists under 

current rules where salary and bonus for 

the most recent fiscal year are 

determined following compliance with 

Item 402 disclosure. Under our 

proposal, where salary and bonus 

cannot be calculated as of the most 

recent practicable date, a current report 

under Item 5.02 of Form 8–K would be 

triggered by a payment, decision or 

other occurrence as a result of which 

such amounts become calculable in 

whole or part.75 The Form 8–K would 

include disclosure of the salary or bonus 

amount and a new total compensation 

figure including that salary or bonus 

amount. 

Request for Comment 

• Is the proposed presentation of 

deferred compensation in the Summary 

Compensation Table and related 

footnotes, along with the proposals 

outlined below, the best means for 

communicating the portion of 

compensation that is deferred? 

• Are there ways that we could better 

clarify how the amounts that would be 

identified as deferred in a footnote to 

the Summary Compensation Table 

relate to the amounts that would be 

required in the Nonqualified Defined 

Contribution and Other Deferred 

Compensation Plans Table? 

• Is the proposed change to Form 8–

K to eliminate the delay in disclosing 

salary or bonus when they cannot be 

calculated as of the most recent 

practicable date appropriate? 

c. Plan-Based Awards 

The next three proposed columns—

Stock Awards, Option Awards and NonStock Incentive Plan Compensation —

cover plan-based awards. 

i. Stock Awards and Option Awards 

Columns 

The Stock Awards Column (proposed 

column (f)) would disclose stock-related 

awards that derive their value from the 

company’s equity securities or permit 

settlement by issuance of the company’s 

equity securities, 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.76 Valuation would be based on 

the grant date fair value of the award 

determined pursuant to Financial 

Accounting Standards Board Statement 

of Financial Accounting Standards No. 

123 (revised 2004), Share-Based 

Payment (FAS 123R) for financial 

reporting purposes. Stock awards 

subject to performance-based conditions 

would also be included in this column 

to ensure consistent reporting of stock 

awards and to ensure their inclusion in 

the proposed Summary Compensation 

Table.77

Awards of options, stock appreciation 

right grants, and similar stock-based 

compensation instruments that have 

option-like features (proposed column 

(g)) would be disclosed in a manner 

similar to the proposed treatment of 

stock and other stock-based awards.78

Instead of the current disclosure of the 

number of securities underlying the 

awards, this column would require 

disclosure of the grant date fair value of 

the award as determined pursuant to 

FAS 123R for financial reporting 

purposes. 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 would 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. 

We propose to eliminate the current 

requirement in the Options/SAR Grants 

in Last Fiscal Year Table 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),79 because these alternative 

disclosures would no longer be 

necessary if the grant date fair value of 

equity-based awards is included in the 

Summary Compensation Table. 

A new instruction would require a 

footnote referencing the discussion of 

the relevant assumptions in the notes to 

the company’s financial statements or to 

the discussion of relevant assumptions 

in the MD&A.80 The same proposed 

instruction would also provide 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 


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6550 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

81See Exchange Act Rule 14a-3 [17 CFR 240.14a3]. 

82We recently 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]. 

83Under 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 allow an 

employee to bear 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 

unless the award has been modified, as described 

later in this proposal. 

84These earnings are currently reportable in the 

Other Annual Compensation or All Other 

Compensation columns of the Summary 

Compensation Table. Current Item 

402(b)(2)(iii)(C)(2) requires disclosure of earnings 

on restricted stock, options, and SARs paid during 

the fiscal year (or payable during that period but 

deferred at the election of the named executive 

officer), to the extent those earnings are abovemarket or preferential. The proposal would require 

disclosure of all such earnings, rather than merely 

any above-market or preferential portion. Current 

item 402(b)(2)(iii)(C)(3) requires similar disclosure 

of all earnings on long-term incentive plan 

compensation. See also current Item 402(b)(2)(v)(B) 

and (C). 

85Proposed Instruction 3 to Item 402(c)(2)(vi) and 

(vii) and Proposed Instruction 2 to Item 

402(c)(2)(viii). 

86See current instruction 3 to Item 402(b)(2)(iv) 

and proposed Instruction 2 to Item 402(c)(2)(vi) and 

(vii). Under FAS 123R, unlike under our proposal, 

only the incremental compensation cost is 

recognized for a modified award. 

87See Section II.B.2.b., discussing the Grants of 

All Other Equity Awards Table required by 

proposed Item 402(c). 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 puropses 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).’’

88See Section II.B.2.a., discussing the Grants of 

Performance-Based Awards Table. 

89See, e.g., Jonathan Weil and Betsy McKay, Coke 

Developed a New Way to Value Options, But 

Company Will Return to its Classic Formula, Wall 

St. J., Mar. 7, 2003, at C3 (highlighting potential 

issue of using one valuation methodology for 

financial statements and another for executive 

compensation disclosure). 

90FAS 123R requires a company to aggregate 

individuals receiving awards into relatively 

homogeneous groups with respect to exercise and 

post-vesting employment termination behaviors for 

the purpose of determining expected term; for 

example executives and non-executives. Our 

proposals today are not intended to change the 

method used to value employee share options for 

purposes of FAS 123R or to affect the judgments as 

to reasonable groups for purposes of determining 

the expected term assumption required by GAS 

shareholders that must precede or 

accompany the company’s proxy 

statement.81 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.82

Under FAS 123R, the compensation 

cost is initially measured based on the 

grant date fair value of an award.83 The 

key measurement principle behind the 

accounting standard, measuring stockbased payments at grant date fair value, 

is also followed in our proposals. Under 

FAS 123R, the compensation cost 

calculated as the fair value is 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). Under our proposals, 

the compensation cost calculated as the 

grant date fair value will be shown as 

compensation in the year in which the 

grant is made. We believe that this 

approach is more consistent with the 

purpose of executive compensation 

disclosure. We are in effect proposing 

an approach that subscribes to the 

measurement method of FAS 123R 

based on grant date fair value, but that 

also provides for immediate disclosure 

of compensation as preferable for 

compensation reporting purposes to the 

timing of recognition of the 

compensation cost for the company’s 

financial statement reporting purposes. 

To consolidate related elements of 

compensation, the Stock Awards and 

Option Awards columns would also 

require disclosure of the earnings on 

outstanding awards in the respective 

categories.84 New instructions would 

require footnote identification and 

quantification of all earnings, whether 

the earnings were paid during the fiscal 

year, payable during the period but 

deferred, or payable by their terms at a 

later date but earned during the year.85

Previously awarded options or 

freestanding stock appreciation awards 

that the company repriced or otherwise 

materially modified during the last 

fiscal year would be disclosed based on 

the total fair value of the award as so 

modified.86

If the award has no performance 

conditions, but instead vests with the 

passage of time and continued 

employment, then the number of shares 

underlying the award and other details 

regarding the award would be disclosed 

in a separate table covering grants of 

equity awards supplementing the 

Summary Compensation Table.87 If the 

award has a performance condition, 

then the details on the estimated future 

payouts will be disclosed in a second 

separate supplemental table covering 

grants of performance-based awards.88

Request for Comment 

• Is the proposed presentation of 

stock awards that do not have optionlike features in the Summary 

Compensation Table the best means for 

presenting restricted stock and similar 

awards? 

• Is FAS 123R the appropriate 

approach for valuing equity-based 

awards, including restricted stock, 

restricted stock units, phantom stock, 

phantom stock units, common stock 

equivalent units, options, stock 

appreciation rights and other similar 

awards for purposes of Item 402 

disclosure? If not, why not and what 

other valuation methods would be 

appropriate? Would any other valuation 

method provide the same 

comparability? If a different approach 

were used, would investors be confused 

by differences between the grant date 

fair value for financial reporting 

purposes and the value in the 

compensation tables? 89

• Should the expected term 

assumption used in computing the grant 

date fair value for financial statement 

purposes under FAS 123R also be used 

in measuring the value of an individual 

named executive officer’s compensation 

for the purposes of Item 402? Or, should 

an expected term assumption used to 

determine an individual named 

executive officer’s compensation be 

used if it differs from the expected term 

assumption used for FAS 123R 

purposes? 90 Should companies use the 


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123R. Under our proposals, 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 

proposed Item 402(l)). 

91Proposed Item 402(c)(2)(viii). An incentive 

plan generally provides for compensation intended 

to serve as an incentive for performance to occur 

over a specific 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 measure. See proposed Item 

402(a)(6)(iii) for definitions of ‘‘incentive plan’’ and 

‘‘non-stock incentive plan.’’

92Awards disclosed in this column 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 would be disclosed in 

the Stock Awards or Option Awards columns, as 

appropriate. 

93See Section II.B.2.a., discussing the Grants of 

Performance-Based Awards Table. Under the 

proposals, 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 

Performance-Based Awards Table, no further 

disclosure would be required under proposed Item 

402 when payment is actually made to the named 

executive officer. 

94Current Items 402(b)(2)(iv)(C) and 402(e). 

95The only exception, as discussed below, would 

be perquisites and personal benefits if they 

aggregated less than $10,000 for a named executive. 

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 current Item 402(a)(2). 

96Current Item 402(b)(2)(iii)(c). 

full term rather than an expected term 

assumption for calculations for named 

executive officers? Would the 

complexity of such an approach for 

investors or the additional burden on 

companies outweigh any advantages, 

such as possible increased 

comparability among companies, of 

adjusting assumptions? 

• Is the timing of reporting stockbased compensation in our proposals 

the best approach? Should stock-based 

compensation instead be reflected in 

Item 402 according to the same time 

schedule by which it is recognized for 

a company’s financial statement 

reporting purposes? 

• Should the valuation method and 

all of the assumptions regarding the 

valuation also be disclosed in the proxy 

statement when they are required to be 

disclosed, described and analyzed 

elsewhere in a document furnished to 

shareholders, including in the notes to 

the financial statements? 

• We propose treating a modification 

of an award as a new award and 

requiring disclosure of the total grant 

date fair value at the time of 

modification. Would it be more 

appropriate to require only disclosure of 

incremental compensation as is the 

approach under FAS 123R? 

• Should we eliminate as proposed 

the current instruction allowing 

performance-based stock awards to be 

reported at the company’s election as 

incentive plan awards? If not, please 

explain whether the availability of this 

election is helpful to and not confusing 

to investors. 

ii. Non-Stock Incentive Plan 

Compensation Column 

We propose that the Non-Stock 

Incentive Plan Compensation column 

(proposed column (h)) would report the 

dollar value of all other amounts earned 

during the fiscal year pursuant to 

incentive plans.91 This column would 

be limited to awards where the relevant 

performance measure under the 

incentive plan is not based on the price 

of the company’s equity securities or the 

award may not be settled by issuance of 

a company’s equity securities; those 

awards would instead be disclosed in 

the Stock Awards and Option Awards 

columns discussed above.92

Performance-based compensation under 

a long-term plan that is not tied to the 

performance of the company’s stock (but 

instead is tied to other measures such as 

a return on assets, return on equity, 

performance of a division, or other such 

measures) would 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 not payment is actually 

made to the named executive officer in 

that year. The grant of an award 

(providing for future compensation if 

such performance measures are 

satisfied) under such a plan would be 

disclosed in the supplemental Grants of 

Performance-Based Awards Table in the 

year of grant, which would generally be 

some year prior to the year in which 

performance-based compensation under 

the plan is reported in the Summary 

Compensation Table.93 Because there is 

not one clearly required or accepted 

standard for measuring the value at 

grant date of these non-stock based 

performance-based awards that reflects 

the applicable performance 

contingencies, as there is for equitybased awards with FAS 123R, we do not 

propose to include such a value in the 

Summary Compensation Table, but 

instead would continue the current 

disclosure format of reflecting these 

items of compensation when earned.94

As with the Stock Awards and Option 

Awards columns, earnings on 

outstanding awards of other incentive 

plans would also be included in the 

Non-Stock Incentive Plan Compensation 

column. 

Request for Comment 

• Since there is not one clearly 

required or accepted standard for 

measuring the value at grant date of 

those cash awards that reflect 

performance contingencies, is our 

approach to include the amounts in the 

Summary Compensation Table when 

earned appropriate? Are there particular 

models or standards that would provide 

a basis for measuring the value of these 

types of awards at grant date that we 

should consider incorporating into our 

rules? 

• Should earnings on outstanding 

awards be reported as proposed in the 

applicable award column or should they 

be reported in another way, such as in 

separate or different columns? 

d. All Other Compensation Column 

The final column in the Summary 

Compensation Table would disclose all 

other compensation not required to be 

included in any other column. This 

approach would allow the capture of all 

current compensation in the Summary 

Compensation Table and also would 

allow a total compensation calculation. 

We confirm that disclosure of all 

compensation would clearly be required 

under the proposals.95

We propose to clarify the disclosure 

required in the All Other Compensation 

Column (proposed column (i)) in two 

principal respects: 

• Consistent with the requirement 

that the Summary Compensation Table 

disclose all compensation, we would 

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 would 

move into this column all items 

currently reportable as ‘‘Other Annual 

Compensation.’’ 96

We also propose 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 

would be included in the column (other 

than aggregate perquisites and other 


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6552 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

97See Section II.B.1.d.iii. regarding separate 

standards for identification of perquisites and other 

personal benefits. 

98Proposed Item 402(c)(2)(ix)(B). 

99Current Items 402(b)(2)(iii)(C)(2) and 

402(b)(2)(v)(B). An instruction specifies that interest 

is above-market only if the rate exceeds 120% of the 

applicable federal long-term rate. Furthermore, 

earnings disclosure is currently required in the 

Other Annual Compensation column or the All 

Other Compensation column, depending upon 

when paid or payable, complicating the preparation 

process and generating confusion among users of 

the Summary Compensation Table. 

100See, e.g., Ellen E. Schultz, Buried Treasure: 

Well-Hidden Perk Means Big Money for Top 

Executives, Wall St. J., Oct. 11, 2002, at A1. 

101Proposed Instruction 3 to Item 402(c)(2)(ix). 

Consistent with current requirements, if 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. Proposed Instruction 5 to Item 

402(c)(2)(ix), which is derived from current 

Instruction 3 to Item 402(b)(2)(iii)(C). 

102Proposed Instruction 5 to Item 402(c)(2)(ix). 

103Proposed Item 402(c)(2)(ix)(G). 

104Proposed Instruction 6 to Item 402(c)(2)(ix). 

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. 

105See Section II.B.5.a., discussing the proposed 

Retirement Plan Potential Annual Payments and 

Benefits Table. 

106Current Item 402(b)(2)(v)(D), which requires 

annual registrant contributions or other allocations 

to vested and unvested defined contribution plans 

to be disclosed in the All Other Compensation 

column. 

107A 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. 

personal benefits less than $10,000 as 

discussed below), but would not be 

required to be identified by type and 

amount.97 Items that would be disclosed 

in the All Other Compensation column 

would include, but would not be 

limited to, the items discussed below. 

Request for Comment 

• Should all compensation no matter 

how de minimis be required to be 

disclosed? Will companies be able to 

track this information without undue 

burden? Is $10,000 the appropriate 

threshold for separate identification and 

quantification? 

i. Earnings on Deferred Compensation 

We propose requiring disclosure in 

the All Other Compensation column of 

all earnings on compensation that is 

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

defined contribution retirement plans.98

Currently, these earnings must be 

disclosed only to the extent of any 

portion that is ‘‘above-market or 

preferential.’’ 99 This limitation has 

generated criticism that Item 402 

permits companies to avoid disclosure 

of substantial compensation.100

Separate footnote identification and 

quantification of all such earnings 

would be required if the amount 

exceeds $10,000.101 A company would 

be permitted to identify by footnote the 

portion of any earnings that it 

considered to be paid at an abovemarket rate, provided that the footnote 

explained the company’s criteria for 

determining the portion considered 

‘‘above-market.’’ 102

Request for Comment 

• Should we require, as proposed, 

disclosure of all earnings on 

compensation that is deferred on a basis 

that is not tax-qualified or should we 

require disclosure only of above-market 

or preferential earnings? If the latter, 

please explain why such an approach is 

more useful or informative for investors 

than our proposed approach. 

ii. Increase in Pension Value 

We propose requiring in the All Other 

Compensation Column the aggregate of 

increase in actuarial value to the 

executive officer of defined benefit and 

actuarial plans (including supplemental 

plans) accrued during the year.103

An instruction would specify 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 taxqualified defined benefit plans and 

supplemental employee retirement 

plans, but excluding defined 

contribution plans.104 The retirement 

section, discussed below, would 

provide more information regarding 

these covered plans.105 In contrast to 

defined contribution plans, for which 

the Summary Compensation Table 

requires disclosure of company 

contributions,106 Item 402 does not 

currently require disclosure of the 

annual increase in value of defined 

benefit plans, such as pension plans, in 

which the named executive officers 

participate.107 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 believe it is appropriate to include 

these values 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 would also permit 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. 

Request for Comment 

• Is disclosure of any additional 

information necessary to provide 

investors with meaningful information 

about the compensation earned 

annually through these plans? 

• Is there any particular form of 

defined benefit or actuarial plan for 

which the proposed disclosure format is 

not suitable? If so, how could the 

proposed disclosure requirement be 

adapted for such plans? 

• Should this disclosure instead be 

provided as a separate column in the 

Summary Compensation Table? 

• Is the aggregate increase in accrued 

actuarial value the best measure for 

disclosing annual compensation earned 

under defined benefit and actuarial 

plans? If not, why? What other method 

should be used? 

• Rather than requiring disclosure of 

the value based on the executive 

officer’s benefit, should we require 

disclosure based on the company’s cost 

for the plan? Under our proposals, 

disclosure of assumptions would be 

considered by companies in the 

narrative disclosure following the 

Summary Compensation Table and 

supplementary tables. Are there other 

preferable approaches? Should we 

otherwise require disclosure of any of 

the details of the calculation? 

• Is it possible to provide meaningful 

disclosure about total compensation 

absent tabular disclosure of the 

compensation earned annually through 

these plans? If so, how? Would such an 

approach be preferable? 

iii. Perquisites and Other Personal 

Benefits 

Perquisites and other personal 

benefits would be included in the All 

Other Compensation column. We 

propose changes to disclosure of 

perquisites and other personal benefits 

to improve disclosure and facilitate 

computing a total amount of 

compensation. We propose to require 

the disclosure of perquisites and other 

personal benefits unless the aggregate 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6553 

108Current Item 402(b)(2)(iii)(C)(1). 

109Proposed Instruction 3 to Item 402(c)(2)(ix). 

Compare current Instruction 1 to Item 

402(b)(2)(iii)(C). 

110See In the Matter of Tyson Foods, Inc. and 

Donald Tyson, Litigation Release No. 34–51625 

(Apr. 28, 2005) (failure to identify perquisites). 

111 In the 1970s and early 1980s, the Commission 

issued several interpretive releases regarding 

executive compensation disclosure issues, 

including disclosure of perquisites and personal 

benefits. See Disclosure of Management 

Remuneration, Release No. 33–5856 (Aug. 18, 1977) 

[42 FR 43058]; Disclosure of Management 

Remuneration, Release No. 33–5904 (Feb. 6, 1978) 

[43 FR 6060]; Disclosure of Management 

Remuneration, Release No. 33–6027 (Feb. 22, 1979) 

[44 FR 16368]; Disclosure of Management 

Remuneration, Release No. 33–6166 (Dec. 12, 1979) 

[44 FR 74803]; and Interpretation of Rules Relating 

to Disclosure of Management Remuneration, 

Release No. 33–6364 (Dec. 3, 1981) [46 FR 60421]. 

In Section I of the 1983 Release, as part of a 

substantial revision to Item 402 adopted at the time, 

the Commission rescinded those interpretive 

releases. Subsequently, neither the Commission nor 

its staff has published interpretations addressing 

what must be disclosed as a perquisite or personal 

benefit. 

112For directors, the disclosure would be 

required in the Director Compensation Table 

discussed below in Section B.9. 

amount of such compensation is less 

than $10,000. We realize this may result 

in the total amount of compensation 

reportable in the Summary 

Compensation Table being slightly less 

than a complete total amount of 

compensation, but 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. The current provision 

permits omission of perquisites and 

other personal benefits if the aggregate 

amount of such compensation is the 

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

total of annual salary and bonus.108 We 

believe this current rule permits the 

omission of too much information that 

investors may consider material. 

We propose requiring footnote 

disclosure that identifies perquisites 

and other personal benefits. We propose 

modifying the current requirement that 

only perquisites and other personal 

benefits that are 25% of the total 

amount for each named executive 

officer are required to be identified and 

quantified. We propose modifying this 

requirement so that, unless the aggregate 

value of perquisites and personal 

benefits is less than $10,000, any 

perquisite or other personal benefit is 

identified and, if it is valued at the 

greater of $25,000 or ten percent of total 

perquisites and other personal benefits, 

its value would be disclosed.109

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. As is the case today, tax 

‘‘gross-ups’’ or other reimbursement of 

taxes owed with respect to any 

compensation, including but not limited 

to perquisites and other personal 

benefits, would 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 

proposal. 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 companyfinanced benefits, such as clothing, 

jewelry, artwork, theater tickets and 

housekeeping services.110

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. 

Further, 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.111

In today’s proposals, perquisites and 

personal benefits are required to be 

disclosed for both named executive 

officers and directors. This discussion 

regarding perquisites and personal 

benefits therefore applies in the context 

of disclosure for both named executive 

officers and directors.112 The concepts 

of perquisites and personal benefits 

should not be interpreted artificially 

narrowly to avoid disclosure. Based on 

our long experience with disclosure in 

this area, we are providing interpretive 

guidance that 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. 

The concept of a benefit that is 

‘‘integrally and directly related’’ to job 

performance is a narrow one. As 

discussed below, it may extend, among 

other things, to office space at a 

company business location, a reserved 

parking space that is closer to business 

facilities but not otherwise preferential 

or additional clerical or secretarial 

services devoted to company matters. It 

does not extend to items that facilitate 

job performance, such as use of 

company-provided aircraft, yachts or 

other watercraft, commuter 

transportation services, additional 

clerical or secretarial services devoted to 

personal matters, or investment 

management services. 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 

relates principally to questions of state 

law regarding use of corporate assets; 

our disclosure requirements are 

triggered by different and broader 

concepts. 

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. 

In addition, as 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. Therefore, for example, a 

company’s decision to provide an item 

of personal benefit for security purposes 


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6554 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

113The Commission has recently taken action in 

circumstances where perquisites were not properly 

disclosed. See In the Matter of Tyson Foods, Inc. 

and Donald Tyson, note 110 above. See also Alex 

Berenson, From Coffee to Jets, Perks for Executives 

Come Out in Court, N.Y. Times, Feb. 22, 2004, at 

11 (citing criminal and civil litigation in which 

perquisites were identified and commentators 

discussing the benefits of improved perquisite 

disclosure). 

114Proposed Instruction 4 to Item 402(c)(2)(ix). 

115See IRS Regulation § 1.61–21(g) [26 CFR 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. 

116See the 1983 Release, at Section III.C. 

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. 

Examples of items that would not be 

perquisites or personal benefits would 

include, among other things, travel to 

and from business meetings, other 

business travel, business entertainment, 

security during business travel, and 

itemized expense accounts the use of 

which is limited to business purposes. 

In seeking to interpret current rules, 

some legal advisers have put forward to 

the Commission staff examples of 

arrangements that they believe raise 

issues requiring more detailed bright 

line guidance regarding the definition of 

perquisites. These examples include 

larger offices or a level of secretarial 

service not available to employees 

generally. We believe that the factors 

enumerated above provide sufficient 

guidance in these areas. For example, an 

office at the job location, even if larger 

than that of other employees, is 

integrally and directly related to 

performance of the executive’s job, as is 

secretarial service used for business 

purposes, even if at a higher level than 

other employees. On the other hand, 

provision of additional secretarial 

services, such as a second secretary, that 

is not directly related to performance of 

an executive’s job would be a perquisite 

or personal benefit. 

Beyond these examples, we assume 

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 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.113

Finally, we observe that the proposal 

calls for aggregate incremental cost to 

the company and its subsidiaries as the 

proper measure of value of perquisites 

and other personal benefits.114 The 

amount attributed to such 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.115

Request for Comment 

• Is $10,000 the proper minimum 

below which disclosure of the total 

amount of perquisites and personal 

benefits should not be required? Should 

there be no minimum? Should the 

minimum be a higher amount, such as 

$25,000 or $50,000? Should the current 

minimum of the lesser of $50,000 or 

10% of total salary and bonus be 

retained? Would some other ratio be 

more appropriate? 

• Should all perquisites be required 

to be separately identified when the 

$10,000 aggregate threshold is exceeded, 

as proposed? 

• Is the greater of $25,000 or 10% of 

the total amount of perquisites and 

personal benefits the proper minimum 

below which perquisites and personal 

benefits should not be required to be 

separately identified and their value 

reported? Should there be a lower 

minimum, such as $10,000, or no 

minimum? Should the current 

minimum of 25% of the total amount be 

retained? 

• Should perquisites and personal 

benefits below the proposed threshold 

be separately identified by category, 

even if not separately quantified? 

Alternatively, is separate identification 

and quantification of all perquisites and 

personal benefits so significant to 

investors that no threshold should apply 

for either purpose? 

• We propose to retain the current 

standard for valuing perquisites and 

other personal benefits, based on the 

aggregate incremental cost to the 

company and its subsidiaries which has 

applied since 1983.116 We believe that 

this approach is consistent with the 

approach we are taking otherwise in 

valuing compensation, including in 

respect of share-based compensation. 

Nevertheless, we realize that there may 

be an issue whether the retail value of 

what is received by the executive officer 

or director, rather than the aggregate 

incremental cost to the company, better 

measures the compensation provided by 

perquisites and other personal benefits. 

Therefore we request comment as to 

whether we should require perquisites 

and other personal benefits to be valued 

based on the retail price of the item or, 

if none, the retail price of a 

commercially available equivalent. In 

determining the commercially available 

equivalents, for example, for travel on 

the company’s aircraft, the retail price of 

a commercially available equivalent 

would be the retail price to charter the 

same model aircraft. First-class airfare 

would not be considered equivalent to 

travel on a private aircraft. 

• Would the proposed valuation 

standard facilitate Item 402 compliance 

while providing meaningful 

compensation disclosure? Is there any 

other valuation methodology that is 

preferable for valuing perquisites and 

other personal benefits? If so, why? 

• Under the proposals a ‘‘gross-up’’ or 

other reimbursement of taxes owed with 

respect to perquisites and other personal 

benefits would be required to be 

included in the table and separately 

quantified and identified in the tax 

reimbursement category if it meets the 

relevant threshold, even if the 

associated perquisites or other personal 

benefits would not be required to be 

included in the table or separately 

quantified. Is separate identification of 

items such as tax gross-ups material to 

investors even if it is clear the amount 

must be included in the All Other 

Compensation column? 

• Should Item 402 include a 

definition of perquisites or other 

personal benefits? If so, how should 

perquisites or other personal benefits be 

defined? How can we assure that new 

perquisites will not be developed in a 

manner intended to avoid the definition 

and therefore disclosure? If such a 

definition is principles-based, what 

principles in addition to those described 

in this release should be considered? 

• We are providing interpretive 

guidance above regarding perquisites 

and personal benefits. Are there any 

areas regarding perquisites and personal 

benefits where we should consider 

providing additional or different 

interpretive guidance? Should any of 

our interpretive guidance be codified? 


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117These items are all currently required to be 

disclosed either under All Other Compensation or 

under Other Annual Compensation. 

118Unlike the current Item 402(b)(2)(v)(A) 

requirement, proposed Item 402(c)(2)(ix)(E) does 

not refer to amounts payable under postemployment benefits, because the focus for this 

item is current year compensation rather than 

aggregate amounts potentially payable in the future. 

These items are also the subject of disclosure as 

post-termination compensation, as described in 

Section II.B.5., 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-incontrol, such as a retention bonus, acceleration of 

option or stock vesting periods, or performancebased compensation intended to serve as an 

incentive for named executive officers to acquire 

other companies or enter into a merger agreement, 

disclosure would be required 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. 

119Proposed Item 402(c)(2)(ix)(F). 

120Proposed Item 402(c)(2)(ix)(H). Because the 

proposal calls for disclosure of the dollar value of 

any life insurance premiums, rather than only 

premiums with respect to term life insurance, as 

currently required, the requirement of current Items 

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 

would be deleted. 

121Proposed Item 402(c)(2)(ix)(C). 

122Proposed Item 402(c)(2)(ix)(D). 

123Proposed Item 402(a)(6)(iii). 

iv. Additional All Other Compensation 

Column Items 

The proposals also would specify that 

items disclosed in the All Other 

Compensation column would include, 

but not be limited to, the following 

items: 117

• 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; 118

• Annual company contributions or 

other allocations to vested and unvested 

defined contribution plans; 119

• The dollar value of any insurance 

premiums paid by the company with 

respect to life insurance for the benefit 

of a named executive officer; 120

• ‘‘Gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 121 and 

• 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 

that discount is available generally 

either to all security holders or to all 

salaried employees of the company, the 

compensation cost computed in 

accordance with FAS 123R.122

Request for Comment 

• Are there other items that should be 

specifically enumerated for inclusion in 

the All Other Compensation Column? If 

so, what are they and how should they 

be valued and reported? 

• Will the combination of the current 

Other Annual Compensation Column 

and the All Other Compensation 

Column result in too many 

compensation items being aggregated 

and separately identified within one 

column of the table? Is there another 

reason to continue to show the two 

groups of items separately? 

• Should we retain the treatment of 

securities purchased at a discount in 

current Item 402(b)(2)(iii)(C)(5), which 

requires inclusion in the Other Annual 

Compensation column of the dollar 

value of the difference between the 

price paid by a named executive officer 

for any security of the company or its 

subsidiaries purchased from the 

company or its subsidiaries (through 

deferral of salary or bonus, or 

otherwise), and the fair market value of 

such a security at the date of purchase? 

If so, why? 

• Because so many different types of 

compensation would be reportable in 

the ‘‘All Other Compensation’’ column, 

would this disclosure be clearer if it 

were presented as a supplemental table 

in the following or similar format: 

Name 

Perquisites 

and other 

personal 

benefits 

Earnings on 

deferred 

compensation 

Tax reimbursements 

Discounted 

securities 

purchases 

Payments/ 

accruals on 

termination 

plans 

Registrant 

contributions to defined contribution 

plans 

Increase in 

pension actuarial value 

Insurance 

premiums Other 

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

PEO ..........

PFO ..........

A ...............

B ...............

C ...............

e. Captions and Table Layout 

Currently a portion of the table is 

labeled as ‘‘annual compensation’’ and 

another portion as ‘‘long term 

compensation.’’ These captions create 

distinctions that may be confusing to 

both users and preparers of the 

Summary Compensation Table. Today’s 

proposal would not separately identify 

some columns as ‘‘annual’’ and other 

columns as ‘‘long term’’ compensation. 

In eliminating this distinction, we also 

propose to revise the 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, because, like the 

captions, the current approach creates 

distinctions that may be confusing to 

users and preparers. The proposals 

would thus define an ‘‘incentive plan’’

as any plan providing compensation 

intended to serve as incentive for 

performance to occur over a specified 

period.123 Consistent with this change, 

as described above, we propose to merge 

the current Other Annual Compensation 

column into the proposed All Other 

Compensation column, and include 

current information regarding incentive 

plan compensation in the appropriate 

column for the relevant form of award. 

Request for Comment 

• Will these changes improve the 

table? Are there any other changes to the 

captions and table layout that would 

improve the table? 

2. Supplemental Annual Compensation 

Tables 

Following the Summary 

Compensation Table, we propose 

requiring two supplemental tables. 

These two tables are intended to help 

explain information in the Summary 

Compensation Table and would be 

derived from two tables currently 

required. 


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124This table would contain the information in 

the current Long-Term Incentive Plan Awards 

Table, augmented with information regarding 

performance-based stock, option and similar 

awards. See current Item 402(e). This table would 

also include awards with performance, market and 

other conditions affecting the terms of the award 

(exercise price, for example) rather than vesting. 

125See note 87. 

126Proposed Instruction 1 to Item 402(d). 

127Proposed Item 402(e). Proposed Instruction 2 

to Item 402(e) would require that if more than one 

award is made to a named executive officer during 

the last completed fiscal year, a separate line should 

be used to disclose each award. 

a. Grants of Performance-Based Awards 

Table 

The first table that would supplement 

the Summary Compensation Table 

would include information regarding 

non-stock 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).124 This would ensure 

consistent reporting treatment of these 

performance-based awards, disclosing 

information equivalent to that currently 

required for grants of other long-term 

incentive plan awards. For purposes of 

this table, awards would be considered 

performance-based if they are subject to 

either a performance condition, or a 

market condition, as those terms are 

defined in FAS 123R.125

Disclosure in this table of grants of 

incentive plan awards would 

complement Summary Compensation 

Table disclosure of grant date fair value 

of stock awards and option awards, and 

the disclosure of annual amounts earned 

under non-stock based incentive 

compensation. This supplemental table 

would show the terms of grants made 

during the current year, including 

estimated future payouts, with separate 

disclosure for each grant.126

GRANTS OF PERFORMANCE-BASED AWARDS

Name 

Performance-based 

stock and 

stock-based 

incentive 

plans: number of 

shares, 

units or 

other rights 

(#) 

Performance-based 

options: 

number of 

securities 

underlying 

options 

(#) 

Non-stock 

incentive 

plan 

awards: 

number of 

units or 

other rights 

(#) 

Dollar 

amount of 

consideration paid 

for award, if 

any 

($) 

Grant date 

for stock or 

option 

awards 

Performance or 

other period 

until vesting 

or payout 

and option 

expiration 

date 

Estimated future payouts 

Threshold 

($) or (#) 

Target 

($) or (#) 

Maximum 

($) or (#) 

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

PEO ..........

PFO ..........

A ...............

B ...............

C ...............

Request for Comment 

• Will the proposed Grants of 

Performance-Based Awards Table 

effectively supplement the equity 

awards and non-stock incentive plan 

compensation information to be 

disclosed in the Summary 

Compensation Table? In particular, 

should tabular disclosure be required of 

any additional information relating to 

performance-based equity awards and 

non-stock incentive plan awards? 

• Is the information required by 

columns (b), (c) and (d) of this proposed 

table redundant with the information 

required in the Grants of PerformanceBased Awards Table describing 

estimated future payouts to be required 

in columns (h), (i) and (j) of the Table, 

such that any of these columns should 

be eliminated? Is any other tabular 

information needed to describe 

estimated future payouts in addition to 

the information that would be required 

in proposed columns (h), (i) and (j)? 

• Are the references to the definitions 

of ‘‘performance condition’’ and 

‘‘market condition’’ in FAS 123R 

appropriate in defining performancebased awards? 

b. Grants of All Other Equity Awards 

Table 

The second table supplementing the 

Summary Compensation Table would 

show 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.127

GRANTS OF ALL OTHER EQUITY AWARDS

Name 

Number of 

securities 

underlying 

options 

granted 

(#) 

Exercise or 

base price 

($/Sh) 

Expiration 

date 

Number of 

shares of 

stock or 

units granted 

(#) 

Vesting date Grant date 

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

PEO ..................................................................................

PFO ..................................................................................

A .......................................................................................

B .......................................................................................

C .......................................................................................


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128Proposed Instructions 3 and 4 to Item 402(e). 

129See current Item 402(c)(2)(vi). We also propose 

removing the column, required by current Item 

402(c)(2)(iii), requiring disclosure of the percent 

that the grant represents of total options and stock 

appreciation rights granted to all employees during 

the fiscal year. At this time, we do not believe that 

this relatively narrow disclosure is independently 

material to an understanding of a named executive 

officer’s compensation. 

130Proposed Item 402(f)(1). Disclosure of 

employment agreement information is currently 

required by Item 402(h)(1). The standard of 

materiality that would apply in proposed Item 

402(f)(1) is that of Basic v. Levinson, 485 U.S. 224 

(1988) and TSC Industries v. Northway, 426 U.S. 

438 (1976). 

131Provisions regarding post-termination 

compensation would 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 

would be disclosable as post-termination 

compensation in the manner described in Section 

II.B.5., below. 

132Current Item 402(i). We believe that the 

disclosure requirement would provide investors 

with material information regarding repricings and 

modifications and eliminate the arguably dated 

information contained in the ten-year option 

repricing table. 

133While this approach is different from that 

required for accounting and financial statement 

reporting purposes under FAS 123R, it does 

proceed from the grant date fair value concept 

embodied in that standard, and we believe it 

provides more meaningful information for 

executive compensation disclosure than the 

financial statement reporting approach and is 

consistent with our current requirement to treat 

repricings as a new award. This treatment would 

continue the current approach of essentially 

treating a repricing as a new award in Instruction 

3 to Item 402(b)(2)(iv). However, this approach 

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 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. 

See Proposed Instruction 2 to Item 402(f)(1). 

134Proposed Item 402(f)(1)(iii), which combines 

some information required by current Instruction 2 

to Item 402(b)(2)(iv) with information required by 

current Instruction 1 to Item 402(e). For a 

discussion of the standard companies should use 

when determining whether disclosure would have 

Continued 

Instructions would require options 

and stock appreciation rights granted in 

connection with a repricing transaction 

to be included in the table, and footnote 

descriptions of any material terms of a 

grant.128 Because the Summary 

Compensation Table would disclose 

grant date fair value of the options, 

stock appreciation rights or similar 

instruments, the columns in the current 

Option/SAR Grants in Last Fiscal Year 

table requiring disclosure of that value 

or, alternatively, potential realizable 

value at assumed five percent and ten 

percent annual rates of return, would be 

eliminated.129 This table would also 

supplement the Summary 

Compensation Table disclosure of the 

aggregate grant date fair value of stock, 

units and similar instruments with 

disclosure relating to the number of 

underlying securities and other material 

terms of the grants. 

Request for Comment 

• Will the Grants of All Other Equity 

Awards Table, as proposed, effectively 

supplement the option and stock grants 

information to be disclosed in the 

Summary Compensation Table? In 

particular, should tabular disclosure be 

required of any additional information 

relating to these grants? 

• Is this table or any aspect of it too 

repetitive? 

• Will it be clear to investors how the 

two supplemental tables relate to the 

Summary Compensation Table? If not, 

how could we make that more clear? 

• Are all plan-based awards covered 

by the two supplemental tables? What 

additional provisions would we need to 

add to cover all such awards? 

• Instead, would it be preferable to 

have two separate versions of the 

Summary Compensation Table, with 

one showing all awards made during the 

year and the other having exactly the 

same columns showing all the amounts 

earned by services during the year? 

Would this approach increase the risk of 

double counting? Would it be 

duplicative as to cash salary and bonus 

and other currently earned and paid 

amounts and benefits? 

3. Narrative Disclosure to Summary 

Compensation Table and Supplemental 

Tables 

We propose requiring narrative 

disclosure in order to give context to the 

tabular disclosure following the 

Summary Compensation Table, the 

Grants of Performance-Based Awards 

Table and the Grants of All Other Equity 

Awards Table. A company would be 

required to provide a narrative 

description of any additional material 

factors necessary to an understanding of 

the information disclosed in the 

tables.130 Unlike the Compensation 

Discussion and Analysis, which would 

focus on broader topics regarding the 

objectives and implementation of 

executive compensation policies, this 

narrative disclosure would focus on and 

provide context to the quantitative 

disclosure in the tables. The material 

factors will vary depending on the facts, 

but may include, in given cases, among 

other things, descriptions of the material 

terms in the named executive officers’

employment agreements, which may be 

a potential source of material 

information necessary to an 

understanding of the tabular disclosure. 

The proposed narrative disclosure 

would cover written or unwritten 

agreements or arrangements. Requiring 

this disclosure in proximity to the 

Summary Compensation Table is 

intended to make the tabular disclosure 

more meaningful.131 Mere filing of 

employment agreements (or summaries 

of oral agreements) may not be adequate 

to disclose material factors depending 

on the circumstances. 

The factors that could be material 

include each repricing or other material 

modification of any outstanding option 

or other stock-based award during the 

last fiscal year. This disclosure would 

address not only option repricings, but 

also other significant changes to the 

terms of stock-based or other awards. 

We propose to eliminate the current tenyear option repricing table.132 In its 

place, the narrative disclosure following 

the Summary Compensation Table 

would 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 elimination of applicable 

performance criteria, change of the 

bases upon which returns are 

determined, or any other material 

modification. The tabular disclosure 

would reflect the award’s total fair value 

after any such modification as a new 

award.133

Narrative text accompanying the 

tables would also describe, to the extent 

material and necessary to an 

understanding of the tabular disclosure, 

award terms relating to data provided in 

the Grants of Performance-Based 

Awards Table, which 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. Consistent with current 

disclosure requirements, however, 

companies would 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 

commercial or business information, 

disclosure of which would adversely 

affect the company’s competitive 

position.134


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an adverse impact on the company’s competitive 

position, see Section II.A.2., above. 

135Proposed Item 402(f)(1)(iv). 

136Proposed Item 402(f)(2). 

137See note 162 below for a discussion of the 

term ‘‘executive officer.’’

138Some of this information is currently required 

in one table, the Aggregated Option/SAR Exercises 

in Last Fiscal Year and Fiscal Year-End Option/SAR 

Values Table required by current Item 402(d). 

139Proposed Item 402(g). Under current rules 

such disclosure is provided only for holdings of 

outstanding stock options and stock appreciation 

rights. Consistent with current interpretations, this 

table, like the Summary Compensation Table, 

would reflect 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. Registration of Securities on Form S–8, 

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

at Section III.D. 

Another factor that may be necessary 

to an understanding of the information 

disclosed in the tables is any material 

waiver or modification of any specified 

performance target, goal or condition to 

payout under any reported incentive 

plan payout because each action can 

materially affect previously disclosed 

information about the plans. Companies 

would be required to disclose as part of 

this narrative discussion whether the 

waiver or modification applied to one or 

more specified named executive officers 

or applied to all compensation subject 

to the condition.135

Material factors necessary to an 

understanding of the tabular disclosure 

could also include information 

regarding defined benefit and deferred 

compensation plans. For example, such 

information could include material 

assumptions underlying the 

determination of the amount of increase 

in actuarial value of defined benefit or 

actuarial plans or the provisions in a 

plan or otherwise for determining 

earnings on deferred compensation 

plans, including defined contribution 

plans, that are not tax-qualified. 

We also propose an additional item 

that would require 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.136 The 

item would require disclosure of the 

amount of each of such employee’s total 

compensation for the most recent fiscal 

year and a description of his or her job 

position. The individuals would not 

need to be named. We are proposing 

this requirement so that shareholders 

will have information about the use of 

corporate assets to compensate 

extremely highly paid employees in a 

company. More detailed information 

about these employees and their 

compensation does not appear 

appropriate in light of the fact that they 

do not have a policy making function at 

the company.137

Request for Comment 

• Will the proposed narrative 

disclosure to the Summary 

Compensation Table enhance an 

understanding of the table? 

• Are there any additional material 

factors that should be listed as possibly 

requiring disclosure in the narrative to 

the Summary Compensation Table? 

• Is the difference between the 

proposed required narrative disclosure 

and the Compensation Discussion and 

Analysis requirement sufficiently clear? 

How can it be made more clear? 

• Should we require an additional 

column in the Summary Compensation 

Table where companies must indicate 

by checkmark whether a particular 

named executive officer has an 

employment agreement, so that 

investors will know to look for 

disclosure about the agreement in the 

narrative accompanying the table or to 

look for the agreement as an exhibit to 

a filing with us? 

• Is the proposed treatment of 

repricings the most appropriate 

approach for executive compensation 

disclosure purposes? Should the 

treatment be consistent with the 

reporting approach of FAS 123R? Would 

tabular presentation rather than 

discussion of material terms in the 

narrative be preferable? In addition to 

the disclosure proposed in the Summary 

Compensation Table and the related 

narrative, should we also require 

quantification of the fair value of the 

award both immediately before and 

immediately after the repricing or other 

modification? 

• Would the proposed disclosure of 

up to three employees who are not 

executive officers but earn more in total 

compensation than any of the named 

executive officers be appropriate in the 

narrative discussion? Should more 

disclosure be required regarding these 

employees and their compensation? Is 

this information material to investors? 

Will disclosure of this information, 

particularly in the case of smaller 

companies, cause competitive harm? Is 

disclosure of this information consistent 

with the overall goals of this proposal? 

4. Exercises and Holdings of Previously 

Awarded Equity 

The next section of proposed 

executive compensation disclosure 

would provide investors with an 

understanding of the compensation in 

the form of equity that has previously 

been awarded and remains outstanding, 

that is unexercised or unvested. This 

section also would disclose 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 propose two tables. 

One table shows the amounts of prior 

awards outstanding and the other shows 

the exercise or vesting of equity awards 

during the fiscal year.138

a. Outstanding Equity Awards at Fiscal 

Year-End 

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 proposing a table that would 

disclose information regarding 

outstanding awards under, for example, 

stock option (or stock appreciation 

rights) plans, restricted stock plans, 

incentive plans and similar plans and 

disclose the market-based values of the 

options, rights, shares or units in 

question as of the company’s most 

recent fiscal year end.139


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140Proposed Instruction 1 to Item 402(g)(2), 

which is based on current Instruction 1 to Item 

402(d)(2). 141Proposed Instruction 3 to Item 402(g)(2). This 

standard is based on the current Summary 

Compensation Table footnote disclosure regarding 

restricted stock, expanded to cover restricted stock 

units and incentive plans. Current Instruction 2 to 

Item 402(b)(2)(iv). 

142Proposed Instruction 2 to Item 402(g)(2). 143This table is similar to a portion of the current 

Aggregate Options/SAR Exercises in Last Fiscal 

Year and FY-End Options/SAR Values Table, 

except unlike that table it would also include the 

vesting of restricted stock and similar instruments. 

Commentators have noted a need for comparable 

disclosure of restricted stock vesting. See, e.g., 

Phyllis Plitch, Restricted Stock Grants Cloud 

Executive Pay Tally, Wall St. J. Online Edition, Jan. 

26, 2005. The number and value of unexercised 

options and stock appreciation rights, included in 

the current option exercises table, would be shown 

in the proposed Outstanding Equity Awards at 

Fiscal Year-End Table described immediately 

above. See current Item 402(d). 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name 

Number of 

securities underlying 

unexercised 

options 

(#) exercisable/ 

unexercisable 

In-the-money 

amount of 

unexercised 

options 

($) exercisable/ 

unexercisable 

Number of 

shares or 

units of 

stock held 

that have 

not vested 

(#) 

Market 

value of 

shares or 

units of 

stock held 

that have 

not vested 

($) 

Incentive 

plans: number of nonvested 

shares, 

units or 

other rights 

held 

(#) 

Incentive 

plans: market or payout value of 

nonvested 

shares, 

units or 

other rights 

held 

($) 

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

PEO .............................................................................

PFO .............................................................................

A ..................................................................................

B ..................................................................................

C ..................................................................................

With respect to options, stock 

appreciation rights and similar 

instruments, an instruction, which 

would be the same as the current 

standard, would indicate that these 

instruments are ‘‘in-the-money’’ if the 

market price of the underlying securities 

exceeds the exercise or base price. The 

in-the-money amount of options, stock 

appreciation rights and similar 

instruments would be calculated by 

determining the difference, at fiscal 

year-end, between the market price of 

the underlying securities and the 

exercise or base price.140 The market 

value of stock (including restricted 

stock, restricted stock units or other 

similar instruments) and incentive plan 

award holdings would be calculated by 

multiplying the closing market price of 

the company’s stock at the end of the 

last completed fiscal year by the 

respective numbers of stock or incentive 

plan award holdings that were not then 

vested.141

A new instruction would require 

footnote disclosure of the expiration 

dates of options, stock appreciation 

rights and similar instruments held at 

fiscal year-end, separately identifying 

those that are exercisable and 

unexercisable, and the vesting dates of 

shares of stock (including restricted 

stock, restricted stock units or other 

similar instruments) and incentive plan 

awards held at fiscal year-end. If the 

expiration date of an option had 

occurred after fiscal year-end but before 

the date on which the disclosure is 

made, the footnote would need to state 

whether the option had been exercised 

or had expired.142

Request for Comment 

• Will the proposed Outstanding 

Equity Awards at Fiscal Year-End Table 

provide material information for 

investors regarding the named executive 

officers’ outstanding awards? 

• Should the table include the value 

of out-of-the-money options and stock 

appreciation rights? Why or why not? If 

such instruments were included, how 

would the value be calculated and 

presented? 

• Should we require, as proposed, 

that options or similar awards that have 

been transferred by an executive must 

still be included in the table? Should 

continued disclosure depend on the 

nature of the transfer or the identity of 

the transferee? 

b. Option Exercises and Stock Vesting 

We are proposing a table that would 

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 would 

allow investors to have a picture of the 

amounts that a named executive officer 

realizes on equity compensation 

through its final stage.143

OPTION EXERCISES AND STOCK VESTED

Name of Executive Officer 

Number of 

shares acquired on 

exercise or 

vesting 

(#) 

Value realized upon 

exercise or 

vesting 

($) 

Grant date 

fair value 

previously 

reported in 

summary 

compensation table 

($) 

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

PEO—Options .........................................................................................................................................

Stock ........................................................................................................................................................

PFO—Options ..........................................................................................................................................

Stock ........................................................................................................................................................


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6560 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

144 15 U.S.C. 78p(a). 145Currently, for defined benefit or actuarial 

plans, disclosure consists 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. 

The table does not provide disclosure for any 

specific named executive officer. See current Item 

402(f)(1). This requirement is for plans under which 

benefits are determined primarily by final 

compensation (or average final compensation) and 

years of service, and includes narrative disclosure. 

If named executive officers are subject to other 

plans under which benefits are not determined 

primarily by final compensation (or average final 

compensation), narrative disclosure is required of 

the benefit formula and estimated annual benefits 

payable to the officers upon retirement at normal 

retirement age. See current Item 402(f)(2). 

146Proposed Item 402(i). 

147These would include, but not be limited to, 

tax-qualified defined benefit plans, supplemental 

employee retirement plans and cash balance plans, 

but would exclude defined contribution plans, for 

which we propose disclosure as described below. 

OPTION EXERCISES AND STOCK VESTED—Continued 

Name of Executive Officer 

Number of 

shares acquired on 

exercise or 

vesting 

(#) 

Value realized upon 

exercise or 

vesting 

($) 

Grant date 

fair value 

previously 

reported in 

summary 

compensation table 

($) 

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

A—Options ...............................................................................................................................................

Stock ........................................................................................................................................................

B—Options ...............................................................................................................................................

Stock ........................................................................................................................................................

C—Options ..............................................................................................................................................

Stock ........................................................................................................................................................

The grant date fair value of these 

instruments would have been disclosed 

in the Summary Compensation Table for 

the year in which they were awarded. 

Therefore, to eliminate the impact of 

double disclosure, this table would 

show that amount from applicable 

previous years from the Summary 

Compensation Table. 

Request for Comment 

• In light of the proposed disclosure 

in the Summary Compensation Table of 

the grant date fair value of the awards, 

is separate reporting of the amounts 

realized upon exercise or vesting 

appropriate? Would it provide material 

information? Would separate reporting 

of the market value at exercise or 

vesting confuse users of financial 

statements and perhaps cause them to 

call into question the original grant date 

fair value estimate? 

• Would the proposed separate 

column for grant date fair value 

previously reported for the same award 

eliminate potential confusion about the 

amount of compensation provided by 

options, stock appreciation rights, stock 

and similar instruments? Are there other 

ways we could make this clear, such as 

an explanatory footnote to the table? 

• Will investors understand that the 

value of equity compensation had 

already been disclosed in the form of 

the grant-date fair value of equity-based 

awards? Are other sources of this 

information, such as reports filed by 

officers and directors pursuant to 

Section 16(a) of the Exchange Act,144

adequate to inform investors of the 

information contained in this table? 

• Would it be preferable to combine 

proposed Outstanding Equity Awards at 

Fiscal Year-End Table and the proposed 

Option Exercises and Stock Vested 

Table into one table? 

5. Post-Employment Compensation 

We are proposing significant revisions 

to the disclosure regarding postemployment compensation to provide a 

clearer picture of this potential future 

compensation. 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 

proposing to replace the current 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. Second, 

we are proposing a table and narrative 

disclosure that will disclose information 

regarding non-qualified defined 

contribution plans and other deferred 

compensation. Finally, we are 

proposing revised requirements 

regarding disclosure of compensation 

arrangements triggered upon 

termination and on changes in control. 

a. Retirement Plan Potential Annual 

Payments and Benefits Table 

We are proposing 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.145 Current 

disclosure frequently does not provide 

investors useful information regarding 

specific potential pension benefits. 

Current disclosure may make it difficult 

for the reader to understand which 

amounts relate to any particular named 

executive officer, and may thus obscure 

the value of a significant component of 

compensation. 

As a result, we propose a new table 

disclosing estimated annual retirement 

payments under defined benefit plans 

for each named executive officer, 

followed by narrative disclosure.146 A 

separate line of tabular disclosure 

would be required for each plan in 

which a named executive officer 

participates that provides for the 

payment of specified retirement 

benefits, or benefits that will be paid 

primarily following retirement.147


wwhite on PROD1PC61 with PROPOSALS2
Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6561 

148Proposed Instruction 3 to Item 402(i). 

149Proposed Instruction 2 to Item 402(i). 

150Nonqualified defined contribution and other 

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. Nonqualified defined 

contribution and other deferred compensation plans 

are generally unfunded, and their taxation is 

governed by Section 409A of the Internal Revenue 

Code [26 U.S.C. 409A]. 

151See Section II.B.1.d.i. above. 

152See Lucian A. Bebchuk and Jesse M. Fried, 

Stealth Compensation via Retirement Benefits, 1 

Berkeley Bus. L.J. 291, 314–316 (2004); See also The 

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

Gretchen Morgenson, Executive Pay, Hiding Behind 

Small Print, N.Y. Times, Feb. 8, 2004, § 3, at 1. 

153Proposed Item 402(j). 

RETIREMENT PLAN POTENTIAL ANNUAL PAYMENTS AND BENEFITS

Name Plan name 

Number of 

years credited service 

(#) 

Normal retirement age 

(#) 

Estimated 

normal retirement annual benefit 

($) 

Early retirement age 

(#) 

Estimated 

early retirement annual 

benefit 

($) 

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

PEO ..................................................................................

PFO ..................................................................................

A .......................................................................................

B .......................................................................................

C .......................................................................................

An instruction would provide that 

quantification of benefits should reflect 

the form of benefit currently elected by 

the named executive officer, such as 

joint and survivor annuity or single life 

annuity, specifying that form in a 

footnote. Where the named executive 

officer is not yet eligible to retire, the 

dollar amount of annual benefits to 

which he or she would be entitled upon 

becoming eligible would be computed 

assuming that the named executive 

officer continued to earn the same 

amount of compensation as reported for 

the company’s last fiscal year. If a 

named executive officer left during the 

year, the dollar amounts of annual 

benefits to which he or she would be 

entitled would be required to be 

disclosed. 

‘‘Normal retirement age’’ would mean 

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’’ would be defined similarly as early 

retirement age as defined in the plan, or 

otherwise available to the executive.148

If the credited years of service for the 

executive under any plan differ from the 

actual years of service with the 

company, a footnote quantifying the 

difference and any resulting benefit 

increase would be required.149

The table would be followed by a 

narrative description of material factors 

necessary to an understanding of each 

plan disclosed in the table. Examples of 

such factors in the proposed rule 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; 

• If the executive or company may 

elect a lump sum distribution, the 

amount of such distribution that would 

be available on election as of the end of 

the company’s last fiscal year, 

disclosing the valuation method and 

material assumptions applied in 

quantifying such amount; 

• 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 reasons for each plan; and 

• Company policies with regard to 

such matters as granting extra years of 

credited service. 

Request for Comment 

• Should any other information 

(including information that may be 

disclosed in the narrative) be included 

in the proposed table? Should any of the 

information we propose to require to be 

disclosed be excluded? 

• Should this item require 

quantification of the aggregate actuarial 

value of a plan benefit as of the end of 

the company’s last fiscal year without 

regard to whether the plan permits a 

lump sum distribution? If so, why? 

Alternatively, would this information 

provide meaningful disclosure only if 

the named executive officer currently is 

eligible to retire under the plan with a 

lump sum distribution? 

• Is there any particular form of plan 

for which the proposed disclosure 

format is not suitable? If so, how could 

the proposed disclosure requirement be 

adapted for such plans? 

b. Nonqualified Defined Contribution 

and Other Deferred Compensation Plans 

Table 

In order to provide a more complete 

picture of potential post-employment 

compensation, we are proposing a new 

table to disclose contributions, earnings 

and balances under nonqualified 

defined contribution and other deferred 

compensation plans. These plans may 

be a significant element of retirement 

and post-termination compensation.150

Our current rules elicit disclosure of the 

compensation when earned and only 

the above-market earnings on 

nonqualified deferred compensation.151

The full value of those earnings and the 

accounts on which they are payable are 

not currently subject to disclosure, nor 

are shareholders and investors informed 

regarding the rate at which these 

amounts—and the corresponding cost to 

the company—are growing.152

Therefore, as noted above, we are 

proposing to require disclosure in the 

Summary Compensation Table of all 

earnings on compensation that is 

deferred on a basis that is not taxqualified and are also proposing new 

tabular and narrative disclosure of 

nonqualified deferred compensation.153


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6562 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

154Proposed Instruction to Item 402(j)(2). 

155Proposed Instruction 4 to Item 402(c), 

described in Section II.B.1.b., above, regarding the 

Summary Compensation Table. 

156Proposed Item 402(j)(3). 157 1983 Release, at Section III.E. 

158Proposed Item 402(k), which would replace 

current Item 402(h)(2). 159We propose to eliminate the current $100,000 

disclosure threshold. With respect to posttermination perquisites, however, the same 

disclosure and itemization thresholds proposed for 

the Summary Compensation Table would apply. 

See Section II.B.1.d.iii, above. 

NONQUALIFIED DEFINED CONTRIBUTION AND OTHER DEFERRED COMPENSATION PLANS

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 ..........................................................................................................

A ...............................................................................................................

B ...............................................................................................................

C ..............................................................................................................

An instruction would require 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.154

This would complement the proposed 

instruction to the Summary 

Compensation Table that would require 

footnote disclosure of amounts for 

which receipt has been deferred.155

Together, these footnotes would operate 

to provide 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. 

The table would be followed by a 

narrative description of material factors 

necessary to an understanding of the 

disclosure in the table.156 Examples of 

such factors in the proposed rule 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. 

Request for Comment 

• Should tabular or narrative 

disclosure require presentation of any 

additional information necessary for 

investors to clearly understand 

nonqualified deferred compensation? 

For example: 

—Should the dollar amount of aggregate 

interest or other earnings accrued 

from inception of the named 

executive officer’s participation in the 

plan through the end of the 

company’s last fiscal year be 

disclosed in the proposed table? 

—Is a narrative description of the tax 

implications for both the participant 

and the company necessary to a 

material understanding of these 

plans? 

• In addition to the footnote required 

by the proposed instruction, are any 

other provisions necessary or 

appropriate to avoid ‘‘double counting’’

of previously reported compensation 

that will have been deferred? 

• Should only above market or 

preferential earnings be included in the 

table? If so, why would such disclosure 

be more useful or informative to 

investors? 

• Is any of the proposed new 

disclosure unnecessary? If so, please 

explain. 

c. Other Potential Post-Employment 

Payments 

We are proposing significant revisions 

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.’’ 157

Currently, disclosure does not in many 

cases capture material information 

regarding these plans and potential 

payments under them. We therefore 

propose disclosure of specific aspects of 

any written or unwritten arrangement 

that provides 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, or a change in control 

of the company. Our proposals would 

call for narrative disclosure of the 

following information regarding 

termination and change in control 

provisions: 158

• The specific circumstances that 

would trigger payment(s) under the 

termination or change-in-control 

arrangements or the provision of other 

benefits (references to benefits include 

perquisites); 

• The estimated payments and 

benefits that would be provided in each 

termination circumstance, and whether 

they would or could be lump-sum or 

annual, disclosing the duration and by 

whom they would be provided; 159

• The specific factors used to 

determine the appropriate payment and 

benefit levels under the various 

circumstances that would trigger 

payments or provision of benefits; 

• 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 

• Any other material features 

necessary for an understanding of the 

provisions. 

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. 

As proposed, a company would be 

required to provide quantitative 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6563 

160See Securities Act Section 27A and Exchange 

Act Section 21E. 

161We propose to adopt the nomenclature used 

most recently in Item 5.02 of Form 8–K, which 

refers to ‘‘principal executive officer’’ and 

‘‘principal financial officer.’’

162Proposed Item 402(a)(3). Currently, the named 

executive officers for whom disclosure is required 

include the company’s chief executive officer and 

the four most highly compensated executive officers 

excluding the chief executive officer. 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 policy making 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 is 

currently the case today, a named executive officer 

may be an executive officer of a subsidiary. 

163Exchange Act Rules 13a–14 and 15d–14. 

164Proposed paragraphs (a)(3)(i) and (a)(3)(ii) of 

Item 402 would 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. Proposed Instruction 4 to 

Item 402(a)(3) would specify 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. 

Proposed Instruction 4 to Item 402(a)(3) would also 

specify 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. 

165These are the registrant’s principal executive 

officer, president, principal financial officer, 

principal accounting officer, principal operating 

officer or any person performing similar functions. 

166Proposed Instruction 1 to Item 402(a)(3). 

167 Id. 

disclosure under these requirements 

even where uncertainties exist as to 

amounts payable under these plans and 

arrangements. In the event that 

uncertainties exist as to the provision of 

payments or benefits or the amounts 

involved, the company would be 

required to make reasonable estimates 

and disclose material assumptions 

underlying such estimates in its 

disclosure. In such event, the disclosure 

would be considered forward-looking 

information as appropriate that falls 

within the safe harbor for disclosure of 

such information.160

Request for Comment 

• Should we, as proposed, eliminate 

the current $100,000 threshold for 

disclosure for compensatory plans or 

arrangements providing payments upon 

termination or change-in-control? 

• Should the proposed item 

specifically require narrative disclosure 

of any additional information? If so, 

what information and why? 

• Would a tabular format result in 

more effective disclosure of any of this 

information? If so, how should such a 

table be constructed so that it is easily 

understood, given the wide variability 

of the factors determining payments? 

For example, should such a table have 

separate columns for cash payments, 

stock payments, and perquisites; 

separate lines for each potential 

termination event; and narrative 

disclosure of other material terms, such 

as duration, renewal and applicable 

covenants? 

• Should we require companies to 

provide quantitative disclosure as 

proposed? If not, how can there be 

assurance that investors can understand 

the significant amounts of compensation 

that may be involved? 

6. Officers Covered 

a. Named Executive Officers 

We propose to have the principal 

executive officer, the principal financial 

officer 161 and the three most highly 

compensated executive officers other 

than the principal executive officer and 

principal financial officer comprise the 

named executive officers.162 In addition, 

as is currently the case, 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 would 

be included. 

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.163 Like the principal 

executive officer, disclosure about the 

principal financial officer would be 

required even if he or she was no longer 

serving in that capacity at the end of the 

last completed fiscal year.164 As is 

currently the case for the chief executive 

officer, all persons who served as the 

company’s principal executive officer or 

principal financial officer during the 

last completed fiscal year would be 

named executive officers. 

We do not propose to require 

compensation disclosure for all of the 

officers listed in Item 5.02 of Form 8–

K.165 Item 5.02 of Form 8–K was 

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. 

Given these factors, it is reasonable for 

the two groups not to be identical. 

Request for Comment 

• Should the principal financial 

officer be specifically included as a 

named executive officer? 

• Would the proposed named 

executive officers be those executive 

officers whose compensation is material 

to investors? Is only the compensation 

of the principal executive officer 

material? The principal executive officer 

and the principal financial officer? 

• Should Item 402 specifically 

require disclosure of the compensation 

of any other officers listed in Form 8–

K Item 5.02? If so, which officers and 

why? If we were to require Item 402 

disclosure regarding compensation of 

additional Item 5.02 officers, should we 

also require Item 402 disclosure for two 

or three additional officers who receive 

the highest compensation? 

• Are there any other specific 

executive officers, such as the general 

counsel or principal accounting officer, 

who should be specifically identified as 

named executive officers? If so, which 

officers and why? 

• Should we retain, as proposed, the 

current requirement that 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 year be included in the 

disclosure? 

• Is the continuation of the current 

requirement for five named executive 

officers appropriate? Should that 

number be higher or lower? 

b. Identification of Most Highly 

Compensated Officers; Dollar Threshold 

for Disclosure 

We propose to identify the most 

highly compensated executive officers 

on the basis of total compensation for 

the most recent fiscal year.166 We also 

propose 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.167

Both the determination of the most 

highly compensated officers and the 

$100,000 disclosure threshold are 


wwhite on PROD1PC61 with PROPOSALS2
6564 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

168Current Instruction 1 to Item 402(a)(3). 

169Current Instruction 3 to Item 402(a)(3). 

170Proposed Instruction 3 to Item 402(a)(3). 

171Current Items 402(a)(2) and 402(a)(5). 

172Because current Item 402(a)(5) otherwise is 

redundant with current Item 402(a)(2), we propose 

to rescind Item 402(a)(5) in its entirety. We propose 

a conforming amendment to Item 402(a)(2). 

173Proposed Instructions 5 and 6 to Item 404(a). 

174Current Item 402(a)(7)(ii), which generally 

defines the term ‘‘plan.’’

175See, e.g., Ellen Simon, At Corporate Helm, 

Extra Benefits Still Alive and Well, Assoc. Press, 

Apr. 26, 2004; and Carrie Johnson, Former Tyco 

Executive Takes Stand in Trial, Wash. Post, Feb. 11, 

2004, at E2. 

176Proposed amendment to Instruction 2 to Item 

15(b) of Form N–1A; proposed amendment to 

Instruction 2 to Item 21.2 of Form N–2; proposed 

amendment to Instruction 2 to Item 22(b) of Form 

N–3. 

177Proposed Item 402(a)(6)(ii). 

178See, 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). 

currently based only on total annual 

salary and bonus for the last fiscal 

year.168 Given the proliferation of 

various forms of compensation other 

than salary and bonus, we believe that 

total compensation more accurately 

identifies those officers who are, in fact, 

the most highly compensated. 

Moreover, 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. 

Under the current rules, companies 

are permitted to exclude an executive 

officer (other than the chief executive 

officer) due to either an unusually large 

amount of cash compensation that is not 

part of a recurring arrangement and is 

unlikely to continue, or cash 

compensation relating to overseas 

assignments attributed predominantly to 

such assignments.169 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 propose to retain this basis for 

exclusion. 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 propose to 

eliminate this basis for exclusion.170

Request for Comment 

• Are there any particular 

circumstances or categories of 

companies for which a measure other 

than total compensation should be 

applied to identify the most highly 

compensated executive officers? If so, 

what measure should be applied and 

why? Is $100,000 the correct disclosure 

threshold? 

• Should payments attributable to 

overseas assignments be included in 

determining the most highly 

compensated officers, given that the 

purpose of such payments typically is to 

compensate for disadvantageous 

currency exchange rates or high costs of 

living? 

• Are there any particular 

circumstances, such as commissions for 

executives responsible for sales, for 

which the ‘‘not recurring and unlikely 

to continue’’ standard should be 

retained? 

7. Interplay of Items 402 and 404 

We propose that Item 402 require 

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. Currently, while Item 

402 states that such compensation is 

reportable under Item 402, even if also 

called for by another requirement, Item 

402 also provides that information may 

be excluded if a transaction has been 

reported in response to Item 404.171

This provision may cause Item 402 

disclosure to omit compensation that a 

transaction disclosed under Item 404 

provides to executives. We propose to 

eliminate that exclusion from Item 

402.172 We also propose instructions to 

Item 404 that would clarify what 

compensation does not need to be 

reported under Item 404.173 In some 

cases the result may nevertheless be that 

compensation information is disclosed 

under Item 402 while a related person 

transaction giving rise to that 

compensation is disclosed under Item 

404. We believe the possibility of 

additional disclosure in the context of 

each of the respective items is preferable 

to the possibility that compensation is 

not properly and fully disclosed under 

Item 402. 

Request for Comment 

• In light of the amendments to Item 

404 that we also propose, are there any 

circumstances for which the current 

exclusion from Item 402 disclosure for 

transactions reported under Item 404 

should be retained? If so, why? 

8. Other Proposed Changes 

A company is currently permitted to 

omit from Item 402 disclosure 

‘‘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 company and that are 

available generally to all salaried 

employees.’’ 174 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 deprive investors of 

disclosure of significant compensatory 

benefits.175 For this reason, we propose 

to delete relocation plans from this 

exclusion. For the same reason, 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.176 We also propose to 

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

is more principles-based.177

Request for Comment 

• Should relocation plans be required 

to be disclosed as compensation? 

Should group life, health, 

hospitalization and medical 

reimbursement also be included in 

reportable compensation? Can these 

plans be operated in a manner that may 

obscure compensation disclosure? Are 

there other plans or benefits that should 

be excluded from the disclosure 

requirements of Item 402? If so, why? 

• Should management investment 

companies be required to disclose all 

relocation plans as portfolio manager 

compensation? Should all group life, 

health, hospitalization, medical 

reimbursement, and pension and 

retirement plans and arrangements also 

be included in compensation that is 

disclosed for portfolio managers of 

management investment companies? 

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 share-based compensation, 

incentive plans and other forms of 

compensation.178 In light of this 

complexity, we have determined to 

propose formatted tabular disclosure for 

director compensation, accompanied by 

narrative disclosure of additional 

material information. In doing so, we 

are revisiting an approach that the 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6565 

179 1995 Release. The 1995 proposal was coupled 

with a proposal 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 the proposals. 

180The Commission received approximately 153 

letters supporting the proposal. Of those, 133, all 

individuals, expressed their views via a brief 

statement submitted using a form letter. Additional 

supporting commenters included corporations, 

associations, unions, and security holder resource 

providers. See, e.g., comment letters on the 1995 

Release in File No. S7–14–95 from Bell Atlantic 

Network Services, Inc.; Chevron Corporation; and 

Scott Paper Company (generally offering support for 

proposal). See also, e.g., coment letters from the 

Amerian Bar Association; American Institute of 

Certified Public Accountants; Association of 

Investment Management and Research; American 

Society of Corporate Secretaries; Instituional 

Shareholder Services; and Ernst & Young LLP 

(favoring tabular disclosure of director 

compensation, but with suggested improvements to 

proposed rules). 181Approximately 20 commenters, primarily 

corporations and associations, opposed the rules. 

See, e.g., comment letters in File No. S7–14–95 

from the American Corporate Counsel Association; 

AT&T Corp.; The Business Roundtable; 

Consolidated Edison Company of New York; Deere 

& Communications, Inc. 

182Under 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 registrant upon a designated event 

such as death or retirement. The amount to be 

disclosed in the table would 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. 

183Proposed Instruction to item 402(l)(2)(iv) and 

(v). 

184The only exception would be if all perquisites 

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

would not need to be disclosed. 

185Proposed Instruction to item 402(l)(2). 

186Proposed Item 402(l)(3). 

Commission proposed in 1995 but did 

not adopt at that time.179 The 

commenters supporting the proposal 

generally believed that it was 

appropriate to treat director 

compensation similarly to executive 

compensation.180 The commenters 

opposing the proposal believed that 

non-executive directors were generally 

compensated uniformly, and therefore 

breaking out compensation for each 

director in a table often could yield 

repetitious data.181

Director compensation has continued 

to evolve since 1995 so that we are again 

proposing a Director Compensation 

Table, which would resemble the 

proposed Summary Compensation 

Table, but would present information 

only with respect to the company’s last 

completed fiscal year. 

DIRECTOR COMPENSATION

Name Total 

Fees 

earned or 

paid in cash 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

A ...........................................................................................

B ...........................................................................................

C ...........................................................................................

D ...........................................................................................

E ...........................................................................................

The All Other Compensation column 

of the proposed Director Compensation 

Table would include, but not be limited 

to: 

• All perquisites and other personal 

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

• All earnings on compensation that 

is deferred on a basis that is not taxqualified; 

• All tax reimbursements; 

• Annual company contributions or 

other allocations to vested and unvested 

defined contribution plans; 

• 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 computed in 

accordance with FAS 123R; 

• Aggregate annual increase in 

actuarial value of all defined benefit and 

actuarial pension plans; 

• Annual company contributions to 

vested and unvested defined 

contribution and other deferred 

compensation plans; 

• All consulting fees; 

• Awards under director legacy or 

charitable awards programs; 182 and 

• The dollar value of any insurance 

premiums paid by, or on behalf of, the 

company for life insurance for the 

director’s benefit. 

In addition to the disclosure specified 

in the columns of the table, companies 

would be required to disclose, for each 

director, by footnote to the appropriate 

column, 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.183 The same instructions as 

provided in the Summary 

Compensation Table would govern 

analogous matters in the Director 

Compensation Table. As with the 

Summary Compensation Table, the 

proposed rules make clear that all 

compensation must be included in the 

table.184 As is the case with the current 

director disclosure requirement, 

companies would 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. 

A proposed instruction to the Director 

Compensation Table would permit the 

grouping of directors in a single row of 

the table if all of their elements and 

amounts of compensation are 

identical.185

Following the table, narrative 

disclosure would describe any material 

factors necessary to an understanding of 

the table. Such factors may include, for 

example, a breakdown of types of 

fees.186 We are not proposing the 

supplemental tables for directors. 

Request for Comment 

• Does the proposed table organize 

director compensation disclosure in a 

format that is easy to understand? 

• Do the proposed table and narrative 

disclose information that is material to 

an investor’s analysis of director 

compensation? Should other tables be 

required, such as the Grants of 

Performance-Based Awards Table and 


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6566 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

187The term small business issuer is defined by 

Item 10(a)(1) of Regulation S–B. Currently, under 

both Item 402 of Regulation S–B and Item 402 of 

Regulation S–K, a small business issuer is 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 current rules also permit 

samll business issuers to exclude the Pension Plan 

Table. 

188Proposed Items 402(b) and 402(c) of 

Regulation S–B. 

189Proposed Item 402(d) of Regulation S–B. 

190Proposed Item 402(f) of Regulation S–B. 

191Proposed Item 402(a) of Regulation S–B. 

Proposed Item 402(c)(1)(vii) of Regulation S–B 

would require an identification to the extent 

material of any item included under All Other 

Compensation in the Summary Compensation 

Table, however identification of an item wold not 

be considered material under the proposal if it did 

not exceed the greater of $25,000 or 10% of all 

items included in the specified category. All items 

of compensation would be requred to be included 

in the Summary Compensatio Table without regard 

to whether such items are required to be 

indentified. 

192Proposed Item 402(c) and 402(e) of Regulation 

S–B. 

193We would also eliminate the current 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. Current Item 

402(a)(1)(i) of Regulation S–K. 

the Grants of All Other Equity Awards 

Table? 

• Should named executive officers 

who are also directors be omitted from 

the table, with any compensation for 

services as a director reported only in 

the Summary Compensation Table, as is 

currently the case? If so, should there be 

some indication of their status as 

directors and compensation related to 

their director service in the Summary 

Compensation Table, the Director 

Compensation Table, or both? Should 

the nature or extent of compensation to 

the chairman of the board of directors be 

presented differently from that of other 

directors? 

• With respect to disclosure of 

perquisites, should the director 

compensation apply the same $10,000 

disclosure threshold as proposed for the 

Summary Compensation Table? Should 

separate identification and 

quantification apply to director 

perquisites? 

• Does the proposed table cover any 

forms of compensation that typically are 

not awarded to directors and therefore 

should be omitted? Should the 

requirements be modified to make it 

easier to capture forms of compensation, 

if any, that develop in the future? 

• Does the proposed table omit any 

forms of compensation awarded to 

directors that should be specifically 

included or identified? 

• Should narrative disclosure 

regarding the company’s policies and 

objectives with respect to director 

compensation and share ownership or 

retention policies accompany this table? 

Should it be included in the 

Compensation Discussion and Analysis? 

• Would more specific footnote 

disclosure, as opposed to the proposed 

accompanying narrative, provide 

additional material information 

regarding director compensation? 

Should there be supplemental tables for 

directors, or should we require 

disclosure of the number of shares, 

units, options and other securities 

awarded to directors in addition to the 

grant date fair value of such awards? 

C. Treatment of Specific Types of 

Issuers 

1. Small Business Issuers 

The Item 402 proposals would 

continue to differentiate between small 

business issuers and other issuers.187 In 

crafting the proposals, we recognize that 

the executive compensation 

arrangements of small business issuers 

typically are less complex than those of 

other public companies. We also 

recognize that satisfying disclosure 

requirements designed to capture more 

complicated compensation 

arrangements may impose new, 

unwarranted burdens on small business 

issuers. 

As proposed, small business issuers 

would be required to provide, along 

with related narrative disclosure: 

• The Summary Compensation 

Table; 188

• The Outstanding Awards at Fiscal 

Year-End Table; 189 and 

• The Director Compensation 

Table.190

Also as proposed, small business issuers 

would only be required to provide 

information in the Summary 

Compensation Table for the last two 

fiscal years. In addition, small business 

issuers would 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.191 Narrative 

discussion of a number of items to the 

extent material would replace 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.192 Small 

business issuers would not be required 

to provide a Compensation Discussion 

and Analysis.193

Request for Comment 

• Would reliance on narrative 

disclosure adversely affect 

comparability of disclosure among small 

business issuers? Are there particular 

forms of compensation that for this 

reason should instead be presented in a 

tabular format? If so, why? 

• Should small business issuers be 

categorically exempted from providing a 

Compensation Discussion and Analysis? 

Are there particular elements of the 

proposed Compensation Discussion and 

Analysis in Item 402 of Regulation S–K 

that small business issuers should be 

required to address? If so, which 

elements and why? 

• Are there other provisions of our 

rule proposal that should not apply to 

small business issuers? 

• Should the Summary Compensation 

Table require disclosure of 

compensation for each of the last two 

fiscal years, or is only the last 

completed fiscal year necessary? 

• Should compensation disclosure be 

provided for a larger group of executive 

officers than we have proposed? If so, 

which officers and why? 

• Should we require small business 

issuers to provide an Option Exercises 

and Stock Vested Table? 

• Should the quantitative threshold 

for identifying the most highly 

compensated executive officers remain 

the same in both Regulation S–B and 

Regulation S–K? For example, if we 

raise this threshold in Item 402 of 

Regulation S–K, should it remain 

$100,000 for Regulation S–B? Should 

any other threshold be different for 

small business issuers? 

• Should small business issuers also 

be required to identify perquisites and 

personal benefits valued, in the 

aggregate, in excess of $10,000 and to 

quantify perquisites and personal 

benefits valued at the greater of $25,000 

or ten percent of total perquisites and 

other personal benefits? 

• Should we require the 

supplemental tables to the Summary 

Compensation Table? 

• Are there other items that should be 

specifically required to be discussed in 

the proposed narrative disclosure for 

small business issuers? 

2. Foreign Private Issuers 

Currently a foreign private issuer will 

be deemed to comply with Item 402 of 

Regulation S–K if it provides 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. The proposals would 

continue this treatment of these issuers 

and clarify that the treatment of foreign 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6567 

194Business 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)]. 

195 Item 11 of Form 10–K. 

196 Items 8 and 22(b)(13) of Schedule 14A. These 

items require business development companies to 

provide certain information required by Item 

402(b)(2)(iv) and (c) of Regulation S–K, as well as 

a compensation table and a brief description of the 

material provisions of certain pension, retirement 

and other plans. 

197 Item 18.14 of Form N–2. 

198Proposed Item 18.15 of Form N–2. Under the 

proposals, business development companies would 

no longer be required to respond to Item 18.14 of 

Form N–2, and Item 18.14(c) of Form N–2 would 

be deleted. Current Items 18.15 and 18.16 of Form 

N–2 would be redesignated as Items 18.16 and 

18.17, respectively. As a result of the redesignation 

of current Item 18.16 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 proposed. 

199Proposed amendment to Item 8 of Schedule 

14A. Under the proposals, business development 

companies would no longer be required to respond 

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

22(b)(13)(iii) of Schedule 14A would be deleted. 

Proposed amendments to Item 22(b)(13) of 

Schedule 14A. 200 Item 11 of Form 10–K. 201See Section II.B.6., above. 202See Instructions 4 and 6 to Item 22(b)(13)(i) of 

Schedule 14A; Instructions 4 and 6 to Item 18.14(a) 

of Form N–2 (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). 

private issuers under Item 402 parallels 

that under Form 20–F. 

Request for Comment 

• Should we eliminate the provision 

which permits a foreign private issuer to 

comply with Item 402 by complying 

with the more limited disclosure 

requirements under Form 20–F with 

respect to management remuneration? 

Should a foreign private issuer that is 

required to comply with Item 402 (for 

example, by filing an annual report on 

Form 10–K) be required to provide all 

of the information required under Item 

402 instead of the information required 

under Form 20–F? 

3. Business Development Companies 

We are proposing to apply the same 

executive compensation disclosure 

requirements to business development 

companies that we are proposing for 

operating companies.194 Currently, 

business development companies are 

required to provide executive 

compensation disclosure based, in part, 

on the requirements that apply to 

operating companies and, in part, on the 

requirements that apply to investment 

companies registered under the 

Investment Company Act. Moreover, the 

executive compensation disclosure 

requirements for business development 

companies are not uniform in Securities 

Act registration statements, proxy and 

information statements, and Form 10–K. 

Under Form 10–K, business 

development companies are required to 

furnish all of the information required 

by Item 402 of Regulation S–K for all of 

the persons covered by Item 402.195 In 

proxy and information statements, 

business development companies are 

required to provide for directors and 

each of the three highest paid officers 

that have aggregate compensation from 

the company for the most recently 

completed fiscal year in excess of 

$60,000, certain information required by 

Item 402 of Regulation S–K and certain 

other information that registered 

investment companies are required to 

provide.196 In registration statements, 

business development companies are 

required to provide the same 

information required in proxy 

statements, but with respect to directors, 

members of the advisory board, and 

each of the three highest paid officers or 

any affiliated person of the company 

that have aggregate compensation from 

the company for the most recently 

completed fiscal year in excess of 

$60,000.197

We are proposing to apply to business 

development companies the same 

executive compensation rules that apply 

to operating companies because the 

proposed disclosure requirements are 

intended to provide investors with a 

clearer and more complete picture of 

executive compensation, and we are 

concerned that this purpose would not 

be achieved through piecemeal 

application of some of the requirements. 

Our proposal would also eliminate the 

current 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. Finally, we 

believe that, similar to operating 

companies, business development 

companies should furnish 

compensation disclosure on proxies 

relating to the compensation 

arrangements and other matters 

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

Schedule 14A and not just in the case 

of director elections as currently 

required by Item 22(b)(13). 

Under the proposals, the registration 

statements of business development 

companies would be required to include 

all of the disclosures required by Item 

402 of Regulation S–K for all of the 

persons covered by Item 402.198 This 

disclosure would 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.199

Business development companies 

would also be required to make these 

disclosures in their annual reports on 

Form 10–K.200

As a result of these proposed 

amendments, the persons covered by 

the compensation disclosure 

requirements would be changed. The 

compensation disclosure in the proxy 

and information statements and 

registration statements of business 

development companies would 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 $100,000,201 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 would no 

longer be required to disclose 

compensation of members of the 

advisory board or certain affiliated 

persons of the company. 

Finally, under the proposals, the 

proxy and information statements and 

registration statements of business 

development companies would not be 

required to include compensation from 

the ‘‘fund complex.’’ Currently, this 

information is required in some 

circumstances.202

Request for Comment 

• Should business development 

companies be required to comply with 

the same compensation disclosure 

requirements as operating companies or 

registered investment companies, a 

combination of the compensation 

disclosure requirements for operating 

companies and registered investment 

companies, or some other set of 

compensation disclosure requirements? 

Should the same compensation 

disclosure requirements apply to 

business development companies in 

registration statements, proxy and 

information statements, and Form 10–

K? In addressing the appropriate 

compensation disclosure requirements 

for business development companies, 

commenters are requested to address 


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6568 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

203Proposed amendments 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(c) of 

Schedule 14A. 

204Proposed amendment to Item 

601(b)(10)(iii)(C)(5). 

205Proposed amendments to Item 10(b)(1)(ii) and 

the Instruction following Item 10(c) of Schedule 

14A. 

206Additional Form 8–K Disclosure Requirements 

and Acceleration of Filing Date, Release No. 33–

8400 (Mar. 16, 2004) [69 FR 15593] (the ‘‘Form 8–

K Adopting Release’’). 

207We stated in Section I of 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.’’

208See, e.g., comment letters on Additional Form 

8–K Disclosure Requirements and Acceleration of 

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

FR 42913] in File No. S7–22–02 from the 

Committee on Federal Regulation of Securities, 

Section of Business Law of the American Bar 

Association; Cleary, Gottlieb, Steen & Hamilton; 

Intel Corporation; Professor Joseph A. Grundfest, et 

al.; Perkins Coie LLP; Sherman & Sterling; and 

Sullivan & Cromwell. 

209See e.g., comment letter in File No. S7–22–02 

from the Section of Business Law of the American 

Bar Association. 

separately the persons covered by the 

disclosure requirements and the 

disclosures required with respect to 

those persons. Commenters are also 

requested to address separately 

disclosures for executive officers and 

directors. 

• Should all business development 

companies be subject to the same 

executive compensation disclosure or 

should we distinguish between smaller 

and larger business development 

companies? Should business 

development companies be subject to 

the executive compensation disclosure 

requirements of Regulation S–B filers? 

• Should we require disclosure of 

compensation paid to affiliated persons 

of a business development company and 

members of the advisory board of the 

company? 

• Should we require disclosure of 

certain compensation paid by the fund 

complex that includes a business 

development company? 

D. Conforming Amendments 

The Item 402 proposals 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, 

the rule proposals would amend: 

• The Item 201(d) of Regulations S–

K and S–B and proxy rule references to 

the Item 402 definition of ‘‘plan;’’ 203

• The Item 601(b)(10) of Regulation 

S–K reference to the Item 402 treatment 

of foreign private issuers; 204 and 

• The proxy rule references to Item 

402 retirement plan disclosure.205

E. General Comment Requests on the 

Item 402 Proposals 

We request comment on any aspect of 

these proposals. In particular: 

• Would the proposals effectively 

provide clearer, more complete 

disclosure of executive and director 

compensation? If not, what changes are 

needed to accomplish this result? 

• Are the proposals sufficiently 

broad-based to continue to operate 

effectively as new forms of 

compensation are developed in the 

future? If not, what changes are 

necessary to achieve this flexibility? 

• To clarify what other filed 

documents provide information about 

executive compensation, should a 

company be required to list in its annual 

proxy statement for the election of 

directors all other documents filed since 

the last proxy statement (such as Forms 

8–K and exhibits filed with Forms 10–

K and 10–Q) that contain this 

information? Instead, should such a list 

be provided solely as an EDGAR-filed 

annex to the proxy statement? 

• Would the presentation and content 

of the executive and director 

compensation disclosure be improved 

by making the information available in 

the form of interactive data? For 

example, could an understanding of the 

information reported in the proposed 

tables be enhanced by the ability to 

access more detailed information 

regarding discrete amounts or items 

reported in the tables? If the 

presentation of interactive data would 

be desirable, what would be the best 

means for introducing interactive data 

capabilities into the proposed Item 402 

disclosure requirements? For example, 

should we develop a data format that 

could be used to submit the information 

that has interactive capability while at 

the same time having the information 

readable on its face? Should we 

consider having the information 

provided using Extensible Business 

Reporting Language, also known as 

XBRL? Could the information be 

provided in a form that permits 

interactive capability in proxy and 

information statements that are made 

available on the Internet or otherwise 

electronically? 

III. Proposed Revisions to Form 8–K 

and the Periodic Report Exhibit 

Requirements 

In March 2004, the Commission 

adopted amendments to Form 8–K that 

significantly expanded the number of 

events that are reportable on Form 8–K 

and reduced the reporting deadline for 

most Form 8–K disclosure items to four 

business days after the triggering 

event.206 These amendments became 

effective on August 23, 2004. As part of 

our broader effort to revise our 

executive and director compensation 

disclosure requirements, we are 

proposing revisions to Item 1.01 of Form 

8–K, which currently requires this realtime 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 over the last year 

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.207 We therefore 

propose to revise Items 1.01 and 5.02 to 

require real-time disclosure of employee 

compensation events that more clearly 

satisfy this standard. 

In addition to the proposed 

amendments to Items 1.01 and 5.02 of 

Form 8–K, we propose 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. 

A. Proposed Revisions to 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 

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.208 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 governing 

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.209

In response to the concerns raised by 

these comments, we adopted Item 1.01 

of Form 8–K so that it used the 


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210 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 that are not named 

executive officers. Id. We reiterate that this phrase 

was intended to indicate that whether plans, 

contracts or arrangements which executive officers 

other than named executive officers participate are 

to be included in the requirements of 601(b)(10) 

must be determined on the basis of materiality. 

211See, e.g., Melissa Klein Aguilar, This Side of 

Caution: New Regs. Prompt 8–K Increases, 

Compliance Week, Aug. 23, 2005; Scott S. Cohen, 

Editorial: Debating the Materiality of ‘‘Material 

Definitive Agreements,’’ Compliance Week, Feb. 8, 

2005; and Patrick McGeehan, Now, an Advance 

Look at Those Big Paychecks, N.Y. Times, Sept. 26, 

2004, at 36. 

212See, e.g., Jerry Knight, Tiny SEC Filing Gave 

a Big Hint to Vastera’s Plans, Wash. Post, Jan. 24, 

2005, at E1; and Alex Berenson, Merck Offering Top 

Executives Rich Way Out, N.Y. Times, Nov. 30, 

2004, at A1. 

213We propose deleting the last sentence of 

current Instruction 1 to Item 1.01 of Form 8–K, 

which references the portions of Item 601(b)(10) 

that specifically relate to management 

compensation and compensatory plans. In place of 

the deleted sentence, we propose to add a sentence 

specifying that agreements involving the subject 

matter identified in Item 601(b)(10)(iii)(A) or (B) of 

Regulation S–K need not be disclosed under Item 

1.01 of Form 8–K. This change also will apply to 

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. 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, employment 

compensation arrangements would be covered 

under Item 5.02 of Form 8–K. 

214 Item 5.02(b) of Form 8–K. 

215 Item 5.02(c) of Form 8–K. 

216 Item 5.02(a) of Form 8–K. 

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. The item refers specifically to 

employment compensation 

arrangements and establishes 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 registrant 

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.210

Therefore, entry into these types of 

contracts triggers 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, 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 

amended Form 8–K 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 has 

triggered compensation disclosure of the 

types of matters that, in some cases, 

appear to fall 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 new Form 8–K 

requirements have resulted in real-time 

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.211

We believe that much of the 

disclosure regarding employment 

compensation matters required in realtime under the new Form 8–K 

requirements is viewed by investors as 

material.212 However, we also believe 

that it would be appropriate to restore 

a more balanced approach to this aspect 

of Form 8–K that is designed to elicit 

unquestionably or presumptively 

material information on a real-time 

basis, but seeks to limit Form 8–K 

disclosure of information below that 

threshold. Accordingly, we propose to 

amend Item 1.01 of Form 8–K to 

eliminate employment compensation 

arrangements and to cover such 

arrangements under a modified broader 

Item 5.02.213

Item 5.02 of Form 8–K currently 

generally requires disclosure within 

four business days of the appointment 

or departure of directors and specified 

officers. In particular, Item 5.02 requires 

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 214 or 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.215 Item 5.02 also requires 

disclosure if a director retires, resigns, is 

removed, or declines to stand for reelection.216 The required disclosure 

currently includes a brief description of 

the material terms of any employment 

agreement between the registrant and 

the officer and a description of 

disagreements, if any. 

We propose to modify Item 5.02 to 

capture generally the currently required 

information under that item, as well as 

additional information regarding 

material employment compensation 

arrangements involving named 

executive officers that currently fall 

under Item 1.01. Our proposal 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. 


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217The Item would continue to cover the officers 

specified therein, whether or not named executive 

officers for the previous or current years, and all 

directors. 

218Plans, 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. 

219See Section II.B.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. 

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

221Form 8–K Adopting Release, at Section II.E. 

222 Id. 

223Because Form S–2 was eliminated effective 

December 1, 2005, a similar proposed change to the 

eligibility rules of Form S–2 is unnecessary. 

Securities Offering Reform, Release No. 33–8591 

(July 19, 2005) [70 FR 44721], at Section V.B.3.c. 

We propose to accomplish 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 currently specified 

in Item 5.02; 217

• 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, 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; 218

• In respect of 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; and 

• Adding a requirement for disclosure 

of salary and 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.219

In the case of each of these disclosure 

items proposed for Item 5.02, we 

emphasize that we are proposing that a 

brief description of the specified matter 

be included. We have observed that in 

response to the current requirement 

under Item 1.01, some companies have 

included disclosure that resembles an 

updating of the disclosure required 

under current Item 402 of Regulation S–

K. In the context of current disclosure 

under Form 8–K, we are seeking a 

disclosure that informs investors of 

specified material events and 

developments. However, the 

information we are seeking does not 

perforce extend to the information 

necessary to comply with Item 402. 

Request for Comment 

• Is there a particular benefit to 

receiving information regarding 

employment compensation on a current 

basis rather than annually or quarterly? 

What information is material in that 

regard? 

• Is disclosure of material 

information about executive and 

director compensation and related 

person transactions avoided if 

comprehensive disclosure of 

compensation and related party 

transactions only occurs annually? 

Should we also require quarterly 

disclosure of material changes to 

information required by Items 402 and 

404 in each company’s Form 10–Q? 

• Would a quarterly update of 

material changes to Item 402 and Item 

404 disclosure provide meaningful 

disclosure to investors that they cannot 

get through other sources? If not, why? 

• Would quarterly updates eliminate 

the need for most of the current 

disclosure about executive and director 

compensation transactions provided 

under Item 1.01 of Form 8–K? Should 

the information we propose to require 

under Item 5.02(e) of Form 8–K only be 

required quarterly? 

• Are the proposed revisions to Items 

1.01 and 5.02 of Form 8–K the most 

effective means to achieve an 

appropriate balance regarding real-time 

director and executive compensation 

disclosure? Please describe any 

suggested alternatives in detail. 

• Should we require disclosure of all 

amendments to the plans, contracts and 

arrangements encompassed by our 

proposed disclosure requirements under 

Item 5.02(e) of Form 8–K? Only material 

amendments? 

B. Proposed 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 That Item From Form S–3 

Eligibility Requirements 

We propose to extend 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 the final rules for the new Form 

8–K requirements, 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 and 

4.02(a). The safe harbor applies until the 

filing due date of the company’s 

quarterly or annual report for the period 

in question. As we stated at the time, we 

believe that these items may require 

management to make rapid materiality 

and similar judgments within the 

timeframe required for filing of a Form 

8–K. Under those circumstances we 

concluded that the risk of liability under 

these provisions was sufficiently 

disproportionate to justify the limited 

safe harbor of fixed duration. For the 

same reasons, we believe that the safe 

harbor should also extend to proposed 

Item 5.02(e) of Form 8–K. We therefore 

propose to amend Exchange Act Rules 

13a–11(c) and 15d–11(c) accordingly. 

In addition, under our current rules, 

a company forfeits its eligibility to use 

Form S–3 if it fails to timely file all 

reports required under Exchange Act 

Sections 13(a) or 15(d) during the 12 

months prior to filing of the registration 

statement.220 For the same reasons, 

when adopting the new Form 8–K rules, 

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.221

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.222 We believe that this safe 

harbor should be extended to proposed 

Item 5.02(e) of Form 8–K. Therefore, we 

propose to amend General Instruction 

I.4 of Form S–3, which pertains to the 

eligibility requirements for use of Form 

S–3 to reflect this position.223

Request for Comment 

• Should we extend the Section 10(b) 

and Rule 10b–5 safe harbor and the 

Form S–3 safe harbor to all of Item 5.02 

or just the provision proposed? 


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224We are also proposing a similar revision to 

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

225Proposed Instruction 4(c) to Exhibits to Form 

20–F. 

226Many jurisdictions now require or encourage 

disclosure of executive compensation information. 

For example, enhanced disclosure of executive 

remuneration is included as part of he 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). 

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

of Regulation S–B are proposed to be revised in the 

same manner. 

228See, 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). 

229This proposal is 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]. 

230Current Item 403(c) of Regulation S–K. See 

also Items 6 and 7(3) of Schedule 13D [17 CFR 

240.13d–101]. 

C. General Instruction D to Form 8–K 

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 currently 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 

propose a revision to General 

Instruction D to permit companies to 

omit the Item 1.01 heading in a Form 8–

K also disclosing 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. 

Request for Comment 

• Is it appropriate to allow a company 

to omit the Item 1.01 heading in a Form 

8–K disclosing any other item? 

D. Foreign Private Issuers 

We propose revising the exhibit 

instructions to Form 20–F under which 

foreign private issuers would be 

required to file any 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 had otherwise 

publicly disclosed the plan.224

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, 

management contracts or compensatory 

plans in which directors or members of 

management participate generally must 

be filed as exhibits, unless the foreign 

private issuer provides compensation 

information on an aggregate basis and 

not on an individual basis. Under these 

rules, an issuer that provides any 

individualized compensation disclosure 

is required to file as an exhibit to Form 

20–F management employment 

agreements that potentially relate to 

matters that have not otherwise been 

disclosed. 

The proposed revision to the exhibit 

instructions to Form 20–F 225 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 would under 

our proposal mirror the public 

availability of such agreements under 

home country requirements or 

otherwise. In addition, we believe that 

the proposed amendments may 

encourage foreign private issuers to 

provide more compensation disclosure 

in their SEC filings 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,226

the proposed revisions would 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. 

Request for Comment 

• Should we require the filing of 

employment agreements by foreign 

private issuers when individualized 

compensation information is disclosed? 

Should we instead require the filing of 

those portions of management 

employment agreements and plans that 

relate to the information that is 

disclosed on an individualized basis 

regardless of whether those portions are 

required to be made public in the 

issuer’s home country or otherwise? 

IV. Beneficial Ownership Disclosure 

We propose to amend Item 403(b) 227

by adding a requirement for footnote 

disclosure of the number of shares 

pledged as security by named executive 

officers, directors and director 

nominees. 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.228 As a 

result, we believe that the existence of 

these securities pledges could be 

material to shareholders.229 Because 

significant shareholders who are not 

members of management are in a 

different relationship with other 

shareholders and have different 

obligations to them, the proposals 

would 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.230 The proposals also would 

specifically require disclosure of 

beneficial ownership of directors’

qualifying shares, which is currently not 

required, because the beneficial 

ownership disclosure should include a 

complete tally of the securities 

beneficially owned by directors. 

Request for Comment 

• Should any specific categories of 

loans, such as margin loans, be treated 

differently under the proposal to 

disclose management pledges of 

beneficially owned securities? If so, 

please explain why. 

• Should directors’ qualifying shares 

continue to be excluded? If so, explain 

why that information is not material. 

V. Certain Relationships and Related 

Transactions Disclosure 

We believe that, in addition to 

disclosure regarding executive 

compensation, a materially complete 


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6572 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

231See 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. 

232The discussion that follows focuses on 

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

explaining the modifications proposed for 

Regulation S–B. References throughout the 

following discussion are to current or proposed 

Items of Regulation S–K, unless otherwise 

indicated. 

233As previously noted, related party transactions 

are currently disclosed under Item 404(a). 

Indebtedness is currently disclosed under Item 

404(c). 

234 Disclosure requiring promoters is currently 

required under Item 404(d). 

235These matters are currently required pursuant 

to various provisions, including Item 7 of Schedule 

14A and Items 306, 401(h), (i) and (j), 402(j) and 

404(b). 

236The related persons specified in current Item 

404(a) are: (1) Any director or executive officer of 

the company; (2) any nominee for election as a 

director; (3) any security holder who is known to 

the company to own of record or beneficially more 

than five percent of any class of the company’s 

voting securities; and (4) any member of the 

immediate family of any of the foregoing persons. 

237The related persons specified in current Item 

404(c) are: (1) Any director or executive officer of 

the company; (2) any nominee for election as a 

director; (3) any member of the immediate family 

of any of the persons specified in (1) or (2) above; 

(4) any corporation or organization (other than the 

company or a majority-owned subsidiary of the 

company) of which any of the persons in (1) or (2) 

above is an executive officer or partner or is, 

directly or indirectly, the beneficial owner of ten 

percent or more of any class of equity securities; 

and (5) any trust or other estate in which any of the 

persons in (1) or (2) above has a substantial 

beneficial interest or as to which such person serves 

as a trustee or in a similar capacity. 

238See Basic v. Levinson and TSC Industries v. 

Northway. 

239 It is possible that some registrants have been 

operating under a misconception. The current 

$60,000 threshold is not, and the proposed 

$120,000 threshold would not be, a bright line 

materiality standard. The rule calls for, and would 

continue to call for, a materiality analysis of 

transactions above the threshold in order to 

determine if the related person has a direct or 

indirect material interest. 

picture of financial relationships with a 

company involves disclosure regarding 

related party transactions. Therefore, we 

are also proposing significant revisions 

to Item 404 of Regulation S–K ‘‘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.231 Today we propose to amend 

Item 404 of Regulation S–K and S–B to 

streamline and modernize this 

disclosure requirement, while making it 

more principles-based. Although the 

proposals would 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—would remain 

unchanged. 

As discussed in greater detail below, 

the proposal has four parts: 232

• Item 404(a) would contain a general 

disclosure requirement for related 

person transactions, including those 

involving indebtedness.233

• Item 404(b) would require 

disclosure regarding the company’s 

policies and procedures for the review, 

approval or ratification of related person 

transactions. 

• Item 404(c) would require 

disclosure regarding promoters of a 

company.234

• New Item 407 would consolidate 

current corporate governance disclosure 

requirements.235 Proposed Item 407(a) 

would require disclosure regarding the 

independence of directors, including 

whether each director and nominee for 

director of the registrant is independent, 

as well as a description of any 

relationships 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 proposing revisions to Item 

404 to make the certain relationships 

and related transactions disclosure 

requirements clearer and easier to 

follow. The proposals would retain the 

principles for disclosure of related 

person transactions that are specified in 

current Item 404(a), but would no longer 

include all of the instructions that serve 

to delineate what transactions are 

reportable or excludable from disclosure 

based on bright lines that can depart 

from a more appropriate materiality 

analysis. Instead, proposed Item 404(a) 

would consist of a general statement of 

the principle for disclosure, followed by 

specific disclosure requirements and 

instructions. The instructions would 

explain the related persons covered by 

the Item, the scope of transactions 

covered by the Item, the method for 

computation of the amounts involved in 

the relationship or transaction, the 

interaction with Item 402, special 

requirements for indebtedness with 

banks, and the materiality of certain 

ownership interests. 

The proposed Item would extend to 

disclosure of indebtedness. Currently, 

Item 404(a) requires disclosure 

regarding transactions involving the 

company and certain related persons,236

and Item 404(c) requires disclosure 

regarding indebtedness.237 We propose 

to consolidate these two provisions in 

order to eliminate confusion regarding 

the circumstances in which each item 

applies and streamline duplicative 

portions of current paragraphs (a) and 

(c) of Item 404. 

1. Broad Principle for Disclosure 

Proposed Item 404(a) would articulate 

a broad principle for disclosure; it 

would state 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. 

We propose to eliminate current 

Instruction 1 to Item 404(a), which is 

repetitive of the general materiality 

standard applicable to the item. By 

proposing to delete this instruction we 

do not intend to change the materiality 

standard applicable to Item 404(a). The 

‘‘materiality’’ standard for disclosure 

currently embodied in Item 404(a) 

would be retained; a company would 

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 would continue to be 

determined on the basis of the 

significance of the information to 

investors in light of all the 

circumstances and the significance of 

the interest to the person having the 

interest.238 The relationship of the 

related persons to the transaction, and 

with each other, and the amount 

involved in the transaction would be 

among the factors to be considered in 

determining the materiality of the 

information to investors. 

We propose to eliminate current 

Instruction 7 to Item 404(a), which 

establishes certain presumptions 

regarding materiality and may operate to 

exclude some transactions from 

disclosure that might otherwise require 

disclosure under the principles 

enunciated by the Item. We also propose 

to eliminate current Instruction 9 to 

Item 404(a), which indicates that the 

$60,000 threshold is not a bright line 

materiality standard. We propose to 

eliminate current Instruction 9 to Item 

404(a) because it is repetitive of the 

general materiality standard applicable 

to the Item.239 We believe that 

application of the materiality principles 

under the Item would be more 

consistent with a principles-based 

approach and would lead to more 


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240The ‘‘related persons’’ covered by the rules 

proposal are discussed below in Section V.A.1.b. 

241However, if the disclosure were being 

incorporated by reference into a registration 

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

disclosure would not be required. Proposed 

Instruction 1 to Item 404. 

242For the same reason, we are eliminating the 

references to ‘‘subsidiaries’’ in the ‘‘compensation 

committee interlocks and insider participation in 

compensation decisions’’ disclosure requirement in 

current Item 402(j). This proposal would not change 

the scope of disclosure required under the rule. See 

proposed Item 407(e)(4). 

243This is the standard proposed for Item 404 of 

Regulation S–B, which is discussed in Section 

V.E.1. below. 

244Codified in Section 13(k) of the Exchange Act 

[15 U.S.C. 78m(k)]. 

245The related person transaction disclosure 

requirement in current Item 404(a) covers 

significant shareholders, while the indebtedness 

disclosure requirement in current Item 404(c) does 

not. The significant shareholders covered would 

continue to be any security holder who is known 

to the registrant to own of record or beneficially 

more than five percent of any class of the 

registrant’s voting securities. Proposed Instruction 

1.b. to Item 404(a). 

246As a result of integrating pragraph (c) of Item 

404 into paragraph (a) of Item 404, the rule 

proposals would set a $120,000 threshold and 

require disclosure only if there is a direct or 

indirect material interest in such an indebtedness 

transaction, while Item 404(c) currently generally 

requires disclosure of all indebtedness exceeding 

$60,000. 

247 Disclosure of these interests currently is 

reuqired by subparagraphs (c)(4) and (c)(5) of Item 

404. Under the rule proposals, these subparagraphs 

would be eliminated. See note 237 for a full 

description fo the related parties specified in these 

subparagraphs. 

appropriate disclosure outcomes than 

application of the instructions that we 

propose to eliminate. 

In addition, the proposals would: 

• 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 single defined term for 

‘‘related persons.’’240

As is currently the case, disclosure 

would be required for three years in 

registration statements filed pursuant to 

the Securities Act or the Exchange 

Act.241

Finally, the rule proposals would 

include a technical modification. 

Currently, Item 404(a) states that 

disclosure must be provided 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 

propose to eliminate it. This proposal 

would not change the scope of 

disclosure required under the Item.242

Request for Comment 

• Should we recast Item 404(a) as a 

more principles-based disclosure 

requirement as proposed? Why or why 

not? 

• In recasting Item 404(a) as a more 

principles-based disclosure 

requirement, should we eliminate all of 

the current instructions, not only the 

ones we propose eliminating? Are there 

any concepts in the instructions to Item 

404(a) that we propose to eliminate that 

should be retained? As a result of 

eliminating the instructions to Item 

404(a), would there be any categories of 

transactions which would have an 

unclear disclosure status? Although the 

analysis required for any particular 

transaction would be fact-specific, 

should we provide further guidance or 

examples regarding the disclosure status 

of particular types of direct or indirect 

interests? 

• Is it appropriate to adjust the 

threshold for disclosure to $120,000? 

Should there be no threshold? Should 

the threshold also operate on a sliding 

scale (for example, the lower of 

$120,000 or 1% of the average of total 

assets for the last three completed fiscal 

years 243 or the lower of $120,000 or a 

percentage of annual corporate 

expenses) to capture smaller 

transactions for smaller companies? 

Explain whether a higher or lower 

threshold, or no threshold, would result 

in more effective disclosure. 

• In Item 404(a), should we require a 

company to be ‘‘involved’’ rather than to 

be ‘‘a participant’’ in transactions 

subject to disclosure? 

a. Indebtedness 

Section 402 of the Sarbanes-Oxley Act 

prohibits most personal loans by an 

issuer to its officers and directors.244

This development raises the issue of 

whether disclosure of indebtedness of 

the sort required under our current rules 

should be maintained. We believe that 

the approach to disclosure of 

indebtedness involving related persons 

that we propose today would be 

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 propose, however, 

to eliminate the current distinction 

between indebtedness and other types 

of related person transactions. 

As a result of integrating paragraph (c) 

of Item 404 into paragraph (a) of Item 

404, the proposals would change some 

situations in which indebtedness 

disclosure is required. First, disclosure 

of indebtedness transactions would be 

required with regard to all related 

persons covered by the related person 

transaction disclosure requirement, 

including significant shareholders.245

Second, the rule proposals would 

require disclosure of all material 

indirect interests in indebtedness 

transactions of related persons, 

including significant shareholders and 

immediate family members.246

Disclosure of material indirect interests 

of these related persons in transactions 

involving the company currently is, and 

would continue to be, required by Item 

404(a). Currently, Item 404(c) requires 

disclosure of specific indirect interests 

of directors, nominees for director, and 

executive officers of the registrant in 

indebtedness through corporations, 

organizations, trusts, and estates.247 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, and, 

as discussed below, we propose to 

address certain ordinary course loans by 

financial institutions in an instruction 

to Item 404(a). 

Request for Comment 

• Is our proposal appropriate in light 

of the prohibition on personal loans to 

officers and directors in the SarbanesOxley Act? 

• Should we combine the related 

person and indebtedness disclosure 

requirements in paragraphs (a) and (c) of 

Item 404? As a result of combining these 

disclosure requirements, would there be 

categories of indebtedness transactions 

for which disclosure would be required 

that should not be required or for which 

disclosure would not be required that 

should be disclosed? 

• Should the disclosure requirements 

for indebtedness be extended to 

significant shareholders? 

b. Definitions 

We propose to define the terms 

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

‘‘amount involved’’ to streamline Item 

404(a) and clarify the broad scope of 

financial transactions and relationships 

covered by the rule. 


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6574 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

248The definition of ‘‘transaction’’ is in proposed 

Instruction 2 to Item 404(a). 

249The definition of ‘‘related person’’ is in 

proposed Instruction 1 to Item 404(a). 

250The principle for disclosure would only apply 

to nominees for director if disclosure were being 

provided in a proxy or information statement 

involving the election of directors. Also, ongoing 

disclosure would not be required regarding 

nominees for director who were not elected (unless 

a nominee was nominated again for director). 

251This position, which had been included in the 

proxy rule provisions that were the precursor to 

Item 404, was deleted from those provisions in 1967 

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—Item 7(f).’’

Note C to Schedule 14A currently provides that 

‘‘information 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.’’ The rule proposals 

would amend Note C to Schedule 14A so that it 

would no longer apply to disclosure of related 

person transactions. 

252These definitions would replace current 

instructions to paragraphs (a) and (c) of Item 404. 

253The definition of ‘‘amount involved’’ is in 

proposed Instruction 3 to Item 404(a). 

254This proposal is based on current Instruction 

3 to Item 404(a). 

255This proposal is based on and clarifies current 

Item 404(c). 

The term ‘‘transaction’’ would have a 

broad scope in proposed Item 404(a).248

As proposed, this term is not to be 

interpreted narrowly, but rather would 

broadly include, but not be limited to, 

any financial transaction, arrangement 

or relationship or any series of similar 

transactions, arrangements or 

relationships. The proposals also would 

specifically note that the term 

‘‘transactions’’ is defined to include 

indebtedness and guarantees of 

indebtedness. 

The proposed definition of ‘‘related 

person’’ would identify the persons 

covered, and clarify the time periods 

during which they would be covered. 

As proposed, the term ‘‘related 

person’’ 249 would mean 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 would 

be required: 

• Any director or executive officer of 

the registrant and his immediate family 

members; and 

• If disclosure were provided in a 

proxy or information statement 

involving 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 registrant to own of record or 

beneficially 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 would also be a related person. 

This is the same list of persons 

covered by current Item 404(a). This 

proposed definition of ‘‘related person’’

would result in requiring disclosure for 

all transactions involving the company 

and a person (other than a significant 

shareholder or 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.250 A person who had such 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 registrant during 

that year. Although current Item 404(a) 

does not specifically indicate whether 

disclosure is required for the transaction 

in this situation, the history of Item 404 

suggests that disclosure would be 

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.251

We believe 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 

proximity in time 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 family members), but are not at the 

time of the transaction, raise different 

considerations and are harder to track, 

and thus we propose to exclude them. 

Disclosure would 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 

person becomes a significant 

shareholder. 

Under the rule proposals, the term 

‘‘immediate family member’’ of a related 

person would mean any child, 

stepchild, parent, stepparent, spouse, 

sibling, mother-in-law, father-in-law, 

son-in-law, daughter-in-law, brother-inlaw, 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 

registrant.252 The proposed definition 

would differ from the current definition 

in that it includes stepchildren, 

stepparents, and any person (other than 

a tenant or employee) sharing the 

household of a related person. 

The proposed definition of ‘‘amount 

involved’’ would incorporate two 

concepts included in current Item 404 

regarding how to determine the 

‘‘amount involved’’ in transactions, and 

to clarify that the amounts reported 

must be in dollars even if the amount 

was set or expensed in a different 

currency.253 Under the proposals, the 

term ‘‘amount involved’’ would mean 

the dollar value of the transaction, or 

series of similar transactions, and would 

include: 

• 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; 254 and 

• In the case of indebtedness, the 

largest aggregate principal 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.255

Request for Comment 

• Does the definition of ‘‘transaction’’

make clear its broad scope? Are there 

any additional categories that it should 

specifically identify? Alternatively, is it 

overly inclusive? If so, explain how. 

• Should the same categories of 

people be covered by the disclosure 

requirements currently in paragraphs (a) 

and (c) of Item 404? Specifically, are 

there any persons who would be 

defined as ‘‘related persons’’ for whom 

indebtedness disclosure should not be 

required or are there any additional 

persons who should be covered? 

• The proposed changes to Item 404 

would require disclosure of indirect 

interests in indebtedness of related 

persons. Should they? 

• Should disclosure be required 

regarding portions of a period during 

which a person did not have the 

relationship giving rise to the disclosure 

requirement? Is it appropriate, as we 

propose, to exclude significant 

shareholders and their immediate 

family members from this approach? 

• Should we expand the definition of 

‘‘immediate family member’’ as 

proposed? Specifically, are there any 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6575 

256The release stated that: 

Registrants should * * * consider the need for 

[MD&A] disclosure about parties that fall outside 

the definition of ‘‘related parties,’’ but with whom 

the registrant or its related parties have a 

relationship that enables the parties to negotiate 

terms of material transactions that may not be 

available from other, more clearly independent, 

parties on an arm’s-length basis. For example, an 

entity may be established and operated by 

individuals that were former senior management of, 

or have some other current or former relationship 

with, a registrant. The purpose of the entity may be 

to own assets used by the registrant or provide 

financing or services to the registrant. Although 

former management or persons with other 

relationships may not meet the definition of a 

related party pursuant to FAS 57, the former 

management positions may result in negotiation of 

terms that are more or less favorable than those 

available on an arm’s-length basis from clearly 

independent third parties that are material to the 

registrant’s financial position or results of 

operations. In some cases, investors may be unable 

to understand the registrant’s reported results of 

operations without a clear explanation of these 

arrangements and relationships. 

Commission Statement about Management’s 

Discussion and Analysis of Financial Condition and 

Results of Operations, Release No. 33–8056 (Jan. 22, 

2002) [67 FR 3746], at Section II.C. 

257As is the case today, the dollar value would 

be computed without regard to the amount of the 

profit or loss involved in the transaction. Because 

of the manner in which the value of the amount 

involved is calculated for indebtedness, as 

discussed above, disclosure with respect to 

indebtedness would 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. 

258Section 10(b) of the Exchange Act [15 U.S.C. 

78j(b)], Rules 10b–5 [17 CFR 249,19b–5] and 12b-20 

[17 CFR 240.12b–20] under the Exchange Act and 

Section 17 of the Securities Act [15 U.S.C. 77q]. 

259Current Instruction 4 to Item 404(c). 

260Proposed Instructions 4, 5, 6, 7 and 8 to Item 

404(a). 

261Proposed Instructions 5 and 6 to Item 404(a), 

which would replace current Instruction 1 to Item 

404. 

262 In particular, current Instruction 1 to Item 404 

covers the scope of Items 402 and 404. We propose 

to eliminate this instruction. 

categories of people that should be 

added to, or removed from, the 

proposed definition? 

• In 2002 we issued a release 

regarding MD&A disclosure. At that 

time, we noted the possible need for 

related party disclosure in 

circumstances additional to those 

specified in Item 404.256 Are there any 

circumstances that fall within the 

MD&A requirements that should also be 

covered by Item 404 where disclosure 

currently is not required, or would not 

be required under the rule proposals? 

• Is there any reason to change the 

current meaning of amount involved in 

transactions involving leases, which we 

propose to retain? 

2. Disclosure Requirements 

Proposed subparagraphs of Item 

404(a) would provide the disclosure 

requirements for related person 

transactions. The company would be 

required to describe the transaction, 

including: 

• The person’s 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 dollar value of the amount 

involved in the transaction and of the 

related person’s interest in the 

transaction.257

Registrants would 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. 

Consistent with the principles-based 

approach that we propose to apply to 

related person transaction disclosure, 

we have, as noted above, eliminated 

many of the instructions that provide 

bright line tests that may be inconsistent 

with general materiality standards. 

Similarly, we propose to eliminate a 

current instruction that, in the case of a 

related person transaction involving a 

purchase of assets by the company or 

sale of assets to the company, calls for 

specific disclosure of the cost of the 

assets if acquired within two years of 

the transaction. We would note, 

however, that if such information was 

material under the proposed standards 

of Item 404(a), because, for example, the 

recent purchase price to the related 

person was materially less than the sale 

price to the company, or the sale price 

to the related person was materially 

more than the recent purchase price to 

the company, disclosure of such prior 

purchase price could be required.258

Currently, disclosure must be 

provided regarding amounts possibly 

owed to the company under Section 

16(b) of the Exchange Act.259 The 

purpose of related person transaction 

disclosure differs from the purpose of 

Section 16(b). Accordingly, the rule 

proposals eliminate this Section 16(b)- 

related disclosure requirement. 

Request for Comment 

• Should Item 404 require specific 

disclosure of the person determining the 

registrant’s purchase or sale price for 

registrant purchases or sales of assets 

not in the ordinary course of business? 

• Should Item 404 require disclosure 

of Section 16(b)-related indebtedness? 

Why or why not? 

• Consistent with our principlesbased approach, should we specify any 

other elements of the transaction for 

disclosure? 

3. Exceptions 

The proposed rules would include 

categories of transactions that do not fall 

within the principle and therefore are 

subject to disclosure exceptions that we 

believe are consistent with our 

principles-based approach.260 The first 

category of transactions involves 

compensation. Disclosure of 

compensation to an executive officer 

would 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 of a related 

person 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 as 

such by the compensation committee of 

the board of directors (or group of 

independent directors performing a 

similar function) of the company. 

Disclosure of compensation to a 

director (or nominee for director) would 

not be required if: 

• The compensation is reported 

pursuant to proposed Item 402(l).261

Since the disclosure either would be 

reported under Item 402, or would not 

be required under Item 402, we do not 

believe the transactions fall within our 

proposed principle or will have already 

been disclosed. We believe the 

transactions involving compensation 

that do not fall within these exceptions 

would be within the scope of the 

proposed Item 404(a) principle for 

disclosure. These exceptions would 

clarify the limited situations in which 

disclosure of compensation to related 

persons is not required under Item 

404.262

The second category of transactions 

involves three types of situations we 

believe do not raise the potential issues 

underlying our principle for disclosure. 

First, in the case of transactions 

involving indebtedness, the following 

items of indebtedness would 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 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 


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6576 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

263This proposal is based on current Instruction 

2 to Item 404(c). 

264 12 CFR Part 220. 

265See Item III.C.1. and 2. of Industry Guide 3, 

Statistical Disclosure by Bank Holding Companies 

[17 CFR 229.802(c)]. 

266Proposed Instruction 7 to Item 404(a). 

267Current Instruction 3 to Item 404(c), which 

would be eliminated. 

268Specifically, the language of current 

Instruction 3 to paragraph (c) of Item 404 would be 

modified to replace the reference ‘‘comparable 

transactions with other persons’’ with the phase 

‘‘comparable loans with persons not related to the 

lender.’’

269Proposed Instruction 8 to Item 404(a). This 

proposal is based on parts A and B of current 

Instruction 8 to Item 404(a). This proposal would 

omit the portion of the current 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 portion of the current 

instruction may result in inappropriate nondisclosure of transactions without regard to whether 

they are material to the company. In addition, we 

propose to eliminate current Instruction 6 to Item 

404(a) that covers a subset of transactions covered 

by this proposed instruction, and therefore is 

duplicative. 

270 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). 

ordinary business travel and expense 

payments and for other transactions in 

the ordinary course of business.263

Second, also in the case of a 

transaction involving indebtedness, if 

the lender is a bank, savings and loan 

association, or broker-dealer extending 

credit under Federal Reserve Regulation 

T264 and the loans are not disclosed as 

nonaccrual, past due, restructured or 

potential problems 265 disclosure under 

proposed 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 bank; and 

• They did not involve more than the 

normal risk of collectibility or present 

other unfavorable features.266

This proposed exception is based on 

a current instruction to Item 404(c),267

and is modified to be more consistent 

with the prohibition of the SarbanesOxley Act on personal loans to officers 

and directors.268

Finally, we propose an instruction 

that indicates 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 

which 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.269

Request for Comment 

• Does proposed Item 404(a) simplify 

and clarify the requirements currently 

contained in paragraphs (a) and (c) of 

Item 404? 

• Would the proposed rule clarify the 

situations in which compensation 

would be reportable under Item 404? 

Are there any categories of 

compensation for which it would be 

unclear whether disclosure would be 

required under proposed Item 404? 

• We propose to exclude from the 

‘‘amount involved’’ disclosure 

requirements indebtedness due for 

purchases subject to usual trade terms, 

ordinary business travel and expense 

payments, and ordinary course business 

transactions as is currently the case. Is 

this exclusion appropriate? Why or why 

not? 

• Do the current instructions that we 

propose to modify or eliminate provide 

necessary guidance for determining if 

disclosure is necessary? Should any of 

these current instructions be retained? 

Should other instructions be added to 

make the application of the principle for 

disclosure clearer? 

• Does proposed Instruction 8 to Item 

404(a), which indicates that a person 

having the specified positions or 

relationships with a person that engages 

in a transaction with the company shall 

not be deemed to have an indirect 

material interest in the transaction, 

provide sufficient guidance for 

determining whether disclosure is 

necessary in the circumstances 

identified in the instruction? Should the 

potential exclusions contemplated in 

the current instructions to Item 404(a), 

including current Instruction 6 

(excluding remuneration transactions 

for services when the person’s interest 

arises solely from a ten percent equity 

ownership interest) and current 

Instruction 8.C. (excluding transactions 

where the interest arises from an equity 

or creditor interest in another person 

and the transaction is not material to the 

other person) be retained or expanded? 

B. Procedures for Approval of Related 

Person Transactions 

We propose adopting a new 

requirement for disclosure of the 

policies and procedures established by 

the company and its board of directors 

regarding related person transactions. 

State corporate law and increasingly 

robust corporate governance practices 

support or provide for such procedures 

in connection with transactions 

involving conflicts of interest.270 We 

believe that this type of information is 

material to investors, and our rule 

proposals would therefore require 

disclosure of policies and procedures 

regarding related person transactions 

under new paragraph (b) of Item 404. 

Specifically, the proposal would 

require a description of the company’s 

policies and procedures for the review, 

approval or ratification of transactions 

with related persons that would be 

reportable under paragraph (a) of Item 

404. The description would include the 

material features of these policies and 

procedures that are necessary to 

understand them. While the material 

features of such policies and procedures 

would 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. 

The proposal would also require 

identification of any transactions 

required to be reported under paragraph 

(a) of Item 404 where the company’s 

policies and procedures did not require 

review, approval or ratification or where 

such policies and procedures were not 

followed. 

Request for Comment 

• Should we require disclosure 

regarding the review, approval or 

ratification of related person 

transactions? Should the rule include 

the proposed requirements? Are there 

other types of information that are 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6577 

271The proposed rules would similarly revise the 

disclosure requirement referencing promoters in 

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

proposal would add Form SB–2 to the list of 

registration statement forms in Item 404 for which 

promoter disclosure would be required. While this 

revision would update the registration statement 

forms listed in Item 404, it would not change the 

promoter disclosure requirement of Form SB–2. 

272Proposed Item 404(c)(2). The term ‘‘group’’

would have 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. 

273Proposed Item 407 of Regulations S–K and S–

B. As proposed, Item 407 would consolidate 

corporate governance disclosure requirements 

located in several places under our rules and the 

principal markets’ listing standards, including in 

particular our requirements under current 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. We are not proposing any 

changes to the substance of Item 306, Item 401(h), 

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

However, the proposed rules would reorder some 

provisions in Item 306 and reflect 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]. 

274Current Item 404(b). 

275Section 10A(m) of the Exchange Act [15 U.S.C. 

78j–1(m)], as added by Section 301of the SarbanesOxley Act of 2002 (15 U.S.C. 7201 et seq.); 

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) [68 

FR 18788]. 

276NASD 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 proposing 

additional action under these petitions. 

material that should be included in the 

description of the approval process? 

• Should we require disclosure of 

transactions required to be reported 

under Item 404(a) where a company’s 

policies and procedures did not require 

review or were not followed? 

C. Promoters 

The proposals would 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. The 

proposed disclosure would be required 

in Securities Act registration statements 

on Form S–1 (generally, the registration 

statement form for initial public 

offerings, offerings by unseasoned 

issuers or those with less than $75 

million public float and offerings by 

issuers otherwise ineligible to use Form 

S–3 or S–4) or on Form SB–2 (a 

registration statement form that small 

business issuers may use) and Exchange 

Act Form 10 (used to register securities 

initially under the Exchange Act) or 

Form 10–SB (a registration form that 

small business issuers may use). The 

proposed disclosure would include: 

• 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 

of any consideration received by the 

company; and 

• Additional information regarding 

any assets acquired by the company 

from a promoter. 

The proposed disclosure requirements 

are consistent with those currently 

required regarding promoters. However, 

this disclosure is not currently required 

if the company has 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 fiveyear test would relate to the period of 

time during which the company had a 

promoter for which the disclosure 

should be provided, as our proposal 

provides, rather than the date of 

organization of the company.271 We also 

are proposing to require 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.272

Request for Comment 

• Does the proposed requirement 

cover the circumstances where promoter 

disclosure would be material to 

investors? If not, what other 

circumstances should be covered? 

• Does the proposed requirement 

cover circumstances where the required 

disclosure would not be material to 

investors? If so, in what circumstance? 

D. Corporate Governance Disclosure 

We propose to consolidate our 

disclosure requirements regarding 

director independence and related 

corporate governance disclosure 

requirements under a single disclosure 

item and to update such disclosure 

requirements regarding director 

independence to reflect our current 

requirements and current listing 

standards.273

Our current requirements provide for 

disclosure of business relationships 

between a director or nominee for 

director and the company that may bear 

on the ability of directors and nominees 

for director to exercise independent 

judgment in the performance of their 

duties.274 In addition, as directed by the 

Sarbanes-Oxley Act of 2002, we adopted 

a rule requiring national securities 

exchanges to adopt listing standards 

requiring independent audit committees 

meeting the standards of our rule.275

Further, in 2003 and 2004, we approved 

amendments to additional listing 

standards, including those of the New 

York Stock Exchange and Nasdaq,276

that imposed specific additional 

independence standards for boards of 

directors, and the compensation and 

nominating committees or persons 

performing similar functions. Currently, 

each listed company 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 proposals would include a 

disclosure requirement identifying the 


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6578 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

277Under the rule proposals, ‘‘listed issuer’’

would have the same meaning as in Exchange Act 

Rule 10A–3. 

278Under the rule proposals ‘‘national securities 

exchange’’ means a national securities exchange 

registered pursuant to Section 6(a) of Exchange Act 

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

279Under the rule proposals ‘‘automated interdealer quotation system of a national securities 

association’’ 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)]. 

280Similar disclosure is currently required 

pursuant to Item 7(d)(2)(ii)(C) and Item 7(d)(3)(iv) 

of Schedule 14A. As part of our consolidation of 

these provisions into proposed Item 407, we 

propose to revise these provisions to reflect the 

general approach discussed above with regard to 

disclosure of director independence for board and 

committee purposes. 

281Proposed Item 407(a)(2). 

282However, disclosure would 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 Sections 13(a) or 15(d). Disclosure 

would not be required of anyone who was a director 

only during the time period before the company 

made its initial public offering if he was no longer 

a director at the time of the offering. Proposed 

Instruction to Item 407(a). 

283For this reason, we do not propose to 

incorporate the concept in current Instruction 4 to 

Item 404(b) into proposed Item 407(a). 

284Current Item 7 of Schedule 14A. 

285However, we are not proposing to revise the 

provision that the audit committee report is 

furnished and not filed. 

286Proposed Item 407(d)(1) and Instruction 2 to 

Item 407. 

287Current Item 7(d) of Schedule 14A. These new 

proposed requirements also would be in proposed 

Item 407(e). 

independent directors of the company 

(and, in the case of disclosure in proxy 

or information statements, nominees for 

director) under the definition for 

determining board independence 

applicable to it. The proposals would 

also require disclosure of any members 

of the compensation, nominating and 

audit committee that the company had 

not identified as independent under the 

definition of independence for that 

board committee applicable to it. 

More specifically, if the company is 

an issuer 277 with securities listed, or for 

which it has applied for listing, on a 

national securities exchange 278 or in an 

automated inter-dealer quotation system 

of a national securities association 279

which has requirements that a majority 

of the board of directors be 

independent, the proposal would 

require disclosure of those directors and 

director nominees that the company 

identifies as independent (and 

committee members not identified as 

independent), using a definition for 

independence for directors (and for 

committee members) that is in 

compliance with the applicable listing 

standards. If the company is not a listed 

issuer, the proposals would require 

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 would 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.280

The proposals would require an issuer 

that has adopted definitions of 

independence for directors and 

committee members to disclose whether 

those definitions are posted on the 

company’s Web site, or include the 

definitions as an appendix to the 

company’s proxy materials at least once 

every three years or if the policies have 

been materially amended since the 

beginning of the company’s last fiscal 

year.281 Further, if the policies are not 

on the company’s Web site, or included 

as an appendix to the company’s proxy 

statement, the company would have to 

disclose in which of the prior fiscal 

years the policies were included in the 

company’s proxy statement. 

In addition, the proposals would 

require, for each director or director 

nominee identified as independent, a 

description 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. 

This independence disclosure would 

be required for any person who served 

as a director of the company during any 

part of the year for which disclosure 

must be provided,282 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.283

The proposals also would revise the 

current disclosure required regarding 

the audit committee and nominating 

committee 284 to eliminate duplicative 

committee member independence 

disclosure and to update the required 

audit committee charter disclosure 

requirement for consistency with the 

more recently adopted nominating 

committee charter disclosure 

requirements.285 As a result, the audit 

committee charter would no longer be 

required to be delivered to security 

holders if it is posted on the company’s 

Web site.286 We also propose moving 

the disclosure required by Section 407 

of the Sarbanes-Oxley Act regarding 

audit committee financial experts to 

Item 407, although we are not proposing 

any substantive changes to that 

requirement. 

In addition to the disclosures 

currently required regarding audit and 

nominating committees of the board of 

directors, we propose requiring similar 

disclosure regarding compensation 

committees.287 The company would 

also 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; 

• Whether the compensation 

committee’s authority is set forth in a 

charter or other document, and if so, the 

company’s Web site address at which a 

current copy is available if it is so 

posted, and if not so posted, attaching 

the charter to the proxy statement once 

every three years; 

• 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, the material elements of the 

instructions or directions given to the 

consultants with respect to the 

performance of their duties under the 

engagement and identifying any 

executive officer within the company 

the consultants contacted in carrying 

out their assignment. 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6579 

288Current Item 402(j). 

289 Item 7(g) of Schedule 14A. 

290 Item 5.02(a) of Form 8–K. 

291Proposed Item 22(b)(17) of Schedule 14A. 

292Current paragraphs (d)(1), (f), and (h)(3) of 

Item 7 of Schedule 14A would be included in 

proposed Item 407(b). 

293Proposed Instructions 1 and 2 to Item 407. 

Proposed Instruction 2 also includes a requirement 

that the charter be provided if it is materially 

amended. 294 Item 7(g) of Schedule 14A. 

295This instruction, which is current Instruction 

2 to Item 404 of Regulation S–B, is proposed 

Instruction 9 to Item 404 of Regulation S–B. 

296This instruction, which is current Instruction 

3 to Item 404 of Regulation S–K, is not included in 

current Item 404 of Regulation S–B. 

In addition, as noted above, 

disclosure would be required regarding 

each member of the compensation 

committee that the registrant has 

identified as not independent. 

Further, the rule proposals would 

consolidate into this compensation 

committee disclosure requirement the 

disclosure currently required in Item 

402 regarding compensation committee 

interlocks and insider participation in 

compensation decisions.288

Finally, for registrants other than 

registered investment companies, the 

rule proposals would eliminate an 

existing proxy disclosure requirement 

regarding directors that have resigned or 

declined to stand for re-election 289

which is no longer necessary since it 

has been superseded by a disclosure 

requirement in Form 8–K.290 For 

registered investment companies, which 

do not file Form 8–K, the requirement 

would be moved to Item 22(b) of 

Schedule 14A.291 Also, the rule 

proposals would combine various proxy 

disclosure requirements regarding board 

meetings and committees into one 

location.292 In addition, we propose two 

instructions to Item 407 to combine 

repetitive provisions, one relating to 

independence disclosure, and the other 

relating to board committee charters.293

Request for Comment 

• Should the disclosure requirements 

proposed to be consolidated in Item 407 

continue to remain separate? If so, why? 

Is the proposed location of this 

consolidated disclosure appropriate, 

including the proposed options for 

disclosing adopted independence 

definitions? 

• Are there independence standards 

that would be preferable to the ones 

referenced in proposed new Item 407? 

• Should companies that are not 

listed on a national securities exchange 

or on an inter-dealer quotation system of 

a national securities association be able 

to reference their own standards of 

independence that they have adopted, 

or should those companies be required 

to refer to established listing standards 

as proposed? 

• Should we require as proposed a 

description of transactions considered 

(other than those that would be reported 

under proposed Item 404(a)) when 

determining if the independence 

standards were met? 

• Is there any reason why we should 

not eliminate the requirement that 

companies provide disclosure in their 

proxy statements regarding directors 

who have resigned or declined to stand 

for re-election? 294

• Are there circumstances in which 

disclosure should not be required under 

proposed Item 407(a)? Should 

disclosure not be required for a director 

who is no longer a director at the time 

of filing any registration statement or 

report? Should disclosure not be 

required if information is being 

presented in a proxy or information 

statement for a director whose term of 

officer as a director will not continue 

after the meeting to which the statement 

relates? 

• Given that registered investment 

companies do not file Form 8–K, should 

we continue to require registered 

investment companies to make proxy 

statement disclosures pursuant to 

current Item 7(g) of Schedule 14A 

regarding directors who have resigned 

or declined to stand for re-election? 

• Should we also move the disclosure 

required by Rule 10A–3(d) (under 

which companies must disclose 

whether they have relied on an 

exemption from the audit committee 

independence requirements of Rule 

10A–3) to proposed Item 407? 

• Should the audit committee charter 

disclosure requirement be changed to be 

consistent with the nominating 

committee charter disclosure 

requirements? Should the compensation 

committee charter disclosure 

requirement be the same? Should there 

be any changes to the proposed 

compensation committee disclosure 

requirements? 

• Are there any disclosure 

requirements regarding compensation 

consultants that we should add to or 

delete or change from the proposal? 

E. Treatment of Specific Types of 

Issuers 

1. Small Business Issuers 

Proposed Item 404 of Regulation S–B 

is substantially similar to proposed Item 

404 of Regulation S–K, except for the 

following two matters: 

• Paragraph (b) relating to policies 

and procedures for reviewing related 

party transactions is proposed not to be 

included in Regulation S–B, and 

• Regulation S–B would provide for a 

disclosure threshold of the lesser of 

$120,000 or one percent of the average 

of the small business issuer’s total assets 

for the last three completed fiscal years, 

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 proposed items would consist of 

disclosure requirements regarding 

related person transactions and 

promoters. These provisions of Item 404 

of Regulation S–B would be 

substantially identical to those of Item 

404 of Regulation S–K, except for 

certain changes conforming proposed 

Item 404 of Regulation S–B to current 

Item 404 of Regulation S–B. These 

changes consist of the following: 

• Throughout proposed Item 404 of 

Regulation S–B using the two year time 

period for disclosure in current Item 404 

of Regulation S–B; 

• Retaining in proposed Item 404 of 

Regulation S–B an instruction in current 

Item 404 of Regulation S–B regarding 

underwriting discounts and 

commissions; 295 and 

• Not including an instruction in 

proposed Item 404 of Regulation S–B 

regarding the treatment of foreign 

private issuers that is included in 

proposed Item 404 of Regulation S–K.296

In addition, proposed Item 404 of 

Regulation S–B would retain a 

paragraph from current Item 404 of 

Regulation S–B 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 its immediate parent, if any. 

One conforming change that we are 

not making, however, concerns the 

calculation of a related person’s interest 

in a given transaction. Current Item 

404(a) of Regulation S–B differs from 

current Item 404(a) of S–K with respect 

to, among other things, the calculation 

of the dollar value of a person’s interest 

in a related transaction. Current 

Instruction 4 to Item 404(a) of 

Regulation S–K specifically provides 

that the amount of such interest shall be 

computed without regard to the amount 

of profit or loss involved in the 

transaction. In contrast, current Item 

404(a) of Regulation S–B contains no 

such instruction. We propose 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 


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6580 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

297Current paragraphs (e), (f), and (g) of Item 401 

of Regulation S–B would become paragraphs (d)(5), 

(d)(4) and (c)(3), respectively, of Item 407 of 

Regulation S–B. 

298This disclosure is currently required under 

Item 402(j) of Regulation S–K. 

299Proposed amendments to Item 7(e) of 

Schedule 14A. Business development companies 

would 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 

proposed amendments to Items 7, 8, and 22(b) of 

Schedule 14A. 

300Proposed Items 22(b)(15)(i) and (ii)(A) and 

22(b)(16)(i) of Schedule 14A. Proposed Item 

22(b)(15)(i) would require the information required 

by Items 407(b)(1) and (2) and (f), corresponding to 

the information that registered investment 

companies are required to provide pursuant to 

current Items 7(f) and 7(h). Proposed Item 

22(b)(15)(ii)(A) would require the information 

required by proposed Items 407(c)(1) and (2), 

corresponding to the information that registered 

investment companies are required to provide 

pursuant to current Items 7(d)(2)(i) and 7(d)(2)(ii) 

(other than the nominating committee 

independence disclosures required by current Item 

7(d)(2)(ii)(C)). Proposed Item 22(b)(16)(i) would 

require closed-end investment companies to 

provide the information required by proposed Items 

407(d)(1) through (3), corresponding to the 

information that closed-end investment companies 

are required to provide pursuant to current Item 

7(d)(3) (other than the audit committee 

independence disclosures required by Items 

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

301Proposed Items 22(b)(15)(ii)(B) and (16)(ii) of 

Schedule 14A. Proposed Item 22(b)(15)(ii)(B) 

requires disclosure about the independence of 

nominating committee members that is similar to 

those required by current Item 7(d)(2)(ii)(C) and 

proposed Item 22(b)(16)(ii) requires disclosure 

about the independence of audit committee 

members that is similar to those required by current 

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

302Proposed amendments to Items 22(b)(7), 

22(b)(8), and 22(b)(9) of Schedule 14A; proposed 

amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8) 

of Form N–1A; proposed amendments to Items 18.9, 

18.10, and 18.11 of Form N–2; proposed 

amendments to Items 20(h), 20(i), and 20(j) of Form 

N–3. 

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. 

Proposed Item 407 of Regulation S–K 

is substantially identical to proposed 

Item 407 of Regulation S–B,297 except 

that it would it would not require 

disclosure regarding compensation 

committee interlocks and insider 

participation in compensation 

decisions, since Regulation S–B 

currently does not require disclosure of 

this information.298

Request for Comment 

• Should small business issuers be 

categorically exempted from any 

additional aspect of the proposed Item 

404 or Item 407 disclosure 

requirements? If so, which requirements 

and why? Should any of the proposed 

exclusions not be excluded? If so, why? 

• Currently Item 404(a) of Regulation 

S–K states that companies are not to 

consider the amount of profit or loss 

when computing the amount involved 

in a transaction, but Item 404 of 

Regulation S–B does not include this 

statement. We propose to provide the 

same instruction in both Regulation S–

K and Regulation S–B. Should Item 

404(a) of Regulation S–B continue to 

omit this instruction? Why or why not? 

• Currently Item 404(a) of Regulation 

S–K specifically provides for using the 

value of the aggregate amount of all 

periodic payments or installments when 

computing the amount involved in a 

transaction, but Item 404 of Regulation 

S–B does not. Should Item 404(a) of 

Regulation S–B, as does proposed 

Instruction 3 to Item 404(a) of 

Regulation S–B, provide for this? 

• Is the definition of ‘‘related person’’

in Item 404 of Regulation S–B 

sufficiently broad? Should this 

definition be expanded to include 

consultants and advisors? 

• Should we use a different 

alternative threshold for disclosure in 

proposed Item 404(a) of Regulation S–B? 

For example the lesser of $120,000 or a 

percentage of annual corporate 

expenses? 

2. Foreign Private Issuers 

Currently a foreign private issuer will 

be deemed to comply with Item 404 of 

Regulation S–K if it provides the 

information required by Item 7.B. of 

Form 20–F. The proposals would retain 

this approach, but would require that if 

more detailed information is 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. 

Request for Comment 

• Is there any reason to discontinue 

this treatment of foreign private issuers? 

Should a foreign private issuer that is 

required to comply with Item 404 (for 

example, by filing an annual report on 

Form 10–K) be required to provide all 

of the information required under Item 

404 instead of the information required 

under Form 20–F? 

3. Registered Investment Companies 

We propose to revise Items 7 and 

22(b) of Schedule 14A to reflect the 

reorganization that we have proposed 

with respect to operating companies. 

Under the proposals, information that is 

currently required to be provided by 

registered investment companies under 

Item 7 would instead be required by 

Item 22(b).299 The requirements of Item 

7 that are currently applicable to 

registered investment companies 

regarding the nominating and audit 

committees, board meetings, the 

nominating process, and shareholder 

communications generally would be 

included in Item 22(b) by crossreferences to the appropriate paragraphs 

of proposed Item 407 of Regulation S–

K.300 The substance of these 

requirements would not be altered. In 

addition, the proposed revisions to Item 

22(b) would directly incorporate 

disclosures relating to the independence 

of members of nominating and audit 

committees that are similar to those 

contained in proposed Item 407(a) of 

Regulation S–K and currently contained 

in Item 7.301

We are also proposing to raise 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.302 This disclosure is required in 

investment company proxy and 

information statements and registration 

statements. The increase in the 

disclosure threshold would correspond 

to the proposal to increase the 

disclosure threshold for Item 404 from 

$60,000 to $120,000. 

Request for Comment 

• Should we reorganize in the 

manner proposed the disclosures that 

registered investment companies are 

currently required to make under Item 

7 of Schedule 14A? If not, how should 

these disclosures be organized? Should 

any substantive changes be made to the 

proposed disclosures? 

• Is it appropriate to adjust 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? 

Should there be no threshold? Should 

the threshold also operate on a sliding 

scale (for example, the lower of 

$120,000 or 1% of total or net assets for 

the last three completed fiscal years or 

the lower of $120,000 or a percentage of 

annual expenses) to capture smaller 

transactions for smaller companies? 

Explain whether a higher or lower 

threshold, or no threshold, would result 

in more effective disclosure. 

F. Conforming Amendments 

The changes we propose to Item 404 

necessitate conforming amendments to 


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303 17 CFR 245.100–104. 304 15 U.S.C. 7244(a), entitled ‘‘Prohibition of 

Insider Trading During Pension Fund Blackout 

Periods.’’ 305 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 

acquired 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. 

306This term is defined in Rule 100(a) of 

Regulation BTR. 

307Rule 100(a)(2) of Regulation BTR. 

308Exchange Act Rules 16b–3(d)(1) and 16b–3(e). 

309Because it appears appropriate that the 

standards for an exemption from Section 16(b) 

liability be readily determinable by reference to the 

exemptive rule, and not variable depending upon 

where the issuer’s securities are listed, we do not 

propose to base the amended definition on the 

listing standards for director independence 

applicable to the issuer. 

310Exchange 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,’’ would not be revised. 

311As under the current rule, each test referring 

to Item 404 will be measured by reference to the 

Regulation S–K Item, even if the disclosure 

requirements applicable to the company are 

governed by Regulation S–B. 

312See proposed 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 

proposed amendments to Forms SB–2, 10–SB and 

10–KSB would require disclosure of the 

information required by proposed Items 404 and 

407(a) of Regulation S–B. 

313See proposed amendments to Item 7(b) of 

Schedule 14A, which refers to proposed Items 

404(a) and (b), and Item 22(b)(11) and the 

Instruction to Item 22(b)(11) of Schedule 14A, and 

Continued 

other rules that refer specifically to Item 

404. 

1. Regulation Blackout Trading 

Restriction 

We are proposing conforming changes 

to Regulation Blackout Trading 

Restriction,303 also known as Regulation 

BTR, which we adopted to clarify the 

scope and operation of Section 

306(a) 304 of the Sarbanes-Oxley Act of 

2002 and to prevent evasion of the 

statutory trading restriction.305 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.’’ 306

Under this definition, 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.’’ 307 To conform 

this provision of Regulation BTR to the 

proposed Item 404 amendments, we 

propose to amend Rule 100(a)(2) so that 

it references only transactions described 

in paragraph (a) of Item 404. 

2. Rule 16b–3 Non-Employee Director 

Definition 

We also are proposing conforming 

amendments to the definition of NonEmployee Director in Exchange Act 

Rule 16b–3. 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.308

The definition of ‘‘Non-Employee 

Director,’’ among other things, limits 

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 

proposals would substantially revise or 

rescind the Item 404 provisions on 

which the Non-Employee Director 

definition is based. To minimize 

potential disruptions and because no 

problems have been brought to our 

attention regarding any aspect of the 

current definition, the proposed 

conforming amendment would continue 

to permit consulting and similar 

arrangements subject to limits measured 

by reference to the proposed Item 404(a) 

disclosure requirements.309 The 

amendment would delete the provision 

referring to business relationships 

subject to disclosure under Item 404(b), 

without otherwise revising the text of 

the rule.310 Because the disclosure 

threshold of Item 404(a) would be raised 

from $60,000 to $120,000, however, the 

effect in some cases may be to permit 

previously ineligible directors to be 

Non-Employee Directors.311 In other 

cases, where proposed Item 404(a) may 

require disclosure of business 

relationships not subject to disclosure 

under current Item 404(b), some current 

Non-Employee Directors may become 

ineligible. 

Request for Comment 

• Should the Rule 16b–3 NonEmployee Director definition continue 

to permit consulting or similar 

arrangements with the issuer, as 

proposed? 

• Is the proposed Item 404(a) 

disclosure threshold an appropriate 

limit for permitting consulting or 

similar arrangements? Instead, should 

the dollar limit be lower, such as the 

current $60,000 threshold? Explain the 

basis for recommending a different 

dollar limit. 

• For business relationships for 

which disclosure is not required by 

current Item 404(b), but would be under 

proposed Item 404(a), should there be a 

different test? Are there any particular 

transactions or relationships that would 

become disclosable under proposed 

Item 404(a) that should not render a 

director ineligible to be a Non-Employee 

Director? If so, explain why. 

• Would continued use of Item 404 as 

a measure for defining Non-Employee 

Directors place an undue burden on 

companies in forming their NonEmployee Director committees? Would 

reference to another disclosure 

requirement or standard be better? 

3. Other Conforming Amendments 

The changes we propose 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 rule proposals would amend: 

• Forms that require disclosure of the 

information required by Item 404 to 

instead require disclosure of the 

information required by proposed Items 

404 and 407(a); 312

• Some forms that require 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 proposed Items 

404(a) and (b), or proposed Item 404(a), 

as appropriate; 313


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6582 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

Item 5.02(c)(2) of Form 8–K, which refer to 

proposed Item 404(a). The proposed amendments to 

Form 8–K that reference paragraphs (a) and (b) of 

Item 404 of Regulation S–B would require 

disclosure of the information required by proposed 

Item 404(a) of Regulation S–B. 

314See proposed amendments to Item 23 of Form 

S–11. 

315See proposed amendments to Item 8 of 

Schedule 14A, Item 11(l) of Form S–1, General 

Instruction I.B.4.(c) to 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. 

316See proposed 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 proposed Item 407, and 

Item 7(b) of Schedule 14A, which refers to Item 401 

and paragraphs (d)(4) and (d)(5) of proposed Item 

407. 

The proposed amendments to Forms SB–2, 10–

SB and 10–KSB would require disclosure of the 

information required by proposed Items 401 and 

407(c)(3), (d)(4) and (d)(5) of Regulation S–B. We 

are not proposing 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 

propose to combine into proposed Item 407. 

317See proposed amendments to Item 5 in Part II 

of Form 10–Q, and Item 5 in Part II of Form 10–

QSB. The proposed amendments to Item 5 in Part 

II of Form 10–QSB would require disclosure of the 

information required by proposed Item 407(c)(3) of 

Regulation S–B. 

318See proposed amendments to Item 1107(e) of 

Regulation AB. 

319Plain 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 General Instruction 1A. to Form 10–K and Item 

1001 of Regulation M–A 17 CFR 229.1001], 

respectively. 

320 See, 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). 

• A form that cross-references an 

instruction in Item 404 which we 

propose to eliminate to instead include 

the text of this instruction; 314

• Item 7 of Schedule 14A to require 

disclosure of the information required 

by proposed Item 407(a) rather than 

current Item 404(b), and to eliminate 

current paragraphs (d)–(h) which are 

duplicative of proposed Item 407 and 

replace them with a requirement to 

disclose information specified by 

corresponding paragraphs of Item 407; 

• Forms that require disclosure of the 

information required by Item 402 to 

instead require disclosure of the 

information required by proposed Item 

402 and Item 407(e)(4); 315

• Some forms that require disclosure 

of the information required by Item 401 

to instead require disclosure of the 

information required by Item 401 and 

paragraphs (c)(3), (d)(4) and/or (d)(5) of 

proposed Item 407, as appropriate; 316

• Forms that require disclosure of the 

information required by Item 401(j), to 

instead require disclosure of the 

information required by proposed Item 

407(c)(3); 317 and 

• Item 10 of Form N–CSR to include 

a cross reference to proposed Item 

407(c)(2)(iv) of Regulation S–K and 

proposed Item 22(b)(15) of Schedule 

14A, in lieu of the current reference to 

Item 7(d)(2)(ii)(G) of Schedule 14A. 

In addition, conforming amendments 

would be made to a provision in 

Regulation AB, which currently requires 

disclosure of the information required 

by Items 401, 402 and 404, so that 

instead it would require disclosure of 

the information required by proposed 

Items 401, 402, 404 and paragraphs (a), 

(c)(3), (d)(4), (d)(5) and (e)(4) of Item 

407.318

VI. Plain English Disclosure 

We are proposing that most of the 

disclosure required by proposed Items 

402, 403, 404 and 407 be provided in 

plain English. We propose that this 

plain English requirement 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). 

In 1998, we adopted rule changes 

requiring issuers to write the cover page, 

summary and risk factors section of 

prospectuses in plain English and apply 

plain English principles to other 

portions of the prospectus.319 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 propose 

to revise, 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 propose to add Exchange Act 

Rules 13a–20 and 15d–20 to require that 

companies prepare their executive and 

director compensation, related person 

transactions, beneficial ownership and 

corporate governance disclosures 

included in Exchange Act reports using 

plain English principles, including the 

following standards: 

• Present information in clear, 

concise sections, paragraphs and 

sentences; 

• Use short sentences; 

• Use definite, concrete, everyday 

words; 

• Use the active voice; 

• Avoid multiple negatives; 

• Use 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, defining terms in the 

glossary or other section of the 

document only if the meaning is unclear 

from the context and using 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 proposed rule would also provide 

additional guidance on drafting the 

disclosure that would comply with 

plain English principles, including 

guidance as to the following practices 

that registrants should avoid: 

• Legalistic or overly complex 

presentations that make the substance of 

the disclosure difficult to understand; 

• Vague ‘‘boilerplate’’ explanations 

that are imprecise and readily subject to 

different interpretations; 

• 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 proposed rules, if the 

executive compensation, beneficial 

ownership, related person transaction or 

corporate governance matters disclosure 

were incorporated by reference into an 

Exchange Act report from a company’s 

proxy or information statement, the 

disclosure would be required to be in 

plain English in the proxy or 

information statement.320 The plain 

English rules are proposed as 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 


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321 17 CFR 240.14a–8. 

322The proposed amendments to the crossreferences in Item 10 of Form N–CSR would appear 

in the Form concurrent with the effective date of 

the amendments to our proxy rules, and would 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 proposed Item 

407(c)(2)(iv) of Regulation S–K (as required by 

proposed Item 22(b)(15) of Schedule 14A). The 

substance of the information required by the Item 

would not be changed. 

323The other proposed executive and director 

compensation disclosure requirements which relate 

to the last completed fiscal year would not be 

affected by this proposed transition approach. The 

Summary Compensation Table would be treated 

differently because, as proposed, it would require 

disclosure of compensation to the named executive 

officers for the last three fiscal years. 

324 44 U.S.C. 3501 et seq. 

325 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

326The 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. 

best administered by the Commission 

under these rules. 

Request for Comment 

• Will the plain English requirements 

discussed above be sufficient to 

discourage boilerplate and promote 

clear, more user-friendly Exchange Act 

reports and proxy or information 

statements? If not, how should we revise 

the requirements? 

• Are there differences between proxy 

statements and Exchange Act reports 

which would require different 

requirements in order to accomplish the 

objectives of plain English? If so, what 

are the different requirements and how 

should the different requirements be 

addressed? 

• In addition to the proposal, should 

we require that information provided 

under proposed Items 402, 403, 404 and 

407 in other filings, such as Form S–1, 

be written in plain English? 

• Since only portions of the 

disclosure under proposed Item 407 

would be required to be included in 

Exchange Act reports, should we 

specifically require that all Item 407 

disclosure be in plain English? If so, 

how should we impose this 

requirement? 

• Should we require that all or 

portions of proxy or information 

statements be in plain English? If so, 

should a plain English requirement 

apply to disclosure provided by anyone 

who solicits a proxy with a proxy 

statement, or should it be limited to just 

companies making a solicitation of their 

shareholders? Should shareholder 

proposals under Exchange Act Rule 

14a–8 321 or financial statements and 

related disclosures under Item 13 of 

Schedule 14A be excluded from any 

plain English requirements applicable to 

proxy statements? Would a plain 

English requirement under the proxy 

rules have the potential to increase 

disputes, including possible litigation, 

that could inappropriately delay or 

frustrate the conduct of solicitations and 

shareholder meetings or otherwise 

interfere with the proper operation of 

the proxy rules? 

VII. Transition 

We propose that, following their 

adoption, the proposed new rules and 

amendments would become effective 

following publication of the adopting 

release in the Federal Register as 

follows: 

• For Forms 10–K and 10–KSB, for 

fiscal years ending 60 days or more after 

publication; 

• For Forms 8–K, for triggering events 

that occur 60 days or more after 

publication; 

• For Securities Act and Investment 

Company Act registration statements 

(including post-effective amendments) 

and Exchange Act registration 

statements that become effective 120 

days or more after publication; and 

• For proxy statements that are filed 

90 days or more after publication.322

We do not propose to require 

companies to ‘‘restate’’ compensation or 

related person transaction disclosure for 

fiscal years for which they previously 

were required to apply the current rules. 

Instead, the proposed Summary 

Compensation Table and disclosure 

required by proposed Item 404(a) would 

be required only for the most recent 

fiscal year.323 This would result in 

phased-in implementation of the 

proposed Summary Compensation 

Table amendments and proposed Item 

404(a) disclosure over a three-year 

period for Regulation S–K companies, 

and a two-year period for Regulation S–

B companies. 

Request for Comment 

• Is the proposed effectiveness 

schedule workable? 

• Is the proposed phased-in transition 

provision for the amended Summary 

Compensation Table and proposed 

related person transaction disclosure 

necessary? Could companies revise the 

previous years’ required disclosure to 

conform to the amended requirements 

without incurring undue costs or 

burdens? 

• Are any special transition 

provisions necessary for any other 

aspects of the proposed amendments? If 

so, explain what would be needed and 

why. 

General Request for Comments 

We request and encourage any 

interested person to submit comments 

on any aspect of our proposals and any 

other matters that might have an impact 

on the amendments. We request 

comment from companies and all users 

of the executive compensation, related 

party and corporate governance 

information required by Commission 

rules that may be affected by the 

proposals. With respect to any 

comments, we note that they are of 

greatest assistance to our rulemaking 

initiative if accompanied by supporting 

data and analysis of the issues 

addressed in those comments and by 

alternatives to our proposals where 

appropriate. 

VIII. Paperwork Reduction Act 

A. Background 

The proposed rules and amendments 

contain ‘‘collection of information’’

requirements within the meaning of the 

Paperwork Reduction Act of 1995.324

We are submitting these to the Office of 

Management and Budget for review and 

approval in accordance with the 

Paperwork Reduction Act.325 The titles 

for this information are: 326

(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 


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6584 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

327The pertinent annual reports are those on 

Form 10–K or 10–KSB. 

328The proposed disclosure requirements 

regarding executive and director compensation, 

beneficial ownership, related person transactions 

and parts of the proposed 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 Schedules 14A or 14C to satisfy the 

disclosure requirements of Form 10–K. The analysis 

that follows assumes that companies would either 

provide the proposed 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 proposed disclosure 

requirements that are included in both the Form 

10–K and in Schedule 14A or 14C. 

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 327 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 proposed amendments to existing 

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; 

• 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 proposals 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 would be mandatory. 

However, the information collection 

requirements relating exclusively to 

proxy and information statements 

would only apply to issuers subject to 

the proxy rules. There would be no 

mandatory retention period for the 

information disclosed, and the 

information disclosed would be made 

publicly available on the EDGAR filing 

system. 

B. Summary of Information Collections 

The proposals would increase existing 

disclosure burdens for annual reports on 

Form 10–K 328 and registration 

statements on Forms 10, S–1, S–4 and 

S–11 by requiring: 

• An expanded and reorganized 

Summary Compensation Table, which 

would 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 stock-based 

and option-based awards computed in 

accordance with FAS 123R, and the 

aggregate increase in actuarial value of 

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 Performance-Based Awards Table and 

a Grants of All Other Equity Awards 

Table, which would build upon existing 

tabular disclosures regarding long term 

incentive plans and awards of option 

and stock appreciation rights to 

supplement the information proposed to 

be included in the Summary 

Compensation Table; 

• Expanded disclosure regarding 

holdings and exercises by named 

executive officers of outstanding 

previously awarded stock, options and 

similar instruments which would 

include the grant date of the award, the 

vesting date of restricted stock and 

similar instruments and amounts (both 

number of shares and value) realized 

upon vesting and the previously 

reported grant date fair value of awards 

exercised or vested; 

• 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; 

• Disclosure regarding up to three 

employees who were not executive 

officers and whose total compensation 

for the last completed fiscal year was 

greater than that of any of the named 

executive officers; 

• 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 current disclosure requirements; 

• Disclosure regarding additional 

related persons under the proposed 

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 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 directors’ qualifying 

shares. 

At the same time, the proposals 

would decrease existing disclosure 

burdens for annual reports on Form 10–

K and registration statements on Form 

10, S–1, S–4 and S–11 by: 

• Eliminating requirements to 

provide a Compensation Committee 

Report and Performance Graph in proxy 

materials and information statements, 

which would substantially offset the 

increased burdens regarding 

Compensation Discussion and Analysis 

that would be required to be included 

or incorporated by reference in annual 

reports or registration statements; 

• Eliminating tabular presentation 

regarding projected stock option values 

under alternative stock appreciation 

scenarios, which would substantially 

offset the increased burdens regarding 

equity holdings and exercises; 

• Eliminating a generalized tabular 

presentation regarding defined benefit 

plans, which would offset in part the 

increased burdens regarding defined 

benefit plan disclosure; 

• Increasing the dollar value 

threshold for determining if related 

person transaction disclosure is 

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

• Eliminating a current disclosure 

requirement regarding specific director 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6585 

329The 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. 

relationships that could affect 

independence. 

In addition, the proposals may 

increase or decrease existing disclosure 

burdens, or not affect them at all, for 

annual reports on Form 10–K and 

registration statements on Form 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 would be 

required to be included or incorporated 

by reference in annual reports and 

registration statements; and 

• Eliminating or reducing the scope 

of instructions that provide bright line 

tests for determining whether 

transactions with related persons are 

required to be disclosed in particular 

circumstances. 

Specifically with respect to proxy and 

information statements, the proposals 

would impose a new disclosure 

requirement regarding the company’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. These 

proposals would not require a 

compensation committee to establish or 

maintain a charter. The proposed 

disclosure that would be required 

regarding compensation committees is 

similar to what is currently required for 

audit committees and nominating 

committees. The proposals would 

decrease existing disclosure 

requirements for proxy and information 

statements by eliminating a current 

disclosure requirement regarding the 

resignation of directors, as well as 

eliminating current requirements to 

provide a Compensation Committee 

Report, Performance Graph and a 

compensation committee report on the 

repricing of options and stock 

appreciation rights. However, the extent 

to which eliminating current 

requirements to provide a 

Compensation Committee Report, 

Performance Graph and a compensation 

committee report on the repricing of 

options and stock appreciation rights 

reduces burdens for proxy and 

information statements would be offset 

to a substantial extent, as discussed 

above, by the proposed Compensation 

Discussion and Analysis and narrative 

disclosure requirement regarding 

repricings and other modifications, both 

of which would be required to be 

included or incorporated by reference in 

annual reports and registration 

statements. We estimate that, on 

balance, the proposed changes that are 

specific to proxy or information 

statements would not result in 

incremental burdens on proxy or 

information statement collections of 

information. 

The proposals would increase existing 

disclosure burdens for annual reports on 

Form 10–KSB 329 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 

would 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 stock-based 

and option-based awards computed in 

accordance with FAS 123R and the 

aggregate increase in actuarial value of 

defined benefit and actuarial pension 

plans; 

• Disclosure at lower dollar 

thresholds for information regarding 

perquisites and other personal benefits; 

• Expanded disclosure regarding 

holdings of previously awarded stock, 

options and similar instruments, which 

would include the value of stock and 

other similar incentive plan awards that 

had not vested; 

• A new table for director 

compensation, to replace current 

narrative disclosure requirements; 

• A narrative description of 

retirement plans; 

• Disclosure regarding additional 

related persons under the proposed 

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 proposals 

would decrease existing disclosure 

burdens for annual reports on Form 10–

KSB and registration statements on 

Form 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; 

• Eliminating tabular disclosure 

regarding long term incentive plan 

awards in the last fiscal year; and 

• Eliminating a current disclosure 

requirement regarding specific director 

relationships that could affect 

independence. 

In addition, the proposals may 

increase or decrease, or not affect, 

existing disclosure burdens for annual 

reports on Form 10–KSB or registration 

statements on Form 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; 

• 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 for the last 

three completed fiscal years; and 

• Eliminating or reducing the scope 

of instructions that provide bright line 

tests for determining whether 

transactions with related persons are 

required to be disclosed in particular 

circumstances. 

The proposals would decrease 

existing disclosure burdens for Forms 

N–1A, N–2, and N–3 by increasing to 

$120,000 the current $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 

these items. The proposals would 

increase the existing disclosure burdens 

for Form N–2 by requiring business 

development companies to provide 

additional disclosure regarding 

compensation. However, the proposals 


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6586 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

330For administative 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 thousand. 

331We apply the same allocation of burden with 

regard to proxy or information statements. 

332 In connection with other recent rulemakings, 

we have had discussions with several private law 

firms to estimate an hourly rate of $300 as the 

average cost of outside professionals that assist 

issuers in preparing disclosures and conducting 

registered offerings. 

333As mentioned above, we do not believe that 

the proposal to increase 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. 

334We calculated an annual average over a three 

year period because OMB approval of Paperwork 

Reduction Act submissions covers a three year 

period. 

335For Form 10–K, we estimate that it would take 

issuers 120 additional hours to prepare the 

proposed disclosure in year one, and 55 hours in 

year two and 25 hours in year three and thereafter, 

which results in an average of 67 hours over the 

three year period. This estimate takes into account 

that the burden would be incurred by either 

including the proposed disclosure in the report 

directly or incorporating by reference from a proxy 

or information statement. 

336Similarly, on an ongoing basis, the hours of 

company personnel time and outside professional 

time required to prepare the disclosure required by 

the proposed conforming revisions to Item 22(b) 

relating to the independence of members of 

nominating and audit committees of investment 

companies would be approximately the same as for 

compliance with the current requirements regarding 

disclosure of the independence of nominating and 

audit committee members of investment companies 

required by existing Item 7 of Schedule 14A. 

would 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 proposals would decrease the 

Form 8–K disclosure burdens, by 

limiting both the existing requirement to 

disclose a company’s entry into a 

material definitive agreement outside of 

the ordinary course of business or any 

material amendment to such an 

agreement and the requirement to 

collect information regarding directors, 

executive officers other than named 

executive officers and officers covered 

by Item 5.02 of Form 8–K. By focusing 

the Form 8–K disclosure requirement on 

more presumptively material 

employment agreements, plans or 

arrangements of a narrower group of 

executive officers, the number of Form 

8–Ks filed each year relating to 

executive and director compensation 

matters should be reduced. 

We do not believe that our proposals 

regarding exhibit filing requirements for 

Form 20–F and our proposed treatment 

for foreign private issuers under the 

revised rules would impose any 

incremental increase or decrease in the 

disclosure burden for these issuers. 

C. Paperwork Reduction Act Burden 

Estimates 

For purposes of the Paperwork 

Reduction Act, we estimate the annual 

incremental increase in the paperwork 

burden for companies to comply with 

our proposed collection of information 

requirements to be approximately 

537,792 hours of in-house company 

personnel time and to be approximately 

$69,794,000 for the services of outside 

professionals.330 These estimates 

include the time and the cost of 

preparing and reviewing disclosure, 

filing documents and retaining records. 

Our methodologies for deriving the 

above estimates are discussed below. 

Our estimates represent the average 

burden for all issuers, both large and 

small. As described below, we expect 

that the burdens and costs could be 

greater for larger issuers and lower for 

smaller issuers. For Exchange Act 

annual reports on Form 10–K or 10–

KSB,331 or current reports on Form 8–

K, 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 $300 per hour.332 For Securities Act 

registration statements on Forms SB–2, 

S–1, S–4, S–11, or N–2 and Exchange 

Act registration statements on Form 10 

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 $300 per hour.333 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 and Exchange Act Annual 

Reports 

For the purposes of the Paperwork 

Reduction Act, we estimate that, over a 

three year period,334 the annual 

incremental disclosure burden imposed 

by 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. To 

the extent that companies incorporate 

information proposed to be required by 

reference to proxy or information 

statements, the proposed plain English 

requirements would apply to disclosure 

in those statements, however the 

incremental burden of preparing plain 

English disclosure is factored into the 

burden estimates for Forms 10–K and 

10–KSB. We estimate that the proposed 

amendments to Item 22(b) of Schedule 

14A and the proposal to increase 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 not impose 

an annual incremental disclosure 

burden. 

These estimates were based on the 

following assumptions: 

• On an ongoing basis, the hours of 

company personnel time and outside 

professional time required to prepare 

the disclosure under proposed Item 402 

of Regulation S–K (executive and 

director compensation) would increase 

in light of the expansion and 

reorganization of the proposed 

disclosure requirements relative to the 

current disclosure requirements on 

these topics, in particular the 

requirements regarding Compensation 

Discussion and Analysis. 

• Companies filing annual reports on 

Form 10–K that would be required to 

include Item 402 of Regulation S–K, as 

we propose to amend it, and proposed 

Item 407(e)(4) of Regulation S–K 

(regarding compensation committee 

interlocks and insider participation), 

would experience higher costs in 

responding to these disclosure 

requirements in the first year of 

compliance 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, with lower incremental 

costs expected in subsequent years.335

• On an ongoing basis, the hours of 

company personnel time and outside 

professional time required to prepare 

the disclosure under proposed Item 404 

(related person transactions), 407(a) 

(director independence) and paragraphs 

(e)(1) through (e)(3) of Item 407 

(compensation committee functions) of 

both Regulation S–K and Regulation S–

B would be approximately the same as 

for compliance with the current related 

party transaction disclosure and 

disclosure about the board of directors 

required by existing Item 404 of 

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

Schedule 14A.336 Other revisions 

proposed to be made by moving 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6587 

337Our 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. 

In order to factor in disclosure that may be 

incorporated by reference from other filings, we 

have estimated that 496 out of 619 registration 

statements on Form S–4 would include the required 

information contemplated by these rule proposals 

through incorporation by reference to a Form 10–

K or Form 10–KSB. 

338For Form 10–KSB, we estimate that it would 

take issuers 70 additional hours to prepare the 

proposed disclosure in year one, and 25 additional 

hours in year two and 10 additional hours in year 

three and thereafter, which results in an average of 

35 additional hours over the three year period. This 

estimate assumes that the burden would be 

incurred by either including the proposed 

disclosure in the report directly or incorporating by 

reference from a proxy or information statement. 

339For Form N–2, we estimate that it would take 

business development companies 100 additional 

hours to prepare the proposed disclosure in year 

one, 50 hours in year two and 25 hours in year three 

and thereafter, which results in an average of 58 

hours for each business development company to 

comply with the proposed compensation 

disclosures that would be required on Form N–2. 

We estimate an average annual incremental 

disclosure burden of 1.675 hours per Form N–2, 

based on 58 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) (58 hours times 27 Form 

N–2 filings (including amendments) = 1,566 hours), 

divided by 935 total annual filings on Form N–2 

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

during the year ended December 31, 2005) (1,566 

hours divided by 935 filings on Form N–2 

(including amendments) = 1.675 hours per Form N–

2 (including amendments)). 

disclosure requirements relating to 

corporate governance to Item 407 of 

Regulations S–K and S–B would not 

change the substance of existing 

disclosure and would therefore not 

increase burdens, particularly for proxy 

or information statements where much 

of the disclosure is currently required. 

• 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) would in many 

cases not have been required to comply 

with the proposed disclosure 

requirements prior to filing such 

registration statements, and would 

therefore take an estimated 60 hours to 

comply with the proposed 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 would generally be required 

for presentation in the Summary 

Compensation Table, as compared to 

three years for issuers already subject to 

Exchange Act reporting requirements.337

• Small business issuers filing annual 

reports on Form 10–KSB would be 

subject to lower incremental costs than 

other issuers as a result of the proposals, 

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 

would experience higher costs in 

responding to the proposed disclosure 

requirements in the first year of 

compliance with them, 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 in subsequent 

years.338

• Small business issuers filing 

registration statements on Forms 10–SB 

and SB–2 that are not already filing 

periodic reports pursuant to Exchange 

Act Sections 13(a) or 15(d) would not 

have been required to comply with the 

proposed disclosure requirements prior 

to filing such registration statements, 

and would therefore take an estimated 

30 additional hours to comply with the 

proposed 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 would 

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 

companies to write certain sections of 

prospectuses in plain English, drafting 

documents in plain English would 

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. The plain English rule proposals 

would 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. 

• We estimate that the proposals to 

increase to $120,000 the current $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 would neither 

increase nor decrease the annual 

paperwork burden, because these forms 

are already required to disclose these 

interests, transactions, and relationships 

in amounts exceeding $60,000, and 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. 

• Business development companies 

filing Form N–2 would be required to 

include Item 402 of Regulation S–K, as 

we propose to amend it, and would 

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.339

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, 

Securities Act registration statements 

and Exchange Act registration 

statements. 


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6588 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

340The burden estimates for Form 10–K and 10–

KSB assume that the proposed 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 estimate 

that the proposed changes to executive 

compensation disclosure and corporate governance 

matters that would be included only in proxy or 

information statements (and thus not in Securities 

Act registration statements or Exchange Act reports 

or registration statement) would not, on balance, 

impose an incremental burden. 

341This is based on the number of responses 

made in the period from October 1, 2004 through 

September 30, 2005. 

342For 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 $300 per hour. The computation of 

the reduction in burden is thus based on 1,722 

fewer Form 8–Ks filed with a per filing burden of 

3.75 hours carried by the company and 1.25 hours 

at a cost of $300 per hour (or $375 per filing). 

343Comments are requested pursuant to 44 U.S.C. 

3506(c)(2)(B). 

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

PERIODIC REPORTS

Form Annual 

responses 

Incremental 

hours/form 

Incremental 

burden 75% Issuer 25% Professional 

$300 Professional cost 

(A) (B) (C) = (A)*(B) (D) = ( C)*0.75 (E) = (C)*0.25 (F) = (E)*$300 

10–K340 .................................................... 8,602 67 576,334 432,250.5 144,083.5 $43,225,050 

10–KSB .................................................... 3,504 35 122,640 91,980.0 30,660.0 9,198,000 

Total .................................................. ........................ ........................ 698,974 524,230.5 ........................ 52,423,050 

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 75% Professional 

$300 

Professional 

cost 

(A) (B) (C) = (A)*(B) (D) = (C)*0.25 (E) = (C)*0.75 (F) = (E)*$300 

10 ............................................................. 72 60 4,320 1,080.0 3,240.0 $972,000 

10–SB ...................................................... 166 30 4,980 1,245.0 3,735.0 1,120,500 

SB–2 ........................................................ 885 30 26,550 6,637.5 19,912.5 5,973,750 

S–1 ........................................................... 528 60 31,680 7,920.0 23,760.0 7,128,000 

S–4 ........................................................... 123 60 7,380 1,845.0 5,535.0 1,660,500 

S–11 ......................................................... 60 60 3,600 900.0 2,700.0 810,000 

N–2 ........................................................... 935 1.675 1,566 391.5 1,174.5 352,350 

Total .................................................. ........................ ........................ 80,076 20,019.0 ........................ 18,017,100 

2. Exchange Act Current Reports 

For purposes of the Paperwork 

Reduction Act, we estimate that the 

proposals affecting the collection of 

information requirements related to 

current reports on Form 8–K would 

reduce the annual paperwork burden by 

approximately 6,458 hours of company 

personnel time and by a cost of 

approximately $645,750 for the services 

of outside professionals. This estimate 

reflects the reduction in the number of 

filings that could result from our 

proposals. These estimates were based 

on the following assumptions: 

• The number of annual responses for 

Form 8–K is estimated to be 110,416.341

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 pursuant to Item 1.01 of 

Form 8–K. 

• Based on a review of Item 1.01 

Form 8–K filings made in September 

2005, we estimate that 6,625 of the 

22,083 current reports on Form 8–K 

filed under Item 1.01 would relate to 

executive or director compensation 

matters. 

• Based on a review of Item 1.01 

Form 8–K filings made in September 

2005, we estimate that 1,722 fewer Form 

8–Ks would be filed because of more 

focused current reporting of executive 

officer and director compensation 

transactions under proposed Item 

5.02(e) of Form 8–K.342

D. Request for Comment 

We request comment in order to: (a) 

Evaluate whether the collections of 

information are necessary for the proper 

performance of our functions, including 

whether the information will have 

practical utility; (b) evaluate the 

accuracy of our estimate of the burden 

of the collections of information; (c) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(d) evaluate whether there are ways to 

minimize the burden of the collections 

of information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology.343

Any member of the public may direct 

to us any comments concerning the 

accuracy of these burden estimates and 

any suggestions for reducing these 

burdens. Persons who desire to submit 

comments on the collection of 

information requirements should direct 

their comments to the OMB, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should send 

a copy of the comments to Nancy M. 

Morris, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–9303, with 

reference to File No. S7–03–06. 

Requests for materials submitted to the 

OMB by us with regard to this collection 

of information should be in writing, 

refer to File No. S7–03–06, and be 

submitted to the Securities and 

Exchange Commission, Office of Filings 

and Information Services, Branch of 

Records Management, 6432 General 

Green Way, Alexandria, VA 22312. 

Because the OMB is required to make a 

decision concerning the collections of 


wwhite on PROD1PC61 with PROPOSALS2
Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6589 

344Current Item 402(a)(2) of Regulation S–B 

requires compensation disclosure for all individuals 

serving as the small business issuer’s chief 

executive officer and the small business issuer’s 

four other highest paid officers other than the chief 

executive officer. 

345Current Item 402(b)(1) of Regulation S–B 

requires disclosure of compensation of the named 

executive officers for each of the last three fiscal 

years, and narrative disclosure is not currently 

required to accompany the Summary Compensation 

Table, however the proposed narrative disclosure 

would address some elements of compensation 

currently required in tables in current Item 402 of 

Regulation S–B. 

information between 30 and 60 days 

after publication, your comments are 

best assured of having their full effect if 

the OMB receives them within 30 days 

of publication. 

IX. Cost-Benefit Analysis 

A. Background 

We are proposing revisions 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 

proposed 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 also propose to revise 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 also propose to revise 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 

proposing to amend our beneficial 

ownership disclosure requirement to 

require disclosure regarding pledges of 

securities by management and directors’

qualifying shares. Finally, we are 

proposing that most of the disclosure 

that would be required under the 

proposed 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 it is 

incorporated by reference from proxy or 

information statements. 

B. Summary of Proposals 

In light of the complexity of, and 

variations in, compensation programs, 

the sometimes inflexible and highly 

formatted nature of current Item 402 of 

Regulation 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 

proposed changes to Item 402 would 

apply a broader approach that would 

eliminate some tables, simplify or 

refocus other tables, reflect total current 

compensation in the Summary 

Compensation Table, and reorganize the 

compensation table 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 would 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 would provide 

transparency regarding company 

compensation policies and procedures, 

and be sufficiently flexible to operate 

effectively as new forms of 

compensation continue to evolve. 

Under the proposals, the scope and 

presentation of information in Item 402 

of Regulation S–B would differ in a 

number of significant ways from Item 

402 of Regulation S–K. Item 402 of 

Regulation S–B would: 

• Limit the named executive officers 

for whom disclosure would be required 

to a smaller group, consisting of the 

principal executive officer and the two 

other highest paid executive officers; 344

• 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; 345

• 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 

would include expanded disclosure 

regarding holdings of previously 

awarded stock, options and similar 

instruments, which would include the 

value of stock and other similar 

incentive plan awards that had not 

vested; 

• 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 would not 

include the following disclosures that 

would be required by proposed Item 402 

of Regulation S–K: 

• Compensation Discussion and 

Analysis; 

• A third fiscal year of Summary 

Compensation Table disclosure; and 

• The supplementary Grants of 

Performance-Based Awards Table and 

Grants of All Other Equity Awards 

Table, the Option Exercises and Stock 

Vested Table, the Retirement Plan 

Potential Annual Payments and Benefits 

Table, and the Nonqualified Defined 

Contribution and Other Deferred 

Compensation Plans Table and the 

separate Potential Payments Upon 

Termination or Change-in-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. 

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 

proposed amendments to Items 1.01 and 

5.02 of Form 8–K would 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. 

Current Item 404 of Regulation S–K 

was adopted to consolidate various 

provisions previously adopted in a 

piecemeal fashion. The proposals would 

revise Item 404 of Regulation S–K to 

streamline and modernize it, while 

making it more principles-based. 

Indebtedness of related persons is 

limited by the Sarbanes-Oxley Act, and 

the disclosure requirement regarding 

indebtedness of related persons would 

be combined into the requirement 

regarding other transactions with related 

persons. This consolidated disclosure 

requirement would apply to an 

expanded group of related persons. 

While the current principles for 

disclosure would be retained, the 

proposal would increase the $60,000 

threshold for disclosure currently in 

paragraphs (a) and (c) of Item 404 to 

$120,000 and eliminate or reduce the 

scope of certain instructions delineating 


wwhite on PROD1PC61 with PROPOSALS2
6590 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

346We also propose conforming revisions to Item 

22(b) relating to the independence of members of 

nominating and audit committees of investment 

companies. 

what transactions are reportable or 

excludable. Existing disclosure 

requirements in Item 404 regarding 

transactions with promoters would 

slightly expanded 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, 

proposed 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 

would similarly increase to $120,000 

the current $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, Form N–2 would require 

business development companies to 

include the compensation disclosure 

required by Item 402 of Regulation S–

K, as we propose to amend it. 

The proposals also would replace the 

disclosure requirement for certain 

business relationships currently in Item 

404(b) of Regulation S–K, which focuses 

on relationships relevant to director 

independence, with requirements for 

director independence disclosure 

discussed below. Under the proposals, 

the disclosure currently required by 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. Proposed Item 404(b) of 

Regulation S–K would require 

disclosure regarding the company’s 

policies for the review, approval or 

ratification of transactions with related 

persons. 

We propose similar amendments to 

Item 404 of Regulation S–B, which 

would result in a more detailed related 

person transaction disclosure 

requirement than currently exists in 

Item 404 of Regulation S–B. However, 

unlike Item 404 of Regulation S–K, Item 

404 of Regulation S–B would not 

require disclosure regarding the 

company’s policies for the review, 

approval or ratification of transactions 

with related persons. We propose to 

retain 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 propose to adopt a new disclosure 

requirement in Item 407 of Regulations 

S–K and S–B that would consolidate 

disclosures required in several places 

throughout our rules addressing director 

independence, board committee 

functions and other related corporate 

governance matters. This proposed Item, 

which would require 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 the national securities 

exchanges and the inter-dealer 

quotation systems of a national 

securities association.346

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 propose to amend Item 403 

of Regulation S–K and Regulation S–B 

to require this disclosure as well as 

disclosure regarding directors’

beneficial ownership of qualifying 

shares. 

We propose to require 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 

would make these documents easier to 

understand. 

The proposed changes to Item 402 of 

Regulation S–K, Items 402 and 404 of 

Regulation S–B, and Form 8–K would 

affect all companies reporting under 

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

Act, other than registered investment 

companies. The proposed changes to 

Item 404 of Regulation S–K would 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 proposed changes to 

Items 402 and 404 of Regulation S–K 

and Regulation S–B would also affect 

additional companies filing Securities 

Act and Exchange Act registration 

statements. The proposed changes to 

Item 22(b) of Schedule 14A will affect 

business development companies and 

registered investment companies filing 

proxy statements with respect to the 

election of directors. The proposed 

changes to Form N–1A will affect openend investment companies registering 

with the Commission on Form N–1A. 

The proposed changes to Form N–2 will 

affect closed-end investment companies 

(including business development 

companies) registering with the 

Commission on Form N–2. The 

proposed 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 

proposals would be 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 would be 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 tabular 

and new quantitative estimate 

disclosure for retirement plans and 

similar benefits and director 

compensation. The proposals would 

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 

proposals also would 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 

proposals of certain forms of 

compensation, such as stock-, optionand incentive plan-based compensation, 

as well as retirement and other postemployment compensation, combined 

with the ability of investors to track the 

elements of executive and director 

compensation and the relative weights 

of those elements over time (and the 

reasons why companies allocate 


wwhite on PROD1PC61 with PROPOSALS2
Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6591 

347For 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). 

348The proposed plain English requirements 

would 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. 

compensation in the manner that they 

do), would enable investors to make 

comparisons both within and across 

companies. A presentation facilitating 

the comparability and 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 disclosure of compensation 

across companies. Disclosure of total 

compensation would 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 would 

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.347 Particularly 

with respect to the proxy statement for 

the annual meeting at which directors 

are elected, this improved disclosure 

would 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. 

We believe that the extent to which 

increased transparency and 

completeness in executive and director 

compensation disclosure would 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 

would affect investors’ decision-making 

with respect to that company. 

Improved transparency in executive 

and director compensation under these 

proposals 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 proposals, including 

requirements to disclose a total amount 

of compensation and more detail 

regarding compensation policies, could 

alter existing policies or practices in 

these areas. We emphasize that we are 

not seeking to foster any given 

directional or other impacts. Our 

objective is to increase transparency to 

enable decision-makers to make more 

informed decisions, which could result 

in different policies or practices or 

increase investor confidence in existing 

policies or practices. 

The proposed amendments to Form 

8–K would 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 would 

be filed pursuant to Item 5.02(e) of Form 

8–K. To find this information, 

shareholders and investors no longer 

would need to examine multiple Item 

1.01 disclosures relating to other 

actions. Companies would also be 

relieved of obligations to quickly report 

arguably less important compensation 

information on Form 8–K. 

The proposed amendments to Item 

404 would 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, approval or ratification of 

relationships with related persons. 

These proposals would 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 current Item 404 into a 

single combined disclosure 

requirement, the proposals would 

reduce confusion regarding the 

disclosure required when more than one 

of the item’s current provisions applies 

to a relationship. Improved corporate 

governance disclosure in proposed Item 

407 would provide investors with better 

organized and more complete 

information regarding the independence 

of members of the board of directors. In 

addition, companies would benefit from 

having one disclosure item to satisfy in 

making required corporate governance 

disclosures. The proposed amendments 

to Item 403 of Regulation S–K and 

Regulation S–B would 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. 

Proposed 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 

would decrease the disclosure burden 

imposed on registered investment 

companies 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). 

Finally, presentation in plain English 

would facilitate investor understanding 

of most of the matters contemplated by 

our proposals. 

The benefits of clearer, more useful 

disclosure are difficult to quantify. 

D. Costs 

In our view, the proposed revisions to 

the executive officer and director 

compensation disclosure requirements 

would increase the costs of complying 

with the Commission’s rules. The 

proposed revisions to the related person 

transaction, director independence and 

corporate governance disclosure 

requirements would generally not 

increase costs. We further believe that 

the costs related to preparing required 

disclosure in plain English would be 

short-term costs arising mainly in the 

first two years of implementation.348

Increased costs under the proposals 

would largely impact companies 

required to comply with the proposals; 

any net increase in costs would 

ultimately be borne by shareholders of 

those companies. If our assumptions 

regarding these costs and current 

practices are not correct or complete, 

then costs may prove to be higher. 

We believe that compliance with 

these proposals would, on balance, be 

more costly for companies than 

compliance with the existing disclosure 

requirements, with the highest 

incremental annual costs occurring 

principally in the first two years as 

companies and their advisors would 

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 

proposing would incrementally increase 


wwhite on PROD1PC61 with PROPOSALS2
6592 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

349The Compensation Discussion and Analysis, 

unlike the current Compensation Committee Report 

and the Performance Graph, but like all of the rest 

of the current compensation disclosure, would be 

considered filed and as such would be part of the 

documents for which certifications apply. 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 * * * 

[T]he 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 * * * Conversely, 

the new rule 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. 

350See current Item 402(f) of Regulation S–B and 

Item 402(g) of Regulation S–K. 

351Significant shareholders are those identified 

under proposed Instruction 1.b.(i) to Item 404 of 

Regulation S–K, that is, any security holder who is 

known to the registrant to own of record or 

beneficially more than five percent of any class of 

the registrant’s voting securities. 

costs for companies in several ways as 

a result of the new or expanded 

requirements. First, we propose that 

companies provide a Compensation 

Discussion and Analysis involving a 

discussion and analysis of material 

factors underlying compensation 

decisions reflected in the tabular 

presentations.349 Second, we propose to 

require narrative disclosure to 

accompany tabular presentations so that 

the data included in the tables may be 

understood in context. Third, we 

propose to expand disclosure regarding 

compensation-related equity-based and 

other plan-based holdings, as well as 

retirement and similar plans. Finally, 

we propose a director compensation 

table that would require more detailed 

information regarding director 

compensation than is specified in the 

current narrative disclosure 

requirement.350 Each of these proposed 

revisions would seek to elicit more 

complete and clearer information than 

is currently required under existing 

rules. 

While the Summary Compensation 

Table as proposed to be revised would 

require reporting of the grant date fair 

value of stock-based and option-based 

awards under the proposals, we do not 

believe that this change would 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 incremental 

changes in the actuarial value of 

retirement benefits for the purposes of 

reporting such compensation in the 

Summary Compensation Table. 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 would increase costs, 

because existing disclosure 

requirements already mandate the 

disclosure of all compensation, and the 

mechanical process of adding up 

disclosure amounts would not be 

significant. Additional costs may be 

incurred in preparing and presenting 

required disclosures regarding up to 

three highly paid non-executive 

employees, 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 proposals. In addition, 

because named executive officers would 

be based on total compensation rather 

than salary and bonus, some companies 

may need to track more employees to 

determine which are the most highly 

compensated. 

Under the proposals regarding Form 

8–K, disclosure regarding executive and 

director arrangements and other plans 

that would no longer be required to be 

reported within four days under Item 

1.01 of Form 8–K would 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 would 

reduce its value to investors, the 

proposals may impose costs on 

investors. 

We believe that there would not be a 

significant increase in the cost of 

complying with the related person 

transaction disclosure requirement. The 

proposals may increase the cost of 

complying with this 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’’ and also, 

in the case of indebtedness transactions, 

significant shareholders.351 Similarly, 

with respect to registered investment 

companies and business development 

companies, proposed 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 would increase to $120,000 

the current $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). 

Since these forms already require such 

disclosure using the $60,000 threshold, 

we do not believe the proposals would 

impose additional costs. 

Proposed Item 404(b) of Regulation S–

K would introduce 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 their policies for the 

review, approval or ratification of 

related person transactions or the 

determination of executive and director 

compensation we understand that 

companies would incur costs of 

collecting the type of information that 

would be required to be disclosed. 

These costs would 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 proposed rules 

would not require companies to create 

new policies for review, approval or 

ratification of relationships with related 

persons or the determination of 

executive and director compensation; 

however, to the extent that companies 

do create new policies that require the 

collection of different or additional 

information, they may incur 

incremental costs. 

The proposed disclosures regarding 

director independence are similar to 

existing 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 

proposed disclosure requirement 

regarding director independence could 

be performed by the same person or 

group of persons responsible for 

compliance under the current rules. 

Because the current rules already 

require 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 proposed disclosure 


wwhite on PROD1PC61 with PROPOSALS2
Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6593 

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 relationships 

with related persons. 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 existing disclosure 

requirements or corporate governance 

listing standards. 

We believe that, overall, the costs 

noted above that are associated with the 

proposed disclosure requirements for 

related person transactions and director 

independence will be offset by cost 

decreases associated with narrowing the 

scope of other disclosure requirements 

under the proposal. In this regard, we 

believe that companies will generally be 

required to provide an amount of 

information that is comparable to what 

is currently required by our rules, but 

under the proposals the information 

regarding these matters would be 

presented in a manner that recognizes 

recent changes such as the imposition of 

corporate governance listing standards 

at the major markets. 

Our plain English proposal would 

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 

would be required to be disclosed in 

Exchange Act reports such as annual 

reports on Forms 10–K or 10–KSB. We 

believe the proposed rules, if adopted, 

would 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 

proposals. 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 

proposals. A company would 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 could 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 proposed collection of 

information requirements to be 

approximately 537,792 hours of inhouse company personnel time and to 

be approximately $69,794,000 for the 

services of outside professionals. These 

costs are based on our estimates that the 

annual incremental disclosure burden 

imposed by the revisions that we 

propose today 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. We estimate that 

the proposed amendments to Item 22(b) 

of Schedule 14A and the proposal to 

increase to $120,000 the current $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 $645,750 

for the services of outside professionals, 

based on an estimate that 1,722 fewer 

Form 8–Ks would be filed because of 

more focused current reporting of 

compensation transactions. Based on 

these estimates for the purposes of the 

Paperwork Reduction Act and assuming 

that the cost of in-house company 

personnel time is $175, the total 

estimated incremental costs of the 

proposals would be approximately 

$163,908,000. We have not quantified 

other costs which might arise as a result 

of implementation of the rules, 

especially to the extent that such costs 

could arise as a result of changes in 

policies, practices or other behavior 

attributable to the proposed disclosure 

requirements. These costs could be 

more than those estimated for the 

purposes of the Paperwork Reduction 

Act. 

E. Request for Comment 

• We solicit quantitative data to assist 

our assessment of the benefits and costs 

of increased disclosure resulting from: 

(1) Requiring narrative disclosure 

regarding executive and director 

compensation in the form of 

Compensation Discussion and Analysis 

and narrative disclosures accompanying 

the tabular presentations, and 

eliminating the Compensation 

Committee Report and Performance 

Graph; (2) expanding disclosure, in a 

tabular format, of director 

compensation; and (3) requiring the 

more focused and in some cases 

expanded tabular presentation of 

executive compensation. We also solicit 

such data regarding the benefits and 

costs of any other aspects of the 

executive compensation disclosure 

proposals. 

• We solicit quantitative data to assist 

our assessment of the benefits and costs 

of revising the requirements for current 

reporting of executive and director 

compensation arrangements on Form 8–

K to focus on those arrangements which 

are unquestionably material. 

• We solicit quantitative data to assist 

our assessment of the benefits and costs 

of increased disclosure resulting from: 

(1) Expanding the group of related 

persons covered by current Item 404(a) 

to include additional ‘‘immediate family 

members’’; (2) expanding the required 

relationship disclosure to include 

significant shareholders as related 

persons who may have reportable 

indebtedness relationships; and (3) 

requiring disclosure of a registrant’s 

policies for approval of relationships 

involving related persons and the 

independence of directors. We also 

solicit such data regarding the benefits 

and costs of any other aspects of the 

related person transactions disclosure 

requirements. 

• Do companies currently have 

policies and procedures regarding the 

review, approval, authorization or 

ratification of relationships with related 

persons? If not, what cost would a 

company incur to institute such 

policies? 

• Are there any public companies 

that currently provide information to 

the public regarding their policies and 

procedures related to the review, 

approval, authorization or ratification of 

relationships with related persons? If so, 

is there any information available as to 

whether investors find this information 

to be useful? 

• We solicit quantitative data to assist 

our assessment of the benefits and costs 

associated with increased disclosure 

and the proposed application of plain 

English principles to the disclosure 

resulting from most of the proposed 

requirements. 

• What are the direct and indirect 

costs associated with the proposals? 

• What are the costs in the first year 

of compliance versus subsequent years? 

• We solicit comments on the degree 

to which companies already collect the 

information that the proposed rules 

would require to be disclosed. 


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6594 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

352 15 U.S.C. 78w(a)(2). 

353 15 U.S.C. 77b(b). 

354 15 U.S.C. 78c(f). 

355 15 U.S.C. 80a–2(c). 

356The principal financial officer is not specified 

as a named executive officer in Item 402 of 

Regulation S–B. 

X. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition and Capital 

Formation 

Exchange Act Section 23(a)(2) 352

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),353 Exchange Act Section 3(f) 354

and Investment Company Act Section 

2(c) 355 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. 

The proposed 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 transaction 

disclosure available to investors and the 

financial markets. These proposals 

would enhance investors’

understanding of how corporate 

resources are used, and enable 

shareholders to better evaluate the 

actions of the board of directors and 

executive officers in fulfilling their 

responsibilities. 

The proposed amendments to Form 

8–K are intended to facilitate the ability 

of investors and shareholders to access 

real-time disclosure of public 

companies’ employee compensation 

events that are unquestionably or 

presumptively material by requiring this 

disclosure only for the compensatory 

agreements with specified executive 

officers. To find this information, 

shareholders and investors no longer 

would need to examine multiple Form 

8–K disclosures relating to other 

executive officers or other material nonordinary course definitive agreements. 

The proposals to expand and 

consolidate into one item the director 

independence and related corporate 

governance disclosure requirements in 

proposed Item 407 of Regulation S–K 

would improve shareholders’ and 

investors’ understanding of the 

composition and functions of the board 

of directors and board committees. 

Proposed 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 proposal to require most of the 

information required in these proposals 

to 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 proposed rules would 

enhance existing reporting requirements 

by providing more effective material 

disclosure to investors in a timely 

manner. We anticipate that these 

proposals would improve investors’’

ability to make informed investment 

and voting decisions and, therefore lead 

to increased efficiency and 

competitiveness of the U.S. capital 

markets. 

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, would be 

required to make the proposed 

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 

current Item 402, registrants would not 

be required to disclose target levels with 

respect to specific quantitative or 

qualitative performance-related factors, 

or any factors or criteria involving 

confidential commercial or business 

information, the disclosure of which 

would have an adverse effect on 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. 

We request comment on whether the 

proposals, if adopted, would promote 

efficiency, competition, and capital 

formation or have an impact or burden 

on competition. Commenters are 

requested to provide empirical data and 

other factual support for their views, if 

possible. 

XI. Initial Regulatory Flexibility Act 

Analysis 

This Initial Regulatory Flexibility Act 

Analysis has been prepared in 

accordance with 5 U.S.C. 603. It relates 

to proposed 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,356 other 

highly paid executive officers and all 

members of the board of directors, and 

of related person transactions. These 

proposed revisions include revising 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 of 

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 all disclosure required by 

the proposed items to be provided in 

plain English. 

A. Reasons for the Proposed Action 

Since the enactment of the Securities 

Act and the Exchange Act, the 

Commission has on a number of 

occasions explored the best methods for 

communicating clear, concise and 

meaningful material information about 

executive and director compensation 

and relationships with the issuer. With 

regard to compensation, at different 

times, the Commission has adopted 

rules mandating narrative, tabular, and 

combinations of narrative and tabular 

disclosure as the best method for 

presenting compensation disclosure in a 

manner that is concise and useful to 

investors. From time to time, the 

Commission has reconsidered executive 

and director compensation information 

requirements in light of changing trends 

in executive compensation, or due to 

concerns about the usefulness of 

disclosure elicited under then 

applicable rules. Most recently, in 1992, 

the Commission proposed and adopted 

amendments to the disclosure rules that 

moved away from the mostly narrative 

disclosure approach adopted in 1983 to 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6595 

357 17 CFR 230.157. 

358 17 CFR 240.0–10(a). 

formatted tables which sought to 

capture the various elements of 

compensation and promote 

comparability from year to year and 

from company to company. 

While this tabular approach remains a 

sound basis for disclosure, its 

sometimes inflexible and formatted 

nature has, especially in light of the 

complexity of and variations in 

compensation programs, resulted in 

some cases in disclosure that does not 

clearly inform investors as to all 

elements of compensation, 

notwithstanding the express 

requirement to do so in the rules. 

Accordingly, the proposals under 

current consideration seek a broaderbased approach to eliciting executive 

compensation disclosure while 

retaining comparability. 

Form 8–K requires disclosure of the 

entry into, amendment of and 

termination of material definitive 

agreements entered into outside the 

ordinary course of business. Under our 

current definitions in Regulation S–K, 

many agreements regarding executive 

compensation are deemed to be material 

agreements entered into outside the 

ordinary course, and when for purposes 

of consistency we adopted those 

definitions for use in the expanded 

Form 8–K requirements, we 

incorporated all of these executive 

compensation agreements into the 

current Form 8–K disclosure 

requirements. Therefore, many 

agreements regarding executive 

compensation are required to be 

disclosed within four business days of 

the applicable triggering event. Because 

it was not our intent in adopting the 

expanded Form 8–K requirements to 

make all elements of compensation for 

all executive officers potential items of 

real-time disclosure, but only to capture 

in this area, as in others, events that are 

unquestionably or presumptively 

material to investors, we believe it is 

appropriate to modify our rules so that 

only those events must be disclosed on 

Form 8–K. 

We believe that disclosure of 

executive and director compensation is 

closely related to disclosure regarding 

financial transactions and relationships 

involving companies and their directors, 

executive officers, significant 

shareholders and respective immediate 

family members. These disclosure 

requirements have historically been 

interconnected, given that relationships 

among these persons 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 current related party 

transaction disclosure requirements 

were adopted piecemeal over the years 

and were combined in one disclosure 

requirement beginning in 1982. In light 

of the many developments, including 

the increasing focus on corporate 

governance and director independence, 

we believe it is necessary to revise the 

rule. We propose to replace the current 

requirement for disclosure about 

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 also propose to consolidate this and 

other requirements regarding director 

independence, board committees and 

other corporate governance matters in a 

new disclosure Item. In addition, we are 

also proposing 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 

an ‘‘interested person’’ of the fund 

within the meaning of Section 2(a)(19) 

of the Investment Company Act (and 

their immediate family members). 

To the extent that shares beneficially 

owned by named executive officers, 

directors and director nominees are 

pledged, these shares are subject to risks 

and 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, and for this 

reason, it appears that the existence of 

these securities pledges could be 

material to shareholders and should be 

disclosed under proposed revisions to 

Item 403 of Regulations S–K and S–B. 

An exclusion from the beneficial 

ownership disclosure requirement for 

directors’’ qualifying shares is also 

proposed to be removed. 

In order for most of these amended 

requirements to result in disclosure that 

is clear, concise and understandable for 

investors when responsive disclosure is 

included in Exchange Act reports or 

incorporated by reference from proxy or 

information statements, we propose to 

add Exchange Act rules to require that 

the disclosure regarding executive and 

director compensation, beneficial 

ownership, related person transactions 

and most corporate governance matters 

be provided in plain English. 

B. Objectives 

The overall goal of the rule proposals 

is to provide investors with a clearer 

and more complete picture of executive 

and director compensation, related 

person transactions and corporate 

governance matters. We believe that the 

proposals would: 

• Confirm our current requirement 

that all elements of compensation must 

be disclosed; 

• Retain the comparability of 

executive and director compensation 

while also providing material 

qualitative information about the 

context in which compensation is 

granted, awarded and earned; 

• Reorganize and modify the type of 

compensation information that must be 

disclosed in current reports; 

• Streamline and modernize the 

related person transaction disclosure 

requirements, while making them more 

principles-based; 

• Update the disclosure requirements 

regarding director independence to 

reflect current listing standards and 

consolidate all such disclosure under a 

single disclosure item so that it is easier 

to locate; and 

• Facilitate more informed voting 

decisions in the face of complex 

information about directors, executive 

officers and corporate governance, by 

requiring that most of the information 

required by these proposals be written 

in plain English. 

C. Legal Basis 

We are proposing the amendments 

pursuant to Sections 3(b), 6, 7, 10 and 

19(a) of the Securities Act; Sections 

10(b), 12, 13, 14(a), 15(d), and 23(a) of 

the Exchange Act; Sections 8, 20(a), 

24(a), 30, and 38 of the Investment 

Company Act; and Section 3(a) of the 

Sarbanes-Oxley Act of 2002. 

D. Small Entities Subject to the 

Proposed Amendments 

The proposals would 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 proposals also would 

affect small entities that file, or have 

filed, a registration statement that has 

not yet become effective under the 

Securities Act and that has not been 

withdrawn. Securities Act Rule 157 357

and Exchange Act Rule 0–10(a) 358


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6596 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

359 17 CFR 270.0–10(a). 

360Proposed Item 404(a) of Regulation S–K only 

includes $120,000 as the threshold. 

361As is the case currently, proposed Item 407 of 

Regulation S–B would not require compensation 

committee interlocks disclosure as would proposed 

Item 407 of Regulation S–K. This retains a current 

difference between Item 402 of Regulation S–B and 

Item 402 of Regulation S–K. 

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. 

We believe that the proposals would 

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.359 We believe that the proposals 

would affect small entities that are 

investment companies. We estimate that 

there are approximately 240 investment 

companies that may be considered small 

entities. 

E. Reporting, Recordkeeping and Other 

Compliance Requirements 

The proposed amendments to Item 

402 of Regulation S–K would expand 

some existing disclosure requirements, 

and consolidate or eliminate others. The 

proposed amendments to Item 402 of 

Regulation S–B would require less 

extensive disclosure for small business 

issuers than would be required for 

companies complying with Item 402 of 

Regulation S–K. Under the proposals, 

the scope and presentation of 

information in Item 402 of Regulation 

S–B would differ in a number of 

significant ways from Item 402 of 

Regulation S–K. Item 402 of Regulation 

S–B would: 

• Limit the named executive officers 

for whom disclosure would 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. 

Item 402 of Regulation S–B would not 

include the following disclosures that 

would be required by proposed Item 402 

of Regulation S–K: 

• Compensation Discussion and 

Analysis; 

• Information regarding two 

additional executives; 

• The third fiscal year of Summary 

Compensation Table disclosure; and 

• The supplementary Grants of 

Performance-Based Awards Table and 

Grants of All Other Equity Awards 

Table, the Option Exercises and Stock 

Vested Table, the Retirement Plan 

Potential Annual Payments and Benefits 

Table, and the Nonqualified Defined 

Contribution and Other Deferred 

Compensation Plans Table and the 

separate Potential Payments Upon 

Termination or Change-in-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 proposed amendments 

to Item 402 of Regulation S–B would not 

result in the same level of incremental 

increase in costs or burdens as would 

the requirements of proposed 

amendments to Item 402 of Regulation 

S–K. 

The proposed amendments to Item 

404 of Regulation S–K and S–B would 

decrease the existing related person 

transaction disclosure requirement that 

companies, including small entities, 

must comply with in some respects and 

expand it in other respects. The 

proposed amendments to Item 404 of 

Regulation S–B would 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 for the last three 

completed fiscal years.360 At the same 

time, the proposed amendments to Item 

404 of Regulation S–B would increase 

the scope of the related person 

transaction disclosure requirement by 

expanding the group of related persons 

covered to include additional 

‘‘immediate family members,’’ and in 

the case of indebtedness relationships, 

significant shareholders. In addition, the 

proposals 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 proposed amendments to 

Item 404 of Regulation S–K, the 

proposed amendments to Item 404 of 

Regulations S–B would 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 proposed amendments to 

Item 404 of Regulation S–B and 

proposed Item 407 of Regulation S–B 

would require, depending upon the 

particular circumstances of a company, 

more or less disclosure by changing the 

disclosure requirement regarding 

director independence.361

Similar to proposed Item 404(a) of 

Regulation S–K, proposed 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 would 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 current $60,000 threshold 

for disclosure of such interests, 

transactions, and relationships. 

The proposed amendments to Item 

403 of Regulation S–K and S–B would 

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 would impose an 

additional disclosure requirement on 

companies, including small entities. 

The proposed plain English rules 

applicable to Exchange Act reports and 

proxy or information statements 

incorporated by reference into Exchange 

Act reports would not affect the 

substance of disclosures that companies 

must make. The proposed plain English 

rules would also not impose any new 

recordkeeping requirements or require 

reporting of additional information. 

Other proposed changes to our rules 

would decrease the scope of the 

disclosure requirements for Form 8–K, 


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and thereby result in a reduction in the 

number of current reports on Form 8–

K filed each year. 

Overall, the proposals are expected to 

result in increased costs to all subject 

companies, large or small, as follows: 

• Incremental increase in costs is 

expected with proposed changes to 

executive and director compensation 

disclosure requirements; 

• No 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 proposed 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 proposed 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 proposed expanded director 

independence disclosure in Item 407 of 

Regulation S–K or S–B could be 

performed by the same person or group 

of persons responsible for compliance 

under the current rules at a minimal 

incremental cost. 

Our plain English proposal would 

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 

would be required to be disclosed in 

Exchange Act reports such as annual 

reports on Forms 10–K or 10–KSB. We 

believe the proposed rules, if adopted, 

would 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 

proposals. 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 would take 

issuers 70 additional hours to prepare 

the proposed disclosure in year one, 25 

additional hours in year two, and 10 

additional hours in year three and 

thereafter, which results in an average of 

35 additional hours over the three year 

period. The same estimates would 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 

would file a Form 10–K, we estimate for 

purposes of the Paperwork Reduction 

Act that it would take issuers 120 

additional hours to prepare the 

proposed disclosure in year one, and 55 

hours in year two, and 25 hours in year 

three and thereafter, which results in an 

average of 67 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 

would be performed by the company 

internally at a cost of $175 per hour and 

25% of the burden would be carried by 

outside professionals retained by the 

company at a cost of $300 per hour, the 

average annual cost to comply with the 

proposed disclosure requirements in 

periodic reports and/or proxy or 

information statements would be 

approximately $7,219. The extent to 

which an additional average compliance 

cost of approximately $7,219 per small 

entity over a three year period would 

constitute a significant economic impact 

for small entities would 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 would take 

business development companies 100 

additional hours to prepare the 

proposed disclosure in year one, 50 

hours in year two and 25 hours in year 

three and thereafter, which results in an 

average of 58 hours for each business 

development company to comply with 

the proposed compensation disclosures 

that would be required on Form N–2. If 

we assume that 25% of the burden 

would be borne internally at a cost of 

$175 per hour and 75% of the burden 

would be carried by outside 

professionals retained by the company 

at a cost of $300 per hour, the average 

annual cost for business development 

companies to comply with the proposed 

disclosure requirements on Form N–2 

would be approximately $15,588. The 

extent to which an additional average 

compliance cost of approximately 

$15,588 per small entity over a three 

year period would constitute a 

significant economic impact for small 

entities would 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. 

We encourage written comments 

regarding this analysis. We solicit 

comments as to whether the proposed 

amendments could have an effect that 

we have not considered. We request that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

the impact. 

F. Duplicative, Overlapping or 

Conflicting Federal Rules 

We believe that there are no federal 

rules that conflict with or completely 

duplicate the proposed rules. 

G. Significant Alternatives 

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 

proposals, 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 

proposed some different compliance or 

reporting requirements for small entities 

and solicited comments on others. 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 would 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 would be necessary to promote 

the goal of relatively uniform 

presentation of comparable information 

for the benefit of investors. Finally, 

although we propose to exempt some 

information required of larger issuers, a 

wholesale exemption for small entities 

would not be appropriate because the 

proposals are designed to make uniform 

the application of the disclosure and 

other requirements that would be 

amended. 


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6598 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

362 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. 363Pub. L. 104–121, Title II, 110 Stat. 857 (1996). 

We note that small business 

issuers,362 which is a broader category 

of issuers than small entities, in certain 

circumstances may provide the 

executive compensation and 

relationships with related persons and 

promoters disclosure specified, 

respectively, in Items 402 and 404 of 

Regulation S–B, rather than the 

corresponding disclosure specified in 

Items 402 and 404 of Regulation S–K. 

We have proposed disclosure 

amendments that would require clear 

and straightforward disclosure of 

executive compensation, and 

relationships with related persons and 

promoters, respectively. We have 

proposed what we believe to be 

appropriate revisions to the small 

business issuer reporting requirements 

under Regulation S–B, given that small 

business issuer compensation structures 

are likely to be less complex than those 

of registrants that are not small business 

issuers. Separate disclosure 

requirements for small entities that 

would differ from the proposed 

reporting requirements of Regulation S–

B would not yield the disclosure we 

believe to be necessary to achieve our 

disclosure objectives. In particular, we 

believe the changes that are reflected in 

the proposed amendments to Regulation 

S–B would balance the informational 

needs of investors in smaller companies 

with the burdens imposed on such 

companies by the disclosure 

requirements. 

We have used design rather than 

performance standards in connection 

with the proposals for two reasons. 

First, based on our past experience, we 

believe the proposed disclosure would 

be more useful to investors if there were 

specific informational requirements. 

The proposed mandated disclosures are 

intended to result in more focused and 

comprehensive disclosure. Second, the 

specific disclosure requirements in the 

proposals would promote more 

consistent disclosure among public 

companies because they would provide 

greater certainty as to the scope of 

required disclosure. In addition, specific 

disclosure requirements would improve 

the Commission’s ability to enforce the 

proposed rules. Therefore, amending the 

disclosure requirements of Items 402 

and 404 of Regulations S–K and 

Regulation S–B and Exchange Act Form 

8–K, and adopting Item 407 of 

Regulation S–K and S–B, appears to be 

the most effective method of eliciting 

the disclosure. 

H. Solicitation of Comment 

We encourage the submission of 

comments with respect to any aspect of 

this Initial Regulatory Flexibility 

Analysis. In particular, we request 

comments regarding: (i) The number of 

small entity issuers that may be affected 

by the proposed revisions; (ii) the 

existence or nature of the potential 

impact of the proposed revisions on 

small entity issuers discussed in the 

analysis; and (iii) how to quantify the 

impact of the proposed revisions. 

Commenters are asked to describe the 

nature of any impact and provide 

empirical data supporting the extent of 

the impact. Such comments will be 

considered in the preparation of the 

Final Regulatory Flexibility Analysis, if 

the proposed revisions are adopted, and 

will be placed in the same public file as 

comments on the proposed 

amendments. 

XII. Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996,363 a rule is ‘‘major’’ if it has 

resulted, or is likely to result in: 

• An annual effect on the U.S. 

economy of $100 million or more; 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment or innovation. 

We request comment on whether our 

proposals would be a ‘‘major rule’’ for 

purposes of the Small Business 

Regulatory Enforcement Fairness Act. 

We solicit comment and empirical data 

on: (a) the potential effect on the U.S. 

economy on an annual basis; (b) any 

potential increase in costs or prices for 

consumers or individual industries; and 

(c) any potential effect on competition, 

investment or innovation. 

XIII. Statutory Authority and Text of 

the Proposed Amendments 

We are proposing 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) and 23(a) of the Exchange Act, as 

amended, and Sections 8, 20(a), 24(a), 

30 and 38 of the Investment Company 

Act of 1940, as amended. 

List of Subjects 

17 CFR Part 228 

Reporting and recordkeeping 

requirements, Securities, Small 

businesses. 

17 CFR Parts 229, 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 forth above, we 

propose to amend Title 17, Chapter II of 

the Code of Federal Regulations 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 


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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 

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)(iii) of this Item), 

provided, however, that no disclosure need 

be provided for any executive officer, other 

than the PEO, whose total compensation 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 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 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 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. 

(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 

measure. A non-stock incentive plan is 

an incentive plan or portion of an 

incentive plan where the relevant 

performance measure is not based on 

the price of the small business issuer’s 

equity securities or the award does not 

permit settlement by issuance of the 

small business issuer’s equity securities. 

The term incentive plan award means 

an award provided under an incentive 

plan. 

(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 Total 

($) 

Salary 

($) 

Bonus 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

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 total 

compensation for the covered fiscal year 

(column (c)). With respect to each 

named executive officer, disclose the 

sum of all amounts reported in columns 

(d) through (i); 

(iv) The dollar value of base salary 

(cash and non-cash) earned by the 

named executive officer during the 

fiscal year covered (column (d)); 

(v) The dollar value of bonus (cash 

and non-cash) earned by the named 

executive officer during the fiscal year 

covered (column (e)); 

Instructions to Item 402(b)(2)(iv) and (v). 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 be 

disclosed in a filing under Item 5.02(e) of 

Form 8–K (17 CFR 249.308). 

2. Small business issuers need not include 

in the salary column (column (d)) or bonus 

column (column (e)) 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, stockbased 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 Table corresponding to that 

fiscal year (e.g., stock awards (column (f)); 

option awards (column (g)); all other 

compensation (column (i))); or if made 

pursuant to a non-stock incentive plan and 

therefore not reportable at grant in the 

Summary Compensation Table, 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. 

(vi) For awards of stock, including 

restricted stock, restricted stock units, 

phantom stock, phantom stock units, 

common stock equivalent units and 

other similar instruments that do not 

have option-like features, the aggregate 

grant date fair value computed in 

accordance with Financial Accounting 

Standards Board Statement of Financial 

Accounting Standards No. 123 (revised 

2004), Share-Based Payment (‘‘FAS 

123R’’), as modified or supplemented, 

applying the same valuation model and 

assumptions as the small business 

issuer applies for financial statement 

reporting purposes, and all earnings on 

any outstanding awards (column (f)); 

(vii) For awards of stock options, with 

or without tandem SARs, freestanding 

SARs and other similar instruments 

with option-like features (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R applying the same valuation 

model and assumptions as the small 

business issuer applies for financial 

statement reporting purposes, and all 

earnings on any outstanding awards 

(column (g)); 

Instructions to Item 402(b)(2)(vi) and (vii). 

1. For awards reported in columns (f) and (g), 

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 402. 

2. If at any time during the last completed 

fiscal year, the small business issuer has 

adjusted or amended the exercise price of 

stock 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 (g), the total fair value of options or 

SARs as so repriced or modified, measured 

as of the repricing or modification date. 

3. All earnings on outstanding awards must 

be identified and quantified in a footnote to 

column (f) or (g), as applicable, whether the 

earnings were paid during the fiscal year, 

payable during the period but deferred, or 

payable by their terms at a later date. 

(viii) The dollar value of all earnings 

for services performed during the fiscal 

year pursuant to non-stock based 

incentive plans as defined in paragraph 

(a)(5)(iii) of this Item, and all earnings 

on any outstanding non-stock incentive 

plan awards (column (h)); 

Instructions to Item 402(b)(2)(viii). 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-stock incentive plan 

compensation must be identified and 

quantified in a footnote to column (h), 

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. 

(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 (d)–(h) 

must be reported in this column. 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 earnings on compensation that 

is deferred on a basis that is not taxqualified, including such earnings on 

non-qualified defined contribution 

plans; 

(C) All ‘‘gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 

(D) 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 

computed in accordance with FAS 123R 

applying the same valuation model and 

assumptions as the small business 

issuer applies for financial statement 

reporting purposes; 

(E) 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; 

(F) Small business issuer 

contributions or other allocations to 

vested and unvested defined 

contribution plans; 

(G) The aggregate increase in actuarial 

value to the named executive officer of 

all defined benefit and actuarial pension 

plans (including supplemental plans) 

accrued during the small business 

issuer’s covered fiscal year; and 

(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 named executive 

officer. 

Instructions to Item 402(b)(2)(ix). 1. 

Incentive plan awards and earnings and 

earnings on restricted stock, options, SARs 

and similar awards are required to be 

reported elsewhere as provided herein. These 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6601 

amounts and amounts received on exercise of 

options and SARs are not reportable as All 

Other Compensation in column (i). 

2. Benefits paid pursuant to defined benefit 

and actuarial plans are reportable as All 

Other Compensation in column (i) if paid to 

the named executive officer during the 

period covered by the Table. Otherwise 

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)(C) 

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 

and its subsidiaries. 

5. Regarding paragraph (b)(2)(ix)(B) of this 

Item, 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. Footnote 

disclosure may be provided disclosing the 

portion of any earnings that the registrant 

considers to be paid at an above-market rate, 

provided that the footnote explains the small 

business issuer’s criteria for determining the 

portion considered to be above-market. 

6. The disclosure required pursuant to 

paragraph (b)(2)(ix)(G) 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 

employee retirement plans, but excluding 

tax-qualified defined contribution plans and 

nonqualified defined contribution plans. 

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), 

78o(d)) at any time during that year, except 

that the small business issuer will be 

required to provide information for 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. 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. Amounts deferred at the election of a 

named executive officer or at the direction of 

the small business issuer, 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. The amount so deferred must 

be disclosed in a footnote to the applicable 

column. 

(c) Narrative disclosure to summary 

compensation table. (1) 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: 

(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, SAR 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 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 (h) 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. 

(iv) The material terms of each grant, 

including but not limited to 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. 

(v) The material terms of any nonoption and non-SAR 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. 

(vi) The assumptions underlying any 

determination of an increase in the 

actuarial value of defined benefit and 

actuarial plans and the method of 

calculating earnings on deferred 

compensation plans including defined 

contribution plans. 

(vii) 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 paragraphs 

(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. 

(2) 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 named executive officers, 

disclose each of such employee’s total 

compensation for that year and describe 

their job positions. 

(d) Outstanding equity awards at 

fiscal year-end table. (1) Provide the 

information specified in paragraph 

(d)(2) of this Item, concerning the 

number and value of unexercised 

options, SARs and similar instruments 

and nonvested stock (including 

restricted stock, restricted stock units or 

other similar instruments) and incentive 

plan awards for each named executive 

officer outstanding as of the end of the 

small business issuer’s last completed 

fiscal year on an aggregated basis in the 

following tabular format: 


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6602 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name 

Number of 

securities underlying 

unexercised 

options 

(#) 

exercisable/ 

unexercisable 

In-the-money 

amount of 

unexercised 

option 

(#) 

exercisable/ 

unexercisable 

Number of 

shares or 

units of 

stock held 

that have 

not vested 

(#) 

Market 

value of 

shares or 

units of 

stock held 

that have 

not vested 

($) 

Incentive 

plans: number of nonvested 

shares, 

units or 

other rights 

held 

(#) 

Incentive 

plans: market or payout value of 

nonvested 

shares, 

units or 

other rights 

held 

($) 

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

PEO .............................................................................

A ..................................................................................

B ..................................................................................

(2) The Table shall include: 

(i) The name of the executive officer 

(column (a)); 

(ii) The total number of securities 

underlying unexercised options, SARs 

and similar instruments with optionlike features held at the end of the last 

completed fiscal year, including awards 

that have been transferred, separately 

identifying the exercisable and 

unexercisable options, SARs and similar 

instruments (column (b)); 

(iii) The aggregate in-the-money 

amount of unexercised options, SARs 

and similar instruments with optionlike features held at the end of the fiscal 

year, including awards that have been 

transferred, separately identifying the 

exercisable and unexercisable options, 

SARs and similar instruments (column 

(c)); 

(iv) The total number of nonvested 

shares of stock (including restricted 

stock, restricted stock units or similar 

instruments that do not have option-like 

features) held at the end of the fiscal 

year (column (d)); 

(v) The aggregate market value of 

nonvested shares of stock (including 

restricted stock, restricted stock units or 

similar instruments that do not have 

option-like features) held at the end of 

the fiscal year (column (e)); 

(vi) The total number of nonvested 

shares, units or other rights awarded 

under any incentive plan, and, if 

applicable the number of shares 

underlying any such unit or right, held 

at the end of the fiscal year (column (f)); 

and 

(vii) The aggregate market or payout 

value of nonvested shares, units or other 

rights awarded under any incentive plan 

held at the end of the fiscal year 

(column (g)). 

Instructions to Item 402(d)(2). 1. In the title 

of the table, specify the applicable fiscal year 

of the small business issuer. 

2. Options, SARs or similar instruments are 

in-the-money if the market price of the 

underlying securities exceeds the exercise or 

base price of the option, SAR or similar 

instrument. Compute the amounts in column 

(c) by determining the difference between the 

market price at fiscal year-end of the 

securities underlying the options, SARs or 

similar instruments and the exercise or base 

price of the options, SARs or similar 

instruments. 

3. The expiration dates of options, SARs 

and similar instruments held at fiscal yearend, separately identifying the exercisable 

and unexercisable options, SARs and similar 

instruments must be disclosed by footnote to 

column (b). If the expiration date of an 

option, SAR or similar instrument held at 

fiscal year-end subsequently has occurred, 

state whether it was exercised or expired 

unexercised. The vesting dates of restricted 

stock shares and similar instruments and 

incentive plan awards held at fiscal-year end 

must be disclosed by footnotes to columns 

(d) and (f), respectively. 

4. Compute the market values of stock 

(including restricted stock, restricted stock 

units or similar instruments) holdings 

reported in column (e) and equity-based 

incentive plan awards reported in column (g) 

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 restricted stock or incentive plan 

award holdings, respectively. 

(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 employee 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 

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 Total 

($) 

Fees 

earned or 

paid in cash 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

A .......................................................................................

B .......................................................................................

C .......................................................................................


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DIRECTOR COMPENSATION—Continued 

Name Total 

($) 

Fees 

earned or 

paid in cash 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

D .......................................................................................

E .......................................................................................

(2) The Table shall include: 

(i) The name of each director, unless 

such director is also a named executive 

officer under Item 402(a) and his or her 

compensation for service as a director is 

fully reflected in the Summary 

Compensation Table pursuant to Item 

402(b) and otherwise as required 

pursuant to Items 402(c) and (e) 

(column (a)); 

(ii) The dollar value of total 

compensation for the covered fiscal year 

(column (b)). With respect to each 

director, disclose the sum of all amounts 

reported in columns (c) through (g); 

(iii) 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 (c)); 

(iv) For awards of stock, including 

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, the aggregate grant 

date fair value computed in accordance 

with FAS 123R, applying the same 

valuation model and assumptions as the 

small business issuer applies for 

financial statement reporting purposes, 

and all earnings on any outstanding 

awards (column (d)); 

(v) For awards of stock options, with 

or without tandem SARs, freestanding 

SARs and other similar instruments 

with option-like features (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R applying the same valuation 

model and assumptions as the small 

business issuer applies for financial 

statement reporting purposes, and all 

earnings on any outstanding awards 

(column (e)); 

Instruction to Item 402(f)(2)(iv) and (v). 

Disclose, for each director, by footnote to the 

appropriate column, the outstanding equity 

awards at fiscal year end as would be 

required if the tabular presentation for named 

executive officers specified in paragraph (d) 

of this Item were required for directors. 

(vi) The dollar value of all earnings 

for services performed during the fiscal 

year pursuant to non-stock-based 

incentive plans as defined in paragraph 

(a)(5)(iii) of this Item, and all earnings 

on any outstanding awards (column (f)); 

and 

(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 for the last 

completed fiscal year that is not 

properly reportable in columns (c)–(f) 

must be reported in this column and 

must be identified and quantified in a 

footnote if it is deemed material in 

accordance with paragraph (c)(6) of this 

Item. Such compensation must include, 

but is not limited to: 

(A) All perquisites and other personal 

benefits, or property, unless the 

aggregate amount of such compensation 

is less than $10,000; 

(B) All earnings on compensation that 

is deferred on a basis that is not taxqualified; 

(C) All amounts reimbursed during 

the fiscal year for the payment of taxes; 

(D) 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 

computed in accordance with FAS 123R 

applying the same valuation model and 

assumptions as the small business 

issuer applies for financial statement 

reporting purposes; 

(E) 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; 

(F) The aggregate increase in actuarial 

value to the director of all defined 

benefit and actuarial pension plans 

(including supplemental plans) accrued 

during the small business issuer’s 

covered fiscal year; 

(G) Small business issuer 

contributions or other allocations to 

vested and unvested defined 

contribution plans; 

(H) Consulting fees earned from, or 

paid or payable by the small business 

issuer and/or its subsidiaries (including 

joint ventures); 

(I) The annual costs of payments and 

promises of payments pursuant to 

director legacy programs and similar 

charitable award programs; and 

(J) 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. 

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)(I) of this Item. Provide 

footnote disclosure of the total dollar amount 

and other material terms of each such 

program for which tabular disclosure is 

provided. 

Instruction to Item 402(f)(2). Two or more 

directors may be grouped in a single row in 

the table if all of their elements of 

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 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. 


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6604 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

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 

3 to paragraph (b) of this Item; the 

Instructions to paragraphs (b)(2)(iv) and (v) of 

this Item; the Instructions to paragraphs 

(b)(2)(vi) and (vii) of this Item; the 

Instructions to paragraph (b)(2)(viii) of this 

Item; the Instructions to paragraph (b)(2)(ix) 

of this Item; and paragraph (c)(6) 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 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 of shares 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 and promoters. 

(a) Transactions with related persons. 

Describe any transaction during the last 

two years, 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 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 each transaction 

and of the amount of the related 

person’s interest in each transaction 

each of which shall be computed 

without regard to the amount of profit 

or loss. 

(4) In the case of indebtedness, 

disclosure of the amount involved in the 

transaction shall include the largest 

aggregate amount of principal 

outstanding during the last two years, 

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. 

(5) 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 any 

of the foregoing persons, which means any 

child, stepchild, parent, stepparent, spouse, 

sibling, mother-in-law, father-in-law, son-inlaw, daughter-in-law, brother-in-law, or 

sister-in-law, and any person (other than a 

tenant or employee) sharing the household of 

a related person identified in paragraph 1.a.i. 

or 1.a.ii. of this instruction; 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. 

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. 

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 transactions involving 

indebtedness, 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. 

5. 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: 

a. The compensation arising from the 

relationship or transaction is reported 

pursuant to Item 402 (§ 228.402); or 

b. The executive officer is not an 

immediate family member of a related person 

(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 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6605 

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 as such by 

the compensation committee of the board of 

directors (or group of independent directors 

performing a similar function) of the small 

business issuer. 

6. Disclosure of compensation to a director 

need not be provided pursuant to paragraph 

(a) of this Item if the compensation is 

reportable pursuant to Item 402(f) 

(§ 228.402(f)). 

7. In the case of a transaction involving 

indebtedness, 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: 

a. Were made in the ordinary course of 

business; 

b. 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 

c. Did not involve more than the normal 

risk of collectibility or present other 

unfavorable features. 

8. 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 which 

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. 

9. 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. 

(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. (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 therefor 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. 

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 

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 a national securities 

association 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 member of a specific 

committee, use those committee specific 

standards. 


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6606 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

(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 or Form 10–SB (§ 249.210 or 

§ 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 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, identify the most 

recent fiscal years 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 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. 

Instruction to Item 407(a). 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 

sections 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. 

(b) Board meetings and committees. 

(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 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 (d)(4) 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; 


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(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 one-year period as of the date of the 

recommendation. 

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), 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), 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 

small business issuer’s Annual Report 

on Form 10–K (17 CFR 249.310) 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 you meet the following 

requirements, provide the disclosure in 

paragraph (d)(4)(ii) of this Item: 

(A) You are a listed issuer, as defined 

in § 240.10A–3 of this chapter; 

(B) You are 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 


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taken with respect to the election of 

directors; and 

(C) You are 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 

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 

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 


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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 each 

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, the material elements of the 

instructions or directions given to the 

consultants with respect to the 

performance of their duties under the 

engagement and identifying the 

executive officer within the small 

business issuer the consultants 

contacted in carrying out their 

assignment. 

(f) Shareholder communications and 

annual meeting attendance. (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. 

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 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 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, 

80a–31(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) 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)). 

* * * * * 

§ 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), 78o(d)) for the twelve 

months immediately prior to the filing 

of the registration statement, report, or 

statement to which this Item is 


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6610 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

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 (l) 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)(iii) of this Item), 

provided, however, that no disclosure need 

be provided for any executive officer, other 

than the PEO and PFO, whose total 

compensation 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 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 required to be 

reported in that table or column in any 

fiscal year covered by that table. 

(6) Definitions. For purposes of this 

Item: 

(i) 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. 

(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 

documents, 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. A nonstock incentive plan is an incentive plan 

or portion of an incentive plan where 

the relevant performance measure is not 

based on the price of the registrant’s 

equity securities or the award does not 

permit settlement by issuance of 

registrant equity securities. The term 

incentive plan award means an award 

provided under an incentive plan. 

(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 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 and not 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 

long-term and currently paid out 

compensation; 

(ii) The policies for allocating 

between cash and non-cash 


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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 longterm goals, management’s exposure to 

downside equity performance risk, 

correlation between cost to registrant 

and expected benefits to the registrant); 

(iv) For equity-based compensation, 

how the determination is made as to 

when awards are granted; 

(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 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; 

(vii) How specific forms of 

compensation are structured to reflect 

these items of the registrant’s 

performance, including 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 an award); 

(viii) The factors considered in 

decisions to increase or decrease 

compensation materially; 

(ix) How compensation or amounts 

realizable from prior compensation (e.g., 

gains from prior option or stock awards) 

are considered in setting other elements 

of compensation (e.g., how gains from 

prior option or stock awards are 

considered in setting retirement 

benefits); 

(x) The impact of the accounting and 

tax treatments of the particular form of 

compensation; 

(xi) 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; 

(xii) 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 

(xiii) 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. 

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, and shall not use boilerplate 

language or repeat 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 factors or criteria involving 

confidential commercial or business 

information, the disclosure of which would 

have an adverse effect on the registrant. 

(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 Total ($) 

Salary 

($) 

Bonus 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

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 total 

compensation for the covered fiscal year 

(column (c)). With respect to each 

named executive officer, disclose the 

sum of all amounts reported in columns 

(d) through (i); 

(iv) The dollar value of base salary 

(cash and non-cash) earned by the 

named executive officer during the 

fiscal year covered (column (d)); 

(v) The dollar value of bonus (cash 

and non-cash) earned by the named 

executive officer during the fiscal year 

covered (column (e)); 

Instructions to Item 402(c)(2)(iv) and (v). 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 


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the amount of salary or bonus is expected to 

be determined, and such amount must be 

disclosed in a filing under Item 5.02(e) of 

Form 8–K (17 CFR 249.308). 

2. Registrants need not include in the 

salary column (column (d)) or bonus column 

(column (e)) any amount of salary or bonus 

forgone at the election of a named executive 

officer pursuant to a registrant’s program 

under which stock, stock-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 (f)); 

option awards (column (g)); all other 

compensation (column (i)); or if made 

pursuant to a non-stock incentive plan and 

therefore not reportable at grant in the 

Summary Compensation Table, a footnote 

must be added to the salary or bonus column 

so disclosing and referring to the Grants of 

Performance-Based Awards Table (required 

by paragraph (d) of this Item) where the 

award is reported. 

(vi) For awards of stock, including 

restricted stock, restricted stock units, 

phantom stock, phantom stock units, 

common stock equivalent units and 

other similar instruments that do not 

have option-like features, the aggregate 

grant date fair value computed in 

accordance with Financial Accounting 

Standards Board Statement of Financial 

Accounting Standards No. 123 (revised 

2004), Share-Based Payment (‘‘FAS 

123R’’), as modified or supplemented, 

applying the same valuation model and 

assumptions as the registrant applies for 

financial statement reporting purposes, 

and all earnings on any outstanding 

awards (column (f)); 

(vii) For awards of stock options, with 

or without tandem SARs, freestanding 

SARs and other similar instruments 

with option-like features (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R applying the same valuation 

model and assumptions as the registrant 

applies for financial statement reporting 

purposes, and all earnings on any 

outstanding awards (column (g)); 

Instructions to Item 402(c)(2)(vi) and (vii). 

1. For awards reported in columns (f) and (g), 

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 stock 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 registrant shall include, as 

awards required to be reported in column (g), 

the total fair value of options or SARs as so 

repriced or modified, measured as of the 

repricing or modification date. 

3. All earnings on outstanding awards must 

be identified and quantified in a footnote to 

column (f) or (g), as applicable, whether the 

earnings were paid during the fiscal year, 

payable during the period but deferred, or 

payable by their terms at a later date. 

(viii) The dollar value of all earnings 

for services performed during the fiscal 

year pursuant to awards under nonstock incentive plans as defined in 

paragraph (a)(6)(iii) of this Item, and all 

earnings on any outstanding awards 

(column (h)); and 

Instructions to Item 402(c)(2)(viii). 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-stock incentive plan 

compensation must be identified and 

quantified in a footnote to column (h), 

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. 

(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 (d)–(h) must be reported in this 

column and must be identified and 

quantified in a footnote if the amount of 

the item exceeds $10,000 (or in the case 

of any perquisite or personal benefit, 

must be identified unless the aggregate 

value of perquisites and personal 

benefits is less than $10,000, and must 

be quantified if it is valued at the greater 

of $25,000 or 10% of total perquisites 

and other personal benefits as specified 

in Instruction 3 to this paragraph). 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 earnings on compensation that 

is deferred on a basis that is not taxqualified, including such earnings on 

non-qualified defined contribution 

plans; 

(C) All ‘‘gross-ups’’ or other amounts 

reimbursed during the fiscal year for the 

payment of taxes; 

(D) 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 

computed in accordance with FAS 123R 

applying the same valuation model and 

assumptions as the registrant applies for 

financial statement reporting purposes; 

(E) 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; 

(F) Registrant contributions or other 

allocations to vested and unvested 

defined contribution plans; 

(G) The aggregate increase in actuarial 

value to the named executive officer of 

all defined benefit and actuarial pension 

plans (including supplemental plans) 

accrued during the registrant’s covered 

fiscal year; and 

(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 named executive officer. 

Instructions to Item 402(c)(2)(ix). 1. 

Incentive plan awards and earnings; earnings 

on restricted stock, options, SARs and similar 

awards; and amounts received on exercise of 

options and SARs 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 reportable as All 

Other Compensation in column (i) if paid to 

the named executive officer during the 

period covered by the Table. Otherwise 

information concerning these plans is 

reportable pursuant to paragraph (i) of this 

Item. 

3. Each perquisite or personal benefit must 

be identified by type unless the aggregate 

value of perquisites and personal benefits is 

less than $10,000 and each perquisite or 

personal benefit that exceeds the greater of 

$25,000 or 10% of the total amount of 

perquisites and personal benefits must be 

quantified for a named executive officer 

pursuant to paragraph (c)(2)(ix)(A) of this 

Item, and each item reported for a named 

executive officer pursuant to paragraph 

(c)(2)(ix) of this Item that exceeds $10,000 


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must be identified by type and amount in a 

footnote to column (i). All items of 

compensation are required to be included in 

the Summary Compensation Table without 

regard to whether such items are required to 

be so identified. Reimbursements of taxes 

owed with respect to perquisites or other 

personal benefits are subject to inclusion in 

column (i) and to separate quantification and 

identification as tax reimbursements 

(paragraph (c)(2)(ix)(C) of this Item) even if 

the associated perquisites or other personal 

benefits are not required to be separately 

quantified or the perquisite or other personal 

benefit is 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 registrant and its 

subsidiaries. 

5. Regarding paragraph (c)(2)(ix)(B) of this 

Item, 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. Footnote 

disclosure may be provided disclosing the 

portion of any earnings that the registrant 

considers to be paid at an above-market rate, 

provided that the footnote explains the 

registrant’s criteria for determining the 

portion considered to be above market. 

6. The disclosure required pursuant to 

paragraph (c)(2)(ix)(G) 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 

employee retirement plans, but excluding 

tax-qualified defined contribution plans and 

nonqualified defined contribution plans. 

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), 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. 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 (l) of this Item. 

4. Amounts deferred at the election of a 

named executive officer or at the direction of 

the registrant, 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. The amount so deferred must 

be disclosed in a footnote to the applicable 

column. 

(d) Grants of performance-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 performance-based plan 

(including a performance-based portion 

of any plan), including awards that 

subsequently have been transferred, in 

the following tabular format: 

GRANTS OF PERFORMANCE-BASED AWARDS

Name 

Performance-based 

stock and 

stock-based 

incentive 

plans: number of 

shares, 

units or 

other rights 

(#) 

Performance-based 

options: 

number of 

securities 

underlying 

options 

(#) 

Non-stock 

incentive 

plan 

awards: 

number of 

units or 

other rights 

(#) 

Dollar 

amount of 

consideration paid 

for award, if 

any 

($) 

Grant date 

for stock or 

option 

awards 

Performance or 

other period 

until vesting 

or payout 

and option 

expiration 

date 

Estimated future payouts 

Threshold 

($) 

or 

(#) 

Target 

($) 

or 

(#) 

Maximum 

($) 

or 

(#) 

(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) The number of shares of 

performance-based stock, including 

restricted stock, restricted stock units, 

phantom stock, phantom stock units, 

common stock equivalent units or 

similar instruments that do not have 

option-like features granted under an 

award, and the number of shares, units 

or other rights granted under an award 

under any stock-based incentive plan 

(and if applicable, the number of shares 

underlying any such unit or right) 

(column (b)); 

(iii) The number of performancebased options, SARs, and similar 

instruments with option-like features 

(column (c)) granted under an award 

under any such plan; 

(iv) The number of units or other 

rights granted under an award under 

any non-stock incentive plan (column 

(d)); 

(v) The dollar amount of 

consideration, if any, paid by the 

executive officer for the award (column 

(e)); 

(vi) The grant date for stock, option or 

similar awards reported in columns (b) 

and (c) (column (f)); 

(vii) The performance or other time 

period until earning, payout or 

maturation of the award, and the 

option/SAR expiration date (column 

(g)); and 

(viii) The dollar value of the estimated 

future payout or the number of shares to 

be awarded in the future as the payout 

on satisfaction of the conditions in 

question, or the applicable range of 

estimated payouts denominated in 

dollars or number of shares under the 

award (threshold, target and maximum 

amount) (columns (h) through (j)). 

Instructions to Item 402(d). 1. Separate 

disclosure shall be provided in the Table for 

each grant of an award made to a named 

executive officer, accompanied by the 

information specified in Instruction 2 to this 

paragraph. 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. 


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2. For column (h), threshold refers to the 

minimum amount payable for a certain level 

of performance under the plan. For column 

(i), target refers to the amount payable if the 

specified performance target(s) are reached. 

For column (j), maximum refers to the 

maximum payout possible under the plan. If 

the award provides only for a single 

estimated payout, that amount should be 

reported as the target in column (i). In 

column (i), registrants must provide a 

representative amount based on the previous 

fiscal year’s performance if the target amount 

is not determinable. 

3. A tandem grant of two instruments, only 

one of which is performance-based, such as 

an option granted in tandem with a 

performance share, need be reported only in 

the table applicable to the other instrument. 

For example, an option granted in tandem 

with a performance share would be reported 

only as an option grant, with the tandem 

feature noted. 

4. Options, SARs and similar option-like 

instruments granted in connection with a 

repricing transaction shall be reported in this 

table. See Instruction 2 to paragraphs 

(c)(2)(vi) and (vii) of this item. 

(e) Grants of all other equity awards 

table. (1) Provide the information 

specified in paragraph (e)(2) of this 

Item, concerning each grant of an 

equity-based award that is not 

performance-based (including awards 

that subsequently have been transferred) 

made during the last completed fiscal 

year to each of the named executive 

officers in the following tabular format: 

GRANTS OF ALL OTHER EQUITY AWARDS

Name 

Number of 

securities 

underlying 

options 

granted 

(#) 

Exercise or 

base price 

($/Sh) 

Expiration 

date 

Number of 

shares of 

stock or 

units granted 

(#) 

Vesting date Grant date 

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

PEO ..................................................................................

PFO ..................................................................................

A .......................................................................................

B .......................................................................................

C .......................................................................................

(2) The Table shall include, with 

respect to each grant: 

(i) The name of the executive officer 

(column (a)); 

(ii) The number of securities 

underlying options, SARs and similar 

option-like instruments granted that are 

not performance-based (column (b)); 

(iii) The per-share exercise or base 

price of the options, SARs and similar 

option-like instruments granted (column 

(c)). If such exercise or base price is less 

than the market price of the underlying 

security on the date of the grant, a 

separate, adjoining column shall be 

added showing market price on the date 

of the grant; 

(iv) The expiration date of the 

options, SARs and similar option-like 

instruments (column (d)); 

(v) The number of shares of stock, 

including restricted stock, units and 

similar instruments that are not optionlike, granted that are not performancebased (column (e)); 

(vi) The vesting date of the restricted 

shares, units and similar instruments 

(column (f)); and 

(vii) The grant date of any options, 

stock or similar instruments reported in 

columns (b) and (e) (column (g)). 

Instructions to Item 402(e). 1. The awards 

reportable in this Table are share-based 

awards that are not subject to a performance 

condition or a market condition, as those 

terms are defined in FAS 123R. 

2. If more than one award was made to a 

named executive officer during the last 

completed fiscal year, a separate line should 

be used to disclose each such award. 

However, multiple option grants during a 

single fiscal year may be aggregated where 

each grant was made at the same exercise 

and/or base price and has the same 

expiration date. A single grant consisting of 

options, SARs and/or similar option-like 

instruments shall be reported as separate 

grants with respect to each tranche with a 

different exercise and/or base price or 

expiration date. 

3. Options, SARs and similar option-like 

instruments granted in connection with a 

repricing transaction shall be reported in this 

Table. See Instruction 2 to paragraphs 

(c)(2)(vi) and (vii) of this Item. 

4. Any material term of the grant or award, 

including but not limited to the date of 

exercisability, the number and nature of any 

tandem instruments, a reload feature, or a 

tax-reimbursement feature, must be described 

in a footnote. 

5. If any provision of a grant or award 

(other than an antidilution provision) could 

cause the exercise price to be lowered, 

registrants must disclose that provision and 

its potential consequences either by a 

footnote or accompanying textual narrative. 

6. In determining if the exercise or base 

price of the options, SARs and similar 

option-like instruments is less than the 

market price of the underlying security on 

the date of the grant, the registrant may use 

either the closing price per share of the 

security on an established public trading 

market on the date of the grant, or if no such 

market exists, any other formula prescribed 

for the security. 

(f) Narrative disclosure to summary 

compensation table and subsidiary 

tables. (1) Provide a narrative 

description of any material factors 

necessary to an understanding of the 

information disclosed in the tables 

required by paragraphs (c), (d) and (e) 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, SAR 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 

(including restricted stock, restricted 

stock units or other similar 

instruments), and if so, the applicable 

dividend rate and whether that rate is 

preferential. Describe the performancebased conditions, and any other 

material conditions, that are applicable 

to the award. Registrants are not 

required to disclose any factor, criteria 

or performance-related or other 

condition to payout or maturation of a 


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particular award that involves 

confidential commercial or business 

information, disclosure of which would 

adversely affect the registrant’s 

competitive position. For purposes of 

the Table required by paragraph (d) of 

this Item and the narrative disclosure 

required by paragraph (f) of this Item, 

performance-based conditions include 

both performance conditions and 

market conditions, as those terms are 

defined in FAS 123R. 

(iv) 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 reported in column 

(h) to the Summary Compensation Table 

required by paragraph (c) 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. 

(v) The assumptions underlying any 

determination of an increase in the 

actuarial value of defined benefit and 

actuarial plans and the method of 

calculating earnings on deferred 

compensation plans including defined 

contribution plans. 

Instruction to Item 402(f)(1). 1. Include a 

discussion of provisions regarding posttermination compensation only to the extent 

disclosure of such compensation is required 

in the Summary Compensation Table 

pursuant to paragraph (c)(2)(ix)(E) of this 

Item; otherwise disclose these provisions 

pursuant to paragraph (k) of this Item. 

2. The disclosure required by paragraph 

(f)(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. 

(2) 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, disclose each of such 

employee’s total compensation for that 

year and describe their job positions. 

(g) Outstanding equity awards at 

fiscal year-end table. (1) Provide the 

information specified in paragraph (g)(2) 

of this Item, concerning the number and 

value of unexercised options, SARs and 

similar instruments; nonvested stock 

(including restricted stock, restricted 

stock units or other similar 

instruments); and incentive plan awards 

for each named executive officer 

outstanding as of the end of the 

registrant’s last completed fiscal year on 

an aggregated basis in the following 

tabular format: 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name 

Number of 

securities underlying 

unexercised 

options 

(#) 

exercisable/ 

unexercisable 

In-the-money 

amount of 

unexercised 

options 

($) 

exercisable/ 

unexercisable 

Number of 

shares or 

units of 

stock held 

that have 

not vested 

(#) 

Market 

value of 

nonvested 

shares or 

units of 

stock held 

that have 

not vested 

($) 

Incentive 

plans: number of nonvested 

shares, 

units or 

other rights 

held 

(#) 

Incentive 

plans: market or payout value of 

nonvested 

shares, 

units or 

other rights 

held 

($) 

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

PEO .............................................................................

PFO .............................................................................

A ..................................................................................

B ..................................................................................

C ..................................................................................

(2) The Table shall include: 

(i) The name of the named executive 

officer (column (a)); 

(ii) The total number of securities 

underlying unexercised options, SARs 

and similar instruments with optionlike features held at the end of the last 

completed fiscal year, including awards 

that have been transferred, separately 

identifying the exercisable and 

unexercisable options, SARs and similar 

instruments (column (b)); 

(iii) The aggregate in-the-money 

amount of unexercised options, SARs 

and similar instruments with optionlike features held at the end of the fiscal 

year, including awards that have been 

transferred, separately identifying the 

exercisable and unexercisable options, 

SARs and similar instruments (column 

(c)); 

(iv) The total number of nonvested 

shares of stock (including restricted 

stock, restricted stock units or similar 

instruments that do not have option-like 

features) held at the end of the fiscal 

year (column (d)); 

(v) The aggregate market value of 

nonvested shares of stock (including 

restricted stock, restricted stock units or 

similar instruments that do not have 

option-like features) held at the end of 

the fiscal year (column (e)); 

(vi) The total number of nonvested 

shares, units or other rights awarded 

under any incentive plan, and, if 

applicable the number of shares 

underlying any such unit or right, held 

at the end of the fiscal year (column (f)); 

and 

(vii) The aggregate market or payout 

value of nonvested shares, units or other 

rights awarded under any incentive plan 

held at the end of the fiscal year 

(column (g)). 

Instructions to Item 402(g)(2). 1. Options, 

SARs or similar instruments are in-themoney if the market price of the underlying 

securities exceeds the exercise or base price 

of the option, SAR or similar instrument. 

Compute the amounts in column (c) by 

determining the difference between the 

market price at fiscal year-end of the 

securities underlying the options, SARs or 

similar instruments and the exercise or base 

price of the options, SARs or similar 

instruments. 

2. The expiration dates of options, SARs 

and similar instruments held at fiscal yearend, separately identifying the exercisable 

and unexercisable options, SARs and similar 

instruments must be disclosed by footnote to 

column (b). If the expiration date of an 

option, SAR or similar instrument held at 

fiscal year-end subsequently has occurred, 

state whether it was exercised or expired 

unexercised. The vesting dates of restricted 

stock shares and similar instruments and 

incentive plan awards held at fiscal-year end 

must be disclosed by footnotes to columns 

(d) and (f), respectively. 

3. Compute the market values of stock 

(including restricted stock, restricted 

stock units or similar instruments) 


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holdings reported in column (e) and 

equity-based incentive plan awards 

reported in column (g) by multiplying 

the closing market price of the 

registrant’s stock at the end of the last 

completed fiscal year by the number of 

restricted stock or incentive plan award 

holdings, respectively. 

(h) Option exercises and stock vested 

table. (1) Provide the information 

specified in paragraph (h)(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: 

OPTION EXERCISES AND STOCK VESTED

Name of executive officer 

Number of 

shares acquired on 

exercise or 

vesting 

(#) 

Value realized upon 

exercise or 

vesting 

($) 

Grant date 

fair value 

previously 

reported in 

summary 

compensation table 

($) 

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

PEO—Options .........................................................................................................................................

Stock ........................................................................................................................................................

PFO—Options ..........................................................................................................................................

Stock ........................................................................................................................................................

A—Options ...............................................................................................................................................

Stock ........................................................................................................................................................

B—Options ...............................................................................................................................................

Stock ........................................................................................................................................................

C—Options ..............................................................................................................................................

Stock ........................................................................................................................................................

(2) The Table shall include: 

(i) The name of the executive officer 

(column (a)); 

(ii) The number of securities for 

which the options, SARs and similar 

instruments were exercised, and the 

number of shares of stock, including 

restricted stock, restricted stock units 

and similar instruments that vested 

(column (b)); 

(iii) The aggregate dollar value 

realized upon exercise and vesting 

(column (c)); and 

(iv) The grant date fair value 

previously reported in the Summary 

Compensation Table for the same 

options, SARs, and similar instruments, 

and the same shares of stock, including 

restricted stock, restricted stock units or 

similar instruments (column (d)). 

Instructions to Item 402(h)(2). 1. Report in 

column (c), line 1, the aggregate dollar 

amount realized by the named executive 

officer upon exercise of the options, SARs 

and similar instruments. 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, SARs or similar instruments. 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 registration is 

required to be disclosed in accordance with 

paragraph (c)(2)(ix) of this item.) Report in 

column (c), line 2, the aggregate dollar 

amount realized by the named executive 

officer upon the vesting of stock, including 

restricted stock, restricted stock units and 

similar instruments. 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. 

2. Report in column (d), line 1, the 

aggregate grant date fair value previously 

reported in the registrant’s Summary 

Compensation Table for the fiscal year of the 

grant for the options, SARs and similar 

instruments that were exercised by the 

named executive officer during the last 

completed fiscal year. Report in column (d), 

line 2, the aggregate grant date fair value 

previously reported in the registrant’s 

Summary Compensation Table for the fiscal 

year of the grant for the shares of stock or 

units, including restricted stock, restricted 

stock units and similar instruments held by 

the named executive officer that vested 

during the last completed fiscal year. If the 

named executive officer was not previously 

a named executive officer during the fiscal 

year of the grant, report in column (d) the 

grant date fair value of the award valued in 

accordance with FAS 123R. 

(i) Retirement plan potential annual 

payments and benefits. (1) Provide the 

information specified in paragraph (i)(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: 

RETIREMENT PLAN POTENTIAL ANNUAL PAYMENTS AND BENEFITS

Name Plan name 

Number of years 

credited service 

(#) 

Normal retirement 

age 

(#) 

Estimated normal 

retirement annual 

benefit 

($) 

Early retirement age 

(#) 

Estimated early 

retirement annual 

benefit 

($) 

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

PEO

PFO

A ......

B ......

C ......


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(2) The Table shall include: 

(i) The name of the executive officer 

(column (a)); 

(ii) The name of the plan (column (b)); 

(iii) The number of years of service 

credited to the named executive officer 

under the plan (column (c)); 

(iv) The normal retirement age under 

the plan (column (d)); 

(v) The estimated dollar amount of 

annual payments and benefits that the 

named executive officer would be 

entitled to receive upon attaining 

normal retirement age, or, if the named 

executive officer currently is eligible to 

retire, the dollar amount of annual 

payments and benefits that the named 

executive officer would be entitled to 

receive, if he or she had retired at the 

end of the registrant’s last completed 

fiscal year (column (e)); 

(vi) The early retirement age, if 

applicable, under the plan (column (f)); 

and 

(vii) The estimated dollar amount of 

annual payments and benefits that the 

named executive officer would be 

entitled to receive upon attaining early 

retirement age, or, if the named 

executive officer currently is eligible for 

early retirement under the plan, the 

dollar amount of annual payments and 

benefits that the named executive officer 

would be entitled to receive if he or she 

had so retired at the end of the 

registrant’s last completed fiscal year 

(column (g)). 

Instructions to Item 402(i)(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 

employee 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. 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. Normal retirement age means 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. Early 

retirement age means early retirement age as 

defined in the plan, or otherwise available to 

the executive. 

4. Quantification of payments and benefits 

should reflect the form of benefit currently 

elected by the executive, such as joint and 

survivor annuity or single life annuity, 

specifying that form in a footnote. Where the 

named executive officer is not yet eligible to 

retire, the dollar amount of annual payments 

and benefits that the named executive officer 

would be entitled to receive upon becoming 

eligible shall be computed assuming that the 

named executive officer will continue to earn 

the same amount of compensation as 

reported for the registrant’s last fiscal year. 

(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 (if 

applicable) early retirement payment 

and benefit formula and eligibility 

standards. If the plan permits a lump 

sum distribution at the election of the 

executive or the registrant, quantify the 

amount of such distribution that would 

be available on such election as of the 

end of the registrant’s last fiscal year, 

and disclose the valuation method and 

all material assumptions applied in 

quantifying such amount; 

(ii) The specific elements of 

compensation (e.g., salary, bonus, etc.) 

included in applying the payment and 

benefit formula, identifying each such 

element; 

(iii) With respect to named executive 

officers’’ participation in multiple plans, 

the reasons for each plan; and 

(iv) Registrant policies with regard to 

such matters as granting extra years of 

credited service. 

(j) Nonqualified defined contribution 

and other deferred compensation plans. 

(1) Provide the information specified in 

paragraph (j)(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 taxqualified in the following tabular 

format: 

NONQUALIFIED DEFINED CONTRIBUTION AND OTHER DEFERRED COMPENSATION PLANS

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 ..............................................................................................................

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)); 

(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(j)(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. 


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(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. 

(k) 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; 

(2) Describe and quantify the 

estimated annual 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 the specific 

factors used to determine the 

appropriate payment and benefit levels 

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. 

Instruction to Item 402(k). The registrant 

must provide quantitative disclosure under 

these requirements even where uncertainties 

exist as to amounts in given circumstances 

payable under these plans and arrangements. 

In the event that uncertainties exist as to the 

provision of payments and benefits or the 

amounts involved, the registrant is required 

to make reasonable estimates and disclose 

material assumptions underlying such 

estimates in its disclosure. In such event the 

disclosure would require forward-looking 

information as appropriate. 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 3 to paragraph (c)(2)(ix) of this 

Item. 

(l) Compensation of directors. (1) 

Provide the information specified in 

paragraph (l)(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 Total 

($) 

Fees 

earned or 

paid in cash 

($) 

Stock 

awards 

($) 

Option 

awards 

($) 

Non-stock 

incentive 

plan compensation 

($) 

All other 

compensation 

($) 

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

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 (c) of this Item and 

otherwise as required pursuant to 

paragraphs 402(d)–(k) (column (a)) of 

this Item; 

(ii) The dollar value of total 

compensation for the covered fiscal year 

(column (b)). With respect to each 

director, disclose the sum of all amounts 

reported in columns (c) through (g); 

(iii) 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 (c)); 

(iv) For awards of stock, including 

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, the aggregate grant 

date fair value computed in accordance 

with FAS 123R, applying the same 

valuation model and assumptions as the 

registrant applies for financial statement 

reporting purposes, and all earnings on 

any outstanding awards (column (d)); 

(v) For awards of stock options, with 

or without tandem SARs, freestanding 

SARs and other similar instruments 

with option-like features (including 

awards that subsequently have been 

transferred), the aggregate grant date fair 

value computed in accordance with 

FAS 123R applying the same valuation 

model and assumptions as the registrant 

applies for financial statement reporting 

purposes, and all earnings on any 

outstanding awards (column (e)); 

Instruction to Item 402(l)(2)(iv) and (v). 

Disclose, for each director, by footnote to the 

appropriate column, the outstanding equity 

awards at fiscal year end as would be 

required if the tabular presentation for named 

executive officers specified in paragraph (g) 

of this Item were required for directors. 

(vi) The dollar value of all earnings 

for services performed during the fiscal 

year pursuant to non-stock incentive 

plans as defined in paragraph (a)(6)(iii) 

of this Item, and all earnings on any 

outstanding awards (column (f)); and 


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(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 for the last completed fiscal year 

that is not properly reportable in 

columns (c)–(f) must be reported in this 

column and must be identified and 

quantified in a footnote if the amount of 

the item exceeds $10,000 (or in the case 

of any perquisites or personal benefits, 

must be itemized unless the aggregate 

value of perquisites and personal 

benefits is less than $10,000, and must 

be quantified if it is valued at the greater 

of $25,000 or 10% of total perquisites 

and personal benefits of the director). 

Such compensation must include, but is 

not limited to: 

(A) All perquisites and other personal 

benefits, or property, unless the 

aggregate amount of such compensation 

is less than $10,000; 

(B) All earnings on compensation that 

is deferred on a basis that is not taxqualified; 

(C) All amounts reimbursed during 

the fiscal year for the payment of taxes; 

(D) 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 

computed in accordance with FAS 123R 

applying the same valuation model and 

assumptions as the registrant applies for 

financial statement reporting purposes; 

(E) 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; 

(F) The aggregate increase in actuarial 

value to the director of all defined 

benefit and actuarial pension plans 

(including supplemental plans) accrued 

during the registrant’s covered fiscal 

year; 

(G) Registrant contributions or other 

allocations to vested and unvested 

defined contribution plans; 

(H) Consulting fees earned from, or 

paid or payable by the registrant and/or 

its subsidiaries (including joint 

ventures); 

(I) The annual costs of payments and 

promises of payments pursuant to 

director legacy programs and similar 

charitable award programs; and 

(J) 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. 

Instruction to Item 402(l)(2)(vii). 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 (l)(2)(vii)(I) of this 

Item. Provide footnote disclosure of the total 

dollar amount and other material terms of 

each such program for which tabular 

disclosure is provided. 

Instruction to Item 402(l)(2). Two or more 

directors may be grouped in a single row in 

the table if all of their elements of 

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 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(l). In addition to the 

Instruction to paragraph (l)(2)(vii) of this 

Item, the following apply equally to 

paragraph (l) of this Item: Instructions 2 and 

3 to paragraph (c) of this Item; Instructions 

to paragraphs (c)(2)(iv) and (v) of this Item; 

Instructions to paragraphs (c)(2)(vi) and (vii) 

of this Item; Instructions to paragraph 

(c)(2)(viii) of this Item and Instructions to 

paragraph (c)(2)(ix). 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 

(l) 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. 

(a) * * * 

(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 class 

so owned. Of the number of shares 

shown in column (3), indicate, by 

footnote, 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 and promoters. 

(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 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 registrant, 

including the related person’s 


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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 each transaction 

and of the amount of the related 

person’s interest in each transaction, 

each of which shall be computed 

without regard to the amount of profit 

or loss. 

(4) 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. 

(5) 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 any 

of the foregoing persons, which means any 

child, stepchild, parent, stepparent, spouse, 

sibling, mother-in-law, father-in-law, son-inlaw, daughter-in-law, brother-in-law, or 

sister-in-law, and any person (other than a 

tenant or employee) sharing the household of 

a related person identified in paragraph 1.a.i 

or 1.a.ii. of this instruction; 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: 

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. 

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 transactions involving 

indebtedness, 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. 

5. 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: 

a. The compensation arising from the 

relationship or transaction is reported 

pursuant to Item 402 (§ 229.402); or 

b. The executive officer is not an 

immediate family member of a related person 

(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 as such by the compensation 

committee of the board of directors (or group 

of independent directors performing a similar 

function) of the registrant. 

6. 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(l) 

(§ 229.402(l)). 

7. In the case of a transaction involving 

indebtedness, 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: 

a. Were made in the ordinary course of 

business; 

b. 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 

c. Did not involve more than the normal 

risk of collectibility or present other 

unfavorable features. 

8. 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 which 

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. 

(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. 

(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. 

(c) Promoters. (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 


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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 or 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 an 

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 an issuer, that acquired 

control of an issuer that is a shell 

company. 

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 a 

national securities association 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 member 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 or Form 10–SB (§ 249.210 or 

§ 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 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, identify the 

most recent fiscal years in which the 


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policies were so included in satisfaction 

of this requirement. 

(3) For each director and nominee for 

director that is identified as 

independent, describe any transactions, 

relationships or arrangements not 

disclosed pursuant to Item 404(a) 

(§ 229.404(a)), or for investment 

companies, Item 22(b) of Schedule 14 

(§ 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. 

Instruction to Item 407(a). 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 sections 13(a) 

or 15(d) of the Exchange Act (15 U.S.C. 

78m(a), 78o(d)) respecting any director who 

is no longer a director at the time of 

effectiveness of the registration statement. 

(b) Board meetings and committees. 

(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 (d)(4) 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 

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 


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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), 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), 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 you meet the following 

requirements, provide the disclosure in 

paragraph (d)(4)(ii) of this Item: 

(A) You are a listed issuer, as defined 

in § 240.10A–3 of this chapter; 

(B) You are 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) You are 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. 

(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 


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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–1through 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 each 

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, the material elements of the 

instructions or directions given to the 

consultants with respect to the 

performance of their duties under the 

engagement and identifying any 


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executive officer within the registrant 

the consultants contacted in carrying 

out their assignment. 

(4) Under the caption ‘‘Compensation 

Committee Interlocks and Insider 

Participation’’: 

(i) The registrant shall 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) The registrant shall 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 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)). 

(f) Shareholder communications and 

annual meeting attendance. (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 

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 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 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. 

* * * * * 


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6626 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

(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 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

19. 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. 

* * * * * 

20. 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. 

Form SB–2 Registration Statement 

Under the Securities Act of 1933 

* * * * * 

Item 15. Organization Within Last 

Five Years. 

Furnish the information required by 

Item 404 of Regulation S–B and Item 

407(a) of Regulation S–B. 

* * * * * 

21. 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 Securites 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 and promoters, and Item 407(a) 

of Regulation S–K (§ 229.407(a) of this 

chapter), corporate governance. 

* * * * * 

22. 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 Items 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: 

* * * * * 

23. 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 of 

this chapter), corporate governance; 

(iii) Item 404 of Regulation S–K 

(§ 229.404 of this chapter), transactions 

with related persons and promoters, 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 of 

this chapter), corporate governance; 

(iii) Item 404 of Regulation S–K 

(§ 229.404), transactions with related 

persons and promoters, and Item 407(a) 

of Regulation S–K (§ 229.407(a)), 

corporate governance. 

* * * * * 

24. 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 of this 

chapter). 

Item 23. Certain Relationships and 

Related Transactions. 

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. 

* * * * * 


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PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

25. 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. 

* * * * * 

26. Amend § 240.13a–11 by revising 

paragraph (c) to read as follows: 

§ 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. 

27. 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. 

28. 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; 

* * * * * 

29. 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), 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 or Item 404 of Regulation 

S–K, 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, 

§ 229.405 and § 229.407 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 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 paragraph 

(e)(4) of Item 407 of Regulation S–K 

(§ 229.407 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 under the Investment 

Company Act of 1940 (15 U.S.C. 80a), furnish 

the information required by Item 22(b)(13) of 

this Schedule. 

* * * * * 

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 (i)(2) of Item 402 of 

Regulation S–K (§ 229.402(i)(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 


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6628 Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 

paragraph (i)(2) of Item 402 of Regulation S–

K (§ 229.402(i)(2) of this chapter). 

* * * * * 

Item 22. Information required in 

investment company proxy statement. 

(a) * * * 

(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 Item 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 Item 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. 

(16) In the case of a Fund that is a closedend 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 inter-dealer quotation system 

of a national securities association registered 

pursuant to section 15A of the Act (15 U.S.C. 

78o–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. 

(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 re-election 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. 

* * * * * 

30. 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. 

31. 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 Items 402, 403, 

404 or 407 of Regulation S–B 

(§§ 228.402, 228.403, 228.404 or 228.407 

of this chapter) or Items 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 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6629 

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. 

§ 240.16b–3 [Amended] 

32. 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; and 

c. Removing paragraph (b)(3)(i)(D). 

PART 245—REGULATION BLACKOUT 

TRADING RESTRICTION 

(REGULATION BTR—BLACKOUT 

TRADING RESTRICTION) 

33. 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] 

34. 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 

35. The authority citation for part 249 

continues to read in part as follows: 

Authority: 15 U.S.C. 78a et seq. and 7201 

et seq.; and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

36. 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). 

* * * * * 

37. 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 and Item 

407(a) of Regulation S–B. 

* * * * * 

38. 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 

contact 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. 

* * * * * 

39. 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 Item 5.02(d)(5) and (e); and 

f. Adding Instruction 3 to Item 5.02. 

The revisions and addition 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 


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officer, principal operating officer, or 

any person performing similar 

functions, or any named executive 

officer for the registrant’s most recent 

fiscal year (as defined by Item 402(a)(3) 

of Regulation S-K (17 CFR 

229.402(a)(3)), 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 Items 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 a 

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. 

(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 (as 

defined by Item 402(a)(3) of Regulation 

S–K (17 CFR 229.402(a)(3)) for the 

registrant’s most recent fiscal year 

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, that are materially consistent 

with the original terms of such plan, contract 

or arrangement, need not be disclosed under 

this Item 5.02(e), provided the registrant has 

previously disclosed such original terms and 

the grant, award or modification is disclosed 

when Item 402 of Regulation S–K (17 CFR 

229.402) requires such disclosure. 

3. If the salary and bonus of a named 

executive officer cannot be calculated as of 

the most recent practicable date and are 

omitted from the Summary Compensation 

Table as specified in Instruction 1 to Item 

402(b)(2)(iv) and (v) of Regulation S–B or 

Instruction 1 to Item 402(c)(2)(iv) and (v) of 

Regulation S–K, disclose the appropriate 

information under this Item 5.02(e) 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 is required even where Instruction 

2 would permit such information not to be 

disclosed. 

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. 

* * * * * 

40. 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). 

* * * * * 

41. 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). 

* * * * * 

42. 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 paragraph (e)(4) of 

Item 407 of Regulation S–K (§ 229.407 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). 

* * * * * 

43. 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) 


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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules 6631 

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). 

* * * * * 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

44. 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. 

* * * * * 

45. 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 

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. 

46. Amend Form N–2 (referenced in 

§§ 239.14 and 274.11a–1) by: 

a. Removing paragraph 14(c) of Item 

18; 

b. Redesignating paragraphs 15 and 16 

of Item 18 as paragraphs 16 and 17, 

respectively; 

c. Adding new paragraph 15 of Item 

18; 

d. 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; 

e. Revising the introductory text of 

paragraph 14 of Item 18; 

f. Removing ‘‘relocation,’’ from 

Instruction 2 to paragraph 2 of Item 21; 

and 

g. Revising the cite ‘‘Item 18.16’’ to 

read ‘‘Item 18.17’’ 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. 

* * * * * 

14. 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’’). 

* * * * * 

15. 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). 

* * * * * 

47. 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 

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. 

48. 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: January 27, 2006. 

By the Commission. 

Nancy M. Morris, 

Secretary. 

[FR Doc. 06–946 Filed 2–7–06; 8:45 am] 

BILLING CODE 8010–01–P 


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