78338 Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 

Indebtedness of Executive Officers and 

Principal Shareholders to a State 

Nonmember Bank and Its 

Correspondent Banks, and because the 

FDIC does not believe that the reports at 

issue contribute significantly to the 

effective monitoring of insider lending 

or the prevention of insider abuse, the 

FDIC is repealing its regulations at part 

349. 

III. Exemption From Public Comment 

The Act repeals the specific statutory 

requirements for these reports. 

However, the FDIC retains authority 

under other provisions of law to collect 

information regarding insider lending 

by depository institutions. The FDIC 

does not believe these reports contribute 

significantly to the effective monitoring 

of insider lending or the prevention of 

insider abuse. Under these 

circumstances, providing prior notice 

and an opportunity for public comment 

on whether to repeal these rules would 

serve no useful purpose. As a result, 

under authority at 5 U.S.C. 553(b)(B), 

FDIC finds good cause to waive such 

procedures. Moreover, no Federal 

agency’s or private sector entity’s 

interest will be adversely affected by 

their repeal. Further, and for the same 

reason, FDIC finds good cause pursuant 

to 553(d)(3) to waive the requirement of 

a 30-day delay in effect for this rule. 

Thus, this rule is effective immediately. 

Regulatory Flexibility Act 

As prior notice and an opportunity for 

public comment are not required under 

5 U.S.C. 553 or any other law, the 

analytical requirements of the 

Regulatory Flexibility Act are 

inapplicable. Thus, no regulatory 

flexibility analysis is required and none 

has been prepared. 

Paperwork Reduction Act 

At the FDIC’s request, the Office of 

Management and Budget (OMB) has 

deleted the collection of information 

associated with this rule (formerly 

approved by OMB under Control No. 

3064–0023, ‘‘Reports of Indebtedness of 

Executive Officers and Principal 

Shareholders to Correspondent Banks 

and to Own Bank,’’ collected using 

FFIEC form 004). The reduction in 

paperwork burden imposed on the 

public resulting from the elimination of 

this collection of information will be 

47,998 hours a year. The Federal 

Financial Institutions Examination 

Council (FFIEC) is providing notice to 

all affected parties that they will no 

longer need to provide this information 

to the agencies. 

Also, as discussed above, section 601 

of the Act eliminated the requirement 

that a bank include a separate report 

with its Call Report each quarter on any 

extensions of credit the bank has made 

to its executive officers since the date of 

its last Call Report. Accordingly, as of 

December 31, 2006, the FDIC will no 

longer require banks to provide the 

‘‘Special Report’’ on loans to executive 

officers, which had been included after 

the final page of the Call Report forms 

in previous quarters. At the FDIC’s 

request, OMB has approved this change 

in the Call Report. The resulting 

reduction in paperwork burden imposed 

on the public will be 5,247 hours a year. 

Small Business Regulatory Enforcement 

Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 

(SBREFA) (Title II, Pub. L. 104–121) 

provides generally for agencies to report 

rules to Congress and the General 

Accounting Office (GAO) for review. 

The reporting requirement is triggered 

when a federal agency issues a final 

rule. The FDIC will file the appropriate 

reports with Congress and the GAO as 

required by SBREFA. The Office of 

Management and Budget has 

determined that the rule does not 

constitute a ‘‘major rule’’ as defined by 

SBREFA. 

List of Subjects in 12 CFR Part 349 

Reports, Public disclosure, 

Indebtedness of principal shareholders, 

Indebtedness of executive officers, State 

nonmember banks, Correspondent 

banks. 

■ For the reasons stated above, the 

Board of Directors of the Federal 

Deposit Insurance Corporation hereby 

amends title 12, chapter III of the Code 

of Federal Regulations under the 

authority of 5 U.S.C. 553 by removing 

and reserving part 349. 

PART 349—[REMOVED AND 

RESERVED] 

Dated at Washington, DC, this 22nd day of 

December, 2006. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

[FR Doc. E6–22260 Filed 12–28–06; 8:45 am] 

BILLING CODE 6714–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 228 and 229 

[Release Nos. 33–8765; 34–55009; File No. 

S7–03–06] 

RIN 3235–AI80 

Executive Compensation Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Interim final rules with request 

for comments. 

SUMMARY: The Securities and Exchange 

Commission is adopting, as interim final 

rules, amendments to the disclosure 

requirements for executive and director 

compensation. The amendments to Item 

402 of Regulations S–K and S–B revise 

Summary Compensation Table and 

Director Compensation Table disclosure 

with respect to stock awards and option 

awards to provide disclosure of the 

compensation cost of awards over the 

requisite service period, as described in 

Financial Accounting Standards Board 

Statement of Financial Accounting 

Standards No. 123 (revised 2004) ShareBased Payment (FAS 123R). FAS 123R 

defines a requisite service period as the 

period or periods over which an 

employee is required to provide service 

in exchange for a share-based payment. 

The revised disclosure replaces 

disclosure in the Summary 

Compensation Table and Director 

Compensation Table of the aggregate 

grant date fair value of awards 

computed in accordance with FAS 

123R. The amendments revise the 

Grants of Plan-Based Awards Table to 

add a column showing, on a grant-bygrant basis, the full grant date fair value 

of awards computed in accordance with 

FAS 123R. The amendments also revise 

the Grants of Plan-Based Awards Table 

to include information concerning 

repriced or materially modified options, 

stock appreciation rights and similar 

option-like instruments, disclosing the 

incremental fair value computed as of 

the repricing or modification date 

computed in accordance with FAS 

123R. The amendments to the Director 

Compensation Table in Item 402 of 

Regulation S–K require footnote 

disclosure corresponding to the new 

Grants of Plan-Based Awards Table fair 

value disclosures. The amendments are 

intended to provide investors with more 

complete and useful disclosure about 

executive compensation. Disclosing the 

compensation cost of stock and option 

awards over the requisite service period 

will give investors a better idea of the 

compensation earned by an executive or 


rmajette on PROD1PC72 with RULES
Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 78339 

1 17 CFR 229.402 and 17 CFR 228.402. 

2 17 CFR 229.10 et seq. 

3 17 CFR 228.10 et seq. 

4Executive Compensation and Related Person 

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

[71 FR 53158] (the ‘‘2006 Executive Compensation 

Release’’). These revisions became effective on 

November 7, 2006. 

5The discussion that follows focuses on 

amendments to Item 402 of Regulation S–K, with 

references to differences from Item 402 of 

Regulation S–B where appropriate. 

6 Item 402(c) of Regulation S–K, which presents 

information for each of the company’s last three 

completed fiscal years, and Item 402(b) of 

Regulation S–B, which presents information for 

each of a small business issuer’s last two completed 

fiscal years. 

7 Item 402(d) of Regulation S–K. 

8 Item 402(c)(2)(x) of Regulation S–K and Item 

402(b)(2)(x) of Regulation S–B. 

9 Item 402(k) of Regulation S–K and Item 402(f) 

of Regulation S–B. Each of these tables presents 

information for the last completed fiscal year. 

10 Items 402(c)(2)(v) and (vi) of Regulation S–K 

and Items 402(b)(2)(v) and (vi) of Regulation S–B 

require these columns in the Summary 

Compensation Table. Items 402(k)(2)(iii) and (iv) of 

Regulation S–K and Items 402(f)(2)(iii) and (iv) of 

Regulation S–B require these columns in the 

Director Compensation Table. 

11 2006 Executive Compensation Release at 

Section II.C.1.c.i. 

12See Executive Compensation Disclosure, 

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

(the ‘‘1992 Release’’). Before the amendments 

adopted in the 2006 Executive Compensation 

Release, the Summary Compensation Table had 

required disclosure of the sum of the number of 

securities underlying stock options granted 

(including options that subsequently have been 

transferred), with or without tandem stock 

appreciation rights (SARs), and the number of freestanding SARs. The Summary Compensation Table 

also had required disclosure of the dollar value (net 

of any consideration paid by the named executive 

officer) of any award of restricted stock, calculated 

by multiplying the closing market price of the 

company’s unrestricted stock on the date of grant 

by the number of shares awarded. Alternatively, 

restricted stock awards subject to performancebased vesting conditions could have been reported 

as long-term incentive plan (LTIP) awards in the 

separate Long-Term Incentive Plan Awards table, 

with vesting later reported in the Summary 

Compensation Table LTIP Payouts column. 

13See, for example, letters from California Public 

Employees’ Retirement System; CFA Centre for 

Financial Market Integrity, dated April 13, 2006; 

Connecticut Retirement Plans and Trust Funds, 

dated April 10, 2006; Leo J. Burns; Governance for 

Owners USA, Inc.; Laborers International Union of 

North America; Nancy Lucke Ludgus; jointly, 

California Public Employees’ Retirement System, 

California State Teachers’ Retirement System, Cooperative Insurance Society—UK, F&C Asset 

Management—UK, Illinois State Board of 

Investment, London Pensions Fund Authority—UK, 

New York State Common Retirement Fund, New 

York City Pension Funds, Ontario Teachers’

Pension Plan, PGGM Investments—Netherlands, 

Public Sector and Commonwealth Super (PSS/ 

CSS)—Australia, RAILPEN Investments—UK, State 

Board of Administration (SBA) of Florida, Stichting 

Pensioenfonds ABP—Netherlands, UniSuper 

Limited—Australia, and Universities 

Superannuation Scheme—UK; State Board of 

Administration (SBA) of Florida; Teamsters Local 

671 Health Services and Insurance Plan; 

Southwestern Pennsylvania and Western Maryland 

Area Teamsters and Employers Pension Fund; 

United Church Foundation, Inc.; Washington State 

Investment Board; and Western PA Teamsters & 

Employers Welfare Fund. 

director during a particular reporting 

period, consistent with the principles 

underlying the financial statement 

disclosure; and retaining the 

requirement to disclose the grant date 

fair value will give investors useful 

information about the total impact of 

compensation decisions made by a 

company in a particular reporting 

period. 

DATES: Effective Date: The amendments 

are effective December 29, 2006. 

Comment Date: As discussed below, 

we are publishing interim final 

regulations. We will, however, consider 

any comments received on or before 

January 29, 2007 and will revise the 

interim final rule amendments to Item 

402 of Regulations S–K and S–B if 

necessary. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/final.shtml); or 

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

Number S7–03–06 on the subject line; 

or 

• Use the Federal Rulemaking Portal 

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

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE, Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–03–06. This file number 

should be included on the subject line 

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

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/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: 

David Lynn or Anne Krauskopf, at (202) 

551–3500, in the Division of 

Corporation Finance, U.S. Securities 

and Exchange Commission, 100 F 

Street, NE., Washington, DC 20549–

3010. 

SUPPLEMENTARY INFORMATION: We are 

adopting amendments to Item 402 1 of 

Regulations S–K 2 and S–B3 as interim 

final rules. 

I. Background 

On July 26, 2006, we voted to adopt 

revisions to our rules governing 

disclosure of executive compensation.4

We intended these revisions 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.5

Two significant features of the 

amended disclosure rules were 

revisions to the Summary Compensation 

Table 6 and adoption of a new Grants of 

Plan-Based Awards Table.7 Among 

other things, we revised the Summary 

Compensation Table to include a new 

‘‘Total’’ column 8 that aggregates the 

total dollar value of each form of 

compensation quantified in the other 

columns. We also adopted a Director 

Compensation Table,9 modeled on the 

revised Summary Compensation Table. 

Under these rules, in order to 

calculate a total dollar amount of 

compensation in the Summary 

Compensation Table for a particular 

fiscal year, a dollar value for all equity 

awards—rather than the number of 

securities underlying an equity award—

must be disclosed. We required this 

valuation to be based on the grant date 

fair value of the awards determined 

pursuant to FAS 123R. In particular, for 

both the Stock Awards and Option 

Awards columns,10 we amended the 

rules to require disclosure of the 

aggregate grant date fair value of the 

awards computed in accordance with 

FAS 123R.11 This approach provided for 

Summary Compensation Table and 

Director Compensation Table disclosure 

of these awards, consistent with the 

timing of option and stock awards 

disclosure that had applied in the 

Summary Compensation Table since 

1992.12

The comments we received regarding 

the dollar amount for Stock Awards and 

Option Awards in the Summary 

Compensation Table reflected differing 

views. Some commenters expressed 

support for requiring companies to 

report the full grant date fair value in 

the fiscal year of the award because it 

would provide a more complete 

representation of compensation and 

would be more consistent with the 

purpose of executive compensation 

disclosure.13 Others stated that we 

should require Summary Compensation 

Table disclosure of the proportionate 


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78340 Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 

14See, for example, letters from the SEC 

Regulations Committee of the American Institute of 

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

Donelson, Bearman, Caldwell & Berkowitz, P.C.; 

Chamber of Commerce of the United States of 

America (‘‘Chamber of Commerce’’); Computer 

Sciences Corporation; Deloitte & Touche LLP 

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

& West LLP (‘‘Fenwick’’); Foley & Lardner LLP 

(‘‘Foley’’); HR Policy Association; American Bar 

Association, Joint Committee on Employee Benefits; 

and KPMG LLP (‘‘KPMG’’). 

15See letters from Chamber of Commerce and 

E&Y. 

16See letters from Foley (noting that awards 

would be forfeited if the executive terminates 

employment before expiration of the vesting period) 

and WorldatWork. 

17See letter from Compass Bancshares, Inc. 

18See, for example, letters from The Corporate & 

Securities Law Committee and the Employment & 

Labor Law Committee of the Association of 

Corporate Counsel; Amalgamated Bank Long-View 

Funds; BDO Seidman, LLP (‘‘BDO Seidman’’); 

Council of Institutional Investors, dated March 29, 

2006; IUE–CWA Pension Fund and 401(k) Plan; and 

Mercer Human Resources Consulting. 

19 Item 402(c)(2)(vii) of Regulation S–K and Item 

402(b)(2)(vii) of Regulation S–B. 

20See letters from AICPA; Chamber of Commerce; 

Deloitte; EY; and KPMG. 

21See letter from Fenwick. 

22See letter from Steven Hall & Partners. If this 

is the case, we would anticipate that this influence 

may be discussed in the Compensation Discussion 

and Analysis. See Item 402(b)(2)(xii) of Regulation 

S–K. 

23See letter from Fenwick. 

24Equity incentive plan and non-equity incentive 

plan are both defined in Item 402(a)(6)(iii) of 

Regulation S–K and Item 402(a)(5)(iii) of Regulation 

S–B. 

25The Compensation Discussion and Analysis 

section is required by Item 402(b) of Regulation S–

K. Instruction 2 to Item 402(b) provides, among 

other things, that the Compensation Discussion and 

Analysis should be of the information contained in 

the tables and otherwise disclosed pursuant to Item 

402 of Regulation S–K. 

amount of an award’s total fair value 

that is recognized in the company’s 

financial statements for the fiscal year.14

Some of these commenters expressed 

concerns that disclosing the full grant 

date fair value would overstate 

compensation earned related to service 

rendered for the year, and might confuse 

the discussion and analysis of 

compensation policies and practices.15

Others stated that requiring immediate 

reporting of the full grant date fair value 

would not necessarily reflect the cost to 

the company or the benefit to the named 

executive officer or director, and that 

the actual amounts earned later could be 

substantially different.16 For example, a 

performance-based stock award might 

never be earned, yet the entire grant 

date fair value of the award is required 

to be reported in the Summary 

Compensation Table in the fiscal year of 

grant.17 Some commenters expressed 

concern regarding inconsistency with 

the presentation of non-equity incentive 

plan compensation,18 which is reported 

when earned.19

Commenters also suggested that 

providing compensation disclosure that 

is consistent with the company’s 

financial statements would make it 

easier for analysts and investors to 

analyze compensation for top 

executives.20 One commenter noted 

particularly that the Financial 

Accounting Standards Board engaged in 

a thorough and extensive process before 

concluding that financial statements 

should reflect the compensation cost of 

the award proportionately over the 

vesting period.21 Another commenter 

stated that the accounting rules shape 

decision-making on executive 

compensation.22 Regarding 

identification of the most highly 

compensated executive officers, one 

commenter noted that reporting full 

grant date fair value would cause wide 

year-to-year swings in reported 

compensation when in fact the 

executive is earning a consistent level of 

compensation, and cause 

inconsistencies in the identification of 

named executive officers from year-toyear.23

Our comprehensive revisions also 

adopted the Grants of Plan-Based 

Awards Table to supplement and 

complement Summary Compensation 

Table disclosure of stock and option 

awards by disclosing, among other 

things, the number of shares of stock or 

units comprising or underlying the 

award. This supplemental table shows 

the terms of grants, including estimated 

future payouts for both equity incentive 

plans and non-equity incentive plans,24

with separate disclosure for each grant. 

II. Discussion 

Under FAS 123R, while the 

compensation cost is initially measured 

based on the grant date fair value of an 

award, it 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). When and where to disclose 

this compensation cost as executive 

compensation disclosure requires a 

careful balancing. In the 2006 Executive 

Compensation Release, we chose to 

require disclosure of the full grant date 

fair value as compensation when the 

grant is made. As we explained, on 

balance we chose that approach for the 

purpose of executive compensation 

disclosure for a variety of reasons, 

including that it informs investors of 

current actions regarding plan awards, 

and emphasizes the importance of the 

compensation committee’s 

compensation decisions for the most 

recent fiscal year. 

We recognize, however, that no one 

approach to disclosure of stock and 

option awards addresses all of the issues 

regarding disclosure of these forms of 

compensation. Upon further 

consideration, we have concluded that a 

combination of disclosure of the 

compensation cost associated with 

equity awards as that cost is recognized 

in the financial statements in the 

Summary Compensation Table, 

combined with disclosure of the grant 

date fair value of those awards on a 

grant-by-grant basis in the Grants of 

Plan-Based Awards Table, would 

provide a fuller and more useful picture 

of executive compensation than our 

recently adopted rules. Thus, we now 

adopt, as interim final rules, 

amendments that implement an 

approach to Summary Compensation 

Table disclosure of equity awards that 

provides disclosure of compensation 

cost of those awards over the requisite 

service period, as described in FAS 

123R. Adopting the amendments as 

interim final rules—before issuers are 

required to comply with the recently 

adopted amendments—will avoid 

presentation of executive compensation 

disclosure in the first year that would be 

different in later years. Measuring 

compensation in this manner should 

provide investors with a clearer view of 

the annual compensation earned by 

executives and the annual 

compensation costs to a company, 

consistent with the timing of financial 

statement reporting. Measuring 

compensation in this manner also 

should eliminate the potential for 

distortion in identifying named 

executive officers based on a measure 

that reflects the full grant date fair value 

of awards, such as when a single large 

grant that will be earned by services to 

be performed over multiple years 

changes the composition of the named 

executive officers in the Summary 

Compensation Table. 

In addition, we are revising the Grants 

of Plan-Based Awards Table to add a 

column showing the full grant date fair 

value of each award granted, computed 

in accordance with FAS 123R. This will 

provide investors a more complete 

perspective of the compensation 

decisions made with respect to the last 

completed fiscal year, and facilitate 

Compensation Discussion and Analysis 

disclosure of the company’s policies 

and decisions regarding compensation 

awarded to, earned by, or paid to the 

named executive officers.25 As a result 

of the amendments, investors will have 

more disclosure and ultimately a more 

complete picture of a company’s 


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Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 78341 

26 Items 402(c)(2)(v) and (vi) of Regulation S–K 

and Items 402(b)(2)(v) and (vi) of Regulation S–B. 

27 Items 402(k)(2)(iii) and (iv) of Regulation S–K 

and Items 402(f)(2)(iii) and (iv) of Regulation S–B. 

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

29Former Instruction 1 to Item 402(c)(2)(v) and 

(vi) of Regulation S–K and former Instruction 1 to 

Item 402(b)(2)(v) and (vi) of Regulation S–B. Each 

of these instructions is redesignated as the 

Instruction to the respective Item. 

30Former Instruction 2 to Item 402(c)(2)(v) and 

(vi) of Regulation S–K and former Instruction 2 to 

Item 402(b)(2)(v) and (vi) of Regulation S–B. With 

respect to the Director Compensation Table, we 

correspondingly amend the Instruction to Item 

402(k) of Regulation S–K and the Instruction to Item 

402(f) of Regulation S–B to reflect this rescission. 

We also make a technical correcting amendment to 

the Instruction to Item 402(k) of Regulation S–K so 

that it also applies Instructions 1 and 5 to Item 

402(c)(2)(ix). These two instructions regarding the 

All Other Compensation column address the 

treatment of non-equity incentive plan awards and 

earnings and earnings on stock and options, and 

accrued amounts under termination or change in 

control plans or arrangements, respectively. 

31See Section II.B. 

32 Instruction 2 to Item 402(c)(2)(iii) and (iv) of 

Regulation S–K and Instruction 2 to Item 

402(b)(2)(iii) and (iv) of Regulation S–B. 

Compensation that is within the scope of FAS 123R, 

and hence reportable in the Stock Awards or Option 

Awards columns, is specified by Paragraph 4 of 

FAS 123R. 

33As defined in Appendix E of FAS 123R, a 

service condition is ‘‘a condition affecting the 

vesting, exercisability, exercise price, or other 

pertinent factors used in determining the fair value 

of an award that depends solely on an employee 

rendering service to the employer for the requisite 

service period. A condition that results in the 

acceleration of vesting in the event of an employee’s 

death, disability, or termination without cause is a 

service condition.’’

compensation decisions. We believe 

that this approach will better fulfill the 

Commission’s objective of informing 

investors of current actions regarding 

plan awards and compensation 

decisions, and that this disclosure 

ultimately will be easier for companies 

to prepare and investors to understand. 

A. Summary Compensation Table 

Under the amendments we adopt 

today as interim final rules, the dollar 

amount of compensation cost 

recognized over the requisite service 

period, as described in FAS 123R, will 

be the amount reported in the Stock 

Awards and Option Awards columns in 

the Summary Compensation Table.26

Compensation cost will include both the 

amounts recorded as compensation 

expense in the income statement for the 

fiscal year as well as any amounts 

earned by an executive that have been 

capitalized on the balance sheet for the 

fiscal year. This amount will include 

compensation cost recognized in the 

financial statements with respect to 

awards granted in previous fiscal years 

and the subject fiscal year. The 

amendments revise the corresponding 

columns in the Director Compensation 

Table in the same way.27

We also amend the related instruction 

calling for a footnote disclosing all 

assumptions made in the valuation by 

reference to a discussion of those 

assumptions in the company’s financial 

statements, footnotes to the financial 

statements, or discussion in 

Management’s Discussion and 

Analysis,28 and providing that the 

referenced sections are deemed part of 

the Item 402 disclosure, to also require 

footnote disclosure of awards that are 

forfeited.29 Since the amendments 

correlate Summary Compensation Table 

disclosure of stock and option awards to 

the dollar amount recognized for 

financial statement purposes with 

respect to the fiscal year, the other 

related instruction, limiting the amount 

reported with respect to a repriced 

option or SAR to the FAS 123R 

incremental fair value,30 is rescinded. 

As discussed below,31 this information 

and the full grant date fair value 

disclosure formerly disclosed in the 

Summary Compensation Table is moved 

to the Grants of Plan-Based Awards 

Table, where it is required on a grantby-grant basis. 

We also revise the instruction to the 

Summary Compensation Table Salary 

and Bonus columns regarding salary or 

bonus forgone at the election of a named 

executive officer in favor of receiving a 

non-cash form of compensation.32

Reporting such forgone amounts in the 

Stock Awards or Option Awards 

columns after salary or bonus is earned 

is inconsistent with the original terms of 

the award that would have compensated 

the named executive officer in cash. 

Accordingly, the revised instruction 

requires the forgone amount to be 

reported in the Salary or Bonus column, 

with footnote disclosure of the receipt of 

non-cash compensation that refers to the 

Grants of Plan-Based Awards Table 

where the stock, option or non-equity 

incentive plan award elected is 

reported. 

Under 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 

recognized in each financial statement 

reporting period. Awards with cashbased settlement, certain repurchase 

features, or other features that do not 

result in an employee bearing the risks 

and rewards normally associated with 

share ownership for a specified period 

of time are 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 of the award, 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 the 

financial statements are then remeasured at each financial statement 

reporting date through the date the 

awards are settled under FAS 123R. 

Under the amendments to the Summary 

Compensation Table and Director 

Compensation Table, these remeasurements of liability awards will be 

reflected in executive compensation 

disclosure, providing a more 

comprehensive measure of liability 

awards over time. 

FAS 123R requires a company to 

aggregate individuals receiving awards 

into relatively homogenous groups, for 

example, executives and nonexecutives, with respect to exercise and 

post-vesting employment termination 

behaviors for the purpose of 

determining expected term assumption 

used for computing the grant date fair 

value. The rules we adopt today as 

interim final rules, like the recently 

adopted amendments, are not intended 

to change the method used to value 

employee stock options for purposes of 

FAS 123R or to affect the judgments as 

to reasonable groupings for purposes of 

determining the expected term 

assumption required by FAS 123R. 

Where a company uses more than one 

group, the measurement of grant date 

fair value for purposes of Item 402 will 

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 the Director Compensation 

Table). 

In determining the amount 

recognized, FAS 123R requires a 

company to estimate at the grant date 

the number of awards that ultimately 

will be earned. Those estimates are 

revised each period as awards vest or 

are forfeited. The interim final rules that 

we adopt today are not intended to 

change the method a company uses to 

estimate forfeitures under FAS 123R. 

However, under the amendments, the 

compensation cost disclosed for Item 

402 purposes will not include an 

estimate of forfeitures related to servicebased vesting conditions. Compensation 

cost for awards containing service-based 

vesting conditions 33 will be disclosed 

assuming that a named executive officer 

will perform the requisite service to vest 

in the award. If the named executive 

officer fails to perform the requisite 

service and forfeits the award, the 


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34This approach to forfeitures was suggested in 

the letter from BDO Seidman. 

35As defined in Appendix E of FAS 123R, a 

performance condition is ‘‘a condition affecting the 

vesting, exercisability, exercise price or other 

pertinent factors used in determining the fair value 

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

rendering service for a specified (either explicitly or 

implicitly) period of time and (b) achieving a 

specified performance target that is defined solely 

by reference to the employer’s own operations (or 

activities). Attaining a specified growth rate in 

return on assets, obtaining regulatory approval to 

market a specified product, selling shares in an 

initial public offering or other financing event, and 

a change in control are examples of performance 

conditions for purposes of this Statement. A 

performance target also may be defined by reference 

to the same performance measure of another entity 

or group of entities. For example, attaining a growth 

rate in earnings per share that exceeds the average 

growth rate in earnings per share of other entities 

in the same industry is a performance condition for 

purposes of this Statement. A performance target 

might pertain either to the performance of the 

enterprise as a whole or to some part of the 

enterprise, such as a division or an individual 

employee.’’

36 Disclosing stock and option awards as they are 

recognized for financial statement reporting 

purposes may not mirror the timing of disclosure 

of non-equity incentive plan compensation. 

Because there is not one clearly required or 

accepted standard for measuring the value at grant 

date of non-equity incentive plan awards that 

reflects the applicable performance contingencies, 

as there is for equity-based awards under FAS 123R, 

we have not included such a value in the Summary 

Compensation Table disclosure. Instead, non-equity 

incentive plan compensation is disclosed in the 

Summary Compensation Table in the year when the 

relevant specified performance criteria are satisfied 

and the compensation earned, whether or not 

payment is actually made to the named executive 

officer in that year. See Item 402(c)(2)(vii) of 

Regulation S–K, Item 402(b)(2)(vii) of Regulation S–

B and 2006 Executive Compensation Release at 

Section II.C.1.c.ii. 

37This example of graded vesting assumes an 

award with service-based vesting conditions only, 

where the company has elected the straight-line 

attribution method pursuant to paragraph 42 of FAS 

123R. 

38Footnote 25 of FAS 123R provides that whether 

vesting is probable for this purpose is determined 

based on the standard set forth in Financial 

Accounting Standards Board Statement of Financial 

Accounting Standards No. 5, Accounting for 

Contingencies (FAS 5), at paragraph 3, which 

defines probable as ‘‘the future event or events are 

likely to occur.’’

39 Instruction 1 to Item 402(a)(3) of Regulation S–

K and Instruction 1 to Item 402(a)(2) of Regulation 

S–B. 

40See letter from Fenwick. 

amount of compensation cost previously 

disclosed in the Summary 

Compensation Table will be deducted in 

the period during which the award is 

forfeited.34

Under the interim final rules, 

compensation cost for awards 

containing a performance-based vesting 

condition 35 will be disclosed in the 

Summary Compensation Table only if it 

is probable that the performance 

condition will be achieved. If the 

achievement of the performance 

condition is not probable at the grant 

date but becomes probable in a 

subsequent period, the proportionate 

amount of compensation cost based on 

service previously rendered will be 

disclosed in the Summary 

Compensation Table during the period 

in which achievement of the 

performance condition becomes 

probable. Likewise, if the achievement 

of a performance condition was 

previously considered probable but in a 

later period is no longer considered 

probable, the amount of compensation 

cost previously disclosed in the 

Summary Compensation Table will be 

reversed during the period in which it 

is determined that achievement of the 

performance condition is no longer 

probable.36

In summary, if an award with service 

or performance-based conditions 

ultimately vests, the amount 

cumulatively recognized in the 

Summary Compensation Table over a 

period of years should equal 100% of 

the grant date fair value of the equity 

award or the total fair value at the date 

of settlement for a liability award. The 

amount cumulatively reported in the 

Summary Compensation Table for 

awards with service or performancebased conditions that do not vest will be 

zero. On this basis, the amount 

cumulatively reported for equity awards 

with graded vesting will equal 100% of 

the grant date fair value of the portion 

of the award that vests. For example, if 

20% of an award to the principal 

executive officer vests in each of the five 

years following the grant and the 

principal executive officer leaves the 

company after the fourth year of service, 

80% of the award’s grant date fair value 

will be reported cumulatively in the 

Summary Compensation Table over 

those four years of service.37

In some cases, correlating disclosure 

in the Stock Awards and Option Awards 

columns to the financial statement 

recognition timing could result in a 

negative number. For example, a 

negative number would result if the 

value of awards forfeited in a fiscal year 

by a named executive officer exceeds 

the value of other awards recognized in 

the Summary Compensation Table for 

that same named executive officer. Such 

a negative number will be disclosed in 

the relevant column and affect the 

calculation of ‘‘total’’ for purposes of 

determining who is a named executive 

officer. In addition, there could be 

instances when compensation cost is 

recognized in the financial statements 

under FAS 123R in the year before the 

award is granted. This occurs when an 

employee is rendering services in 

exchange for an award, but a grant has 

not occurred because the terms of the 

award have not yet been finalized. 

There also could be instances where a 

grant has been made, but compensation 

cost is not recognized in the financial 

statements. This occurs when an award 

has a performance condition that is not 

considered at the date of grant to be 

probable to vest.38

Under FAS 123R, an award granted to 

a retirement eligible employee who is 

entitled to retain the award at retirement 

generally is not considered to have a 

substantive service requirement. This is 

because the employee can keep the 

benefit of the award without performing 

services, regardless of the stated vesting 

terms. In this circumstance, the full 

grant date fair value of the award is 

recognized in the company’s financial 

statements in the year of grant. Thus, 

the interim final rules do not effect 

significant change from the former 

requirements for computing Stock 

Awards and Option Awards disclosure 

for retirement eligible executives. 

The amendments do not revise the 

instruction regarding the determination 

of the most highly compensated 

executive officers for purposes of 

identifying named executive officers 

other than the principal executive 

officer and principal financial officer.39

This determination will continue to be 

based on total compensation, reduced 

by the sum of the increase in pension 

values and nonqualified deferred 

compensation above-market or 

preferential earnings reported in column 

(h) of the Summary Compensation 

Table, subject to a $100,000 threshold. 

However, the amendments to the Stock 

Awards and Option Awards disclosure 

may reduce potential fluctuations in 

total compensation resulting from yearto-year differences in equity awards, as 

a commenter suggested.40 Consequently, 

a company’s identification of named 

executive officers may be more 

consistent from year-to-year, facilitating 

investors’ ability to track year-to-year 

changes in compensation for the same 

persons. 

B. Grant of Plan-Based Awards Table 

Under the interim final rules, the 

grant date fair value information with 

respect to equity awards to named 

executive officers is moved to the Grants 

of Plan-Based Awards Table and 

expanded to include grant-by-grant 

information. As described above, this 

should provide investors a more 

complete perspective of the 

compensation decisions made with 

respect to the last completed fiscal year 

and facilitate Compensation Discussion 

and Analysis disclosure of the 


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Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 78343 

41See general discussion in Section II above. 

42 Item 402(d)(2)(viii) of Regulation S–K. 

Disclosing the value of the equity award in this 

table resembles the approach taken in the Option/ 

SAR Grants Table previously required by Item 

402(c) of Regulation S–K as adopted in the 1992 

Release. That table required disclosure of either (a) 

the present value of the grant at grant date under 

any option-pricing model, or (b) the potential 

realizable value of each option or freestanding SAR 

grant assuming annualized appreciation rates of 5% 

and 10%, and 0% for awards where the exercise or 

base price was below the market price of the 

underlying security at the date of grant. In their 

comment letters, AICPA, E&Y and KPMG 

recommended presenting full grant date fair value 

in a supplemental table. In light of our previous 

decision to report the full grant date fair value in 

the Summary Compensation Table, we did not 

follow this recommendation in the 2006 Executive 

Compensation Release. 

43As noted in the 2006 Executive Compensation 

Release at Section II.C.1.c.i, disclosing grant date 

fair value will give investors a clearer picture of the 

value of any in-the-money awards. 

44 Item 402(c)(2)(ix)(G) of Regulation S–K and 

Item 402(b)(2)(ix)(G) of Regulation S–B require 

disclosure in the Summary Compensation Table, 

All Other Compensation column of the dollar value 

of any dividends or other earnings paid on stock or 

option awards when those amounts were not 

factored in the grant date fair value for the stock or 

option award. Item 402(k)(2)(vii)(I) of Regulation S–

K and Item 402(f)(2)(vii)(I) of Regulation S–B 

require corresponding disclosure in the Director 

Compensation Table. These Items are amended to 

reflect that the grant date fair value no longer is 

required to be reported in the Stock Awards or 

Option Awards columns, and in the case of 

Regulation S–K, must be reported in the Grants of 

Plan-Based Awards Table with respect to named 

executive officers. 

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

46 Instead, Item 402(c) of Regulation S–B requires 

narrative disclosure to the Summary Compensation 

Table. Item 402(c)(4) includes among the examples 

of material factors necessary to an understanding of 

the Summary Compensation Table for which 

narrative disclosure should be provided the 

material terms of each grant, including but not 

limited to the date of exercisability, any conditions 

to exercisability, any tandem feature, any reload 

feature, any tax-reimbursement feature, and any 

provision that could cause the exercise price to be 

lowered. 

47See 2006 Executive Compensation Release at 

Section II.D.1. 

48 Instruction 7 to Item 402(d) of Regulation S–K. 

Disclosure of repriced awards was proposed for the 

Grants of All Other Equity Awards Table, on which 

the Grants of Plan-Based Awards Table is based in 

part. Executive Compensation and Related Party 

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

FR 6542] at Section II.B.2.b. In light of previously 

adopting Summary Compensation Table disclosure 

of the FAS 123R incremental fair value of these 

awards, we did not adopt disclosure of these 

awards in the Grants of Plan-Based Awards Table 

in the 2006 Executive Compensation Release. See 

the 2006 Executive Compensation Release at 

Section II.C.2. 

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

50 Instruction 7 to Item 402(d) and Instruction to 

Item 402(k)(2)(iii) and (iv), which conform to 

Instruction 1 to Item 402(e)(1). 

51 Item 402(e)(1)(ii) of Regulation S–K and Item 

402(c)(2) of Regulation S–B. 

52 2006 Executive Compensation Release at 

Section II.C.3.a. 

53See 5 U.S.C. 553(b). 

54 Id. 

55 2006 Executive Compensation Release at 

Section VII. 

company’s policies and decisions 

regarding named executive officers’

compensation.41

The amendments revise the Grants of 

Plan-Based Awards Table to add 

column (l), showing the full grant date 

fair value of each equity award, 

computed in accordance with FAS 

123R.42 Presenting this information on a 

grant-by-grant basis is consistent with 

the presentation of other information in 

the Grants of Plan-Based Awards Table. 

This presentation should continue to 

provide investors a clear picture of the 

value of options when granted, 

including in-the-money awards.43 The 

table will continue to disclose the 

number of shares underlying an award 

and other details regarding the award.44

To conform the presentation for 

directors, we amend the Director 

Compensation Table in Item 402 of 

Regulation S–K to require footnote 

disclosure of the grant date fair value of 

each equity award computed in 

accordance with FAS 123R.45 Under the 

amendments, grant date fair value 

information is not required regarding 

equity awards to named executive 

officers or directors of companies 

covered by Item 402 of Regulation S–B, 

which does not include a Grants of 

Plan-Based Awards Table.46 This 

differential treatment of small business 

issuers is consistent with other aspects 

of Item 402 of Regulation S–B, which in 

general recognizes that the executive 

compensation arrangements of small 

business issuers typically are less 

complex than those of other public 

companies and that satisfying disclosure 

requirements applicable to other public 

companies may impose unwarranted 

burdens on small business issuers.47

The interim final rules further amend 

the Grants of Plan-Based Awards Table 

to include information concerning 

repriced or materially modified options, 

stock appreciation rights and similar 

option-like instruments, disclosing the 

incremental fair value, computed as of 

the repricing or modification date in 

accordance with FAS 123R.48

Consistent with the presentation of 

other information in the Grants of PlanBased Awards Table, this disclosure 

will be made on a grant-by-grant basis. 

The Director Compensation Table in 

Item 402 of Regulation S–K also is 

amended to require footnote disclosure 

of the same information.49 Consistent 

with FAS 123R, this disclosure does not 

apply to any modification that equalizes 

the fair value of an award before and 

after the modification, such as a 

modification made pursuant to an 

antidilution provision that requires 

adjustment in the event of a 

recapitalization or similar transaction 

equally affecting all holders of the class 

of securities underlying the options or 

SARs. Similarly, this disclosure does 

not apply to a repricing that occurs 

through a pre-existing formula or 

mechanism in the terms of the plan or 

award that results in the periodic 

adjustment of the option or SAR 

exercise or base price, as the adjustment 

feature would have been reflected in the 

grant date fair value of the award.50 As 

described in the 2006 Executive 

Compensation Release, disclosure also 

will be provided in the Compensation 

Discussion and Analysis and the 

narrative disclosures for the Summary 

Compensation Table and Grants of PlanBased Awards Table,51 as appropriate, 

regarding awards granted in connection 

with repricing transactions.52

III. Administrative Law Matters and 

Request for Comments 

The Administrative Procedure Act 

generally requires an agency to publish 

notice of a proposed rulemaking in the 

Federal Register.53 This requirement 

does not apply, however, if the agency 

‘‘for good cause finds * * * that notice 

and public procedure are impracticable, 

unnecessary, or contrary to the public 

interest.’’ 54

The Commission, for good cause, 

finds that notice and solicitation of 

comment regarding the amendments to 

Item 402 of Regulations S–K and S–B is 

impracticable, unnecessary and contrary 

to the public interest. First, the subject 

matter of the amendments already was 

subject to extensive public comment in 

connection with the 2006 Executive 

Compensation Release, and the 

Commission has considered those 

comments thoroughly in adopting these 

interim final rules. 

Second, compliance with the Item 402 

amendments adopted in the 2006 

Executive Compensation Release is 

required for proxy and information 

statements filed on or after December 

15, 2006 that are required to include 

Item 402 disclosure for fiscal years 

ending on or after December 15, 2006, 

and for Forms 10–K and 10–KSB for 

fiscal years ending on or after December 

15, 2006.55 This compliance schedule 

affects all public companies with a 

calendar year fiscal year that are 

required to file proxy or information 

statements, which we estimate to 

number approximately 12,190, 

excluding investment companies. 

Submitting the amendments to notice 

and further opportunity for public 

comment would generate considerable 


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78344 Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 

56See 5 U.S.C. 553(d). 

57 Id. 

58This finding also satisfies the requirements of 

5 U.S.C. 808(2), allowing the rules to become 

immediately effective notwithstanding the 

requirements of 5 U.S.C. 801 (if a Federal agency 

finds that notice and public comment are 

‘‘impractical, unnecessary, or contrary to the public 

interest,’’ a rule ‘‘shall take effect at such time as 

the Federal agency promulgating the rule 

determines.’’) 

59See 2006 Executive Compensation Release at 

Section VII. 

60 Instruction 3 to Item 402(c)(2)(viii) of 

Regulation S–K. 

61This disclosure is required by Item 402(j) of 

Regulation S–K and Item 402(e) of Regulation S–B. 

uncertainty regarding the executive 

compensation disclosure standards to 

apply as these companies prepare their 

proxy statements. Given that the 

amendments affect not only the 

calculation of total compensation for 

each named executive officer, but also 

the identification of the named 

executive officers (other than the 

principal executive officer and principal 

financial officer) based on highest total 

compensation, such uncertainty could 

impose extensive burdens and costs. In 

effect, submitting the amendments to 

notice and further opportunity for 

public comment could compel calendar 

year-end companies to prepare two 

different sets of executive compensation 

disclosures because they would not 

know which version of Item 402 

ultimately would apply on the date the 

proxy or information statement must be 

filed. 

Adopting the amendments as interim 

final rules also will substantially benefit 

investors by minimizing any 

inconsistency between the measure 

used for disclosure in the Summary 

Compensation Table of Stock Awards 

and Option Awards in the first year of 

compliance and the measure used in 

later years. Avoiding such potential 

inconsistency will facilitate year-to-year 

comparability of the compensation 

disclosed for individual named 

executive officers and directors. 

The Administrative Procedure Act 

also generally requires that an agency 

publish an adopted rule in the Federal 

Register 30 days before it becomes 

effective.56 This requirement, however, 

does not apply if the agency finds good 

cause for making the rule effective 

sooner.57 For the same reasons as it is 

waiving notice and comment, the 

Commission finds good cause to make 

the amendments effective as interim 

final rules upon publication of this 

release in the Federal Register.58 The 

compliance dates for the interim final 

rules will be the same as the compliance 

dates for the amendments to Item 402 of 

Regulations S–K and S–B that were 

adopted in the 2006 Executive 

Compensation Release.59

Although the Commission is 

dispensing with prior notice of 

proposed rulemaking, the Commission 

is interested in receiving written 

comments on the interim final rules 

within 30 days after publication of this 

release in the Federal Register. The 

Commission will consider those 

comments and make changes to the 

amendments if necessary. 

• Do the amendments result in 

disclosure that is easier or more difficult 

for investors to understand? Do the 

amendments facilitate or complicate 

company compliance? For example, 

does presenting the compensation costs 

of stock and option awards over the 

requisite service period, as described in 

FAS 123R, for each individual named 

executive officer increase compliance 

costs? 

• Does correlating the Summary 

Compensation Table and Director 

Compensation Table disclosure to the 

recognition of the compensation cost of 

stock and option awards over the 

requisite service period, as described in 

FAS 123R, with full grant date fair value 

disclosure for named executive officers 

and directors of non-small business 

issuers only, provide investors with a 

clearer and more useful presentation of 

compensation for the subject fiscal year 

than disclosure of aggregate grant date 

fair value in the Summary and Director 

Compensation Tables? Are there other 

approaches that would provide a better 

presentation of compensation? 

• Should footnote or narrative 

disclosure be required to identify the 

remeasurement of liability awards? If so, 

what level of detail should we require? 

• Under the interim final rules, the 

compensation cost disclosed for 

Summary Compensation Table and 

Director Compensation Table purposes 

does not include an estimate of 

forfeitures related to service-based 

vesting conditions. Is this deviation 

from FAS 123R needed to present 

meaningful executive compensation 

disclosure? If not, why not? Does this 

deviation make it easier or harder for 

companies to prepare the disclosure and 

for investors to understand it? 

• Correlating disclosure in the Stock 

Awards and Option Awards columns to 

an approach that provides disclosure of 

compensation cost of those awards over 

the requisite service period could result 

in a negative number. In this 

circumstance, the negative number will 

be disclosed and will affect the 

calculation of ‘‘total’’ for purposes of 

determining who is a named executive 

officer. Instead, should the same 

approach be followed as for disclosure 

of the aggregate change in actuarial 

present value of the named executive 

officer’s accumulated benefit under all 

defined benefit and actuarial plans, 

where a negative number is disclosed in 

a footnote but not reflected in the 

applicable column and not subtracted 

for purposes of computing the total? 60

• Does applying a recognition-based 

measure for Summary Compensation 

Table disclosure of equity awards result 

in any circumstances where, in 

disclosing a named executive officer’s 

potential payments upon termination or 

change-in-control,61 there would be a 

disclosure gap regarding the remaining 

value of outstanding awards (as adjusted 

for any acceleration of vesting) that has 

not yet been recognized? 

• Does spreading out disclosure of 

equity award compensation over the 

period that the cost is recognized for 

financial reporting purposes result in 

less variability in the amount of total 

compensation reported from year-toyear? 

• If the amendments result in fewer 

year-to-year fluctuations in the list of 

named executive officers, will such 

increased consistency result in more 

meaningful disclosure to investors? 

• The interim final rules revise 

Summary Compensation Table 

disclosure of salary or bonus forgone at 

the election of a named executive officer 

under which stock, equity-based or 

other forms of non-cash compensation 

have instead been received by the 

named executive officer to require this 

compensation to be disclosed in the 

salary or bonus column, as applicable. 

Should this compensation be disclosed 

this way? Are there any other items of 

disclosure that should be revised in 

light of adopting a recognition-based 

approach to Summary Compensation 

Table and Director Compensation Table 

disclosure of equity-based 

compensation? 

• Will Grants of Plan-Based Awards 

Table disclosure of the grant date fair 

value on a grant-by-grant basis improve 

investors’ understanding of the value of 

awards, including in-the-money grants? 

• For companies subject to Item 402 

of Regulation S–K, is footnote disclosure 

in the Director Compensation Table of 

the grant date fair value of each equity 

award necessary to investors’

understanding of director 

compensation? 

• Under the interim final rules, 

disclosure of the full grant date fair 

value of equity awards and disclosure of 

the incremental fair value for repriced 

or materially modified awards no longer 

will be required for named executive 

officers and directors of small business 


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Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 78345 

62 Item 402(c) of Regulation S–B. 

63 Item 402(f)(3) of Regulation S–B. 

64Under the amendments, the adjustments to 

update the cumulative compensation costs 

recognized for certain awards that a company might 

have in the year that FAS 123R initially is adopted 

will not be included in the Summary Compensation 

Table disclosure for that year. 

65Under the modified prospective transition 

method in FAS 123R, the accounting for new 

awards and awards that are modified, repurchased 

or cancelled after the standard’s effective date must 

apply the provisions of FAS 123R. 

66Consequently, for companies that have not 

adopted the modified prospective transition method 

for financial statement reporting, the tabular 

compensation disclosure may not match financial 

statement disclosure during the transition period. 

67 44 U.S.C. 3501 et seq. 

68 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

69The paperwork burden from Regulation S–K 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 

Regulation S–K to be a total of one hour. 

70 17 CFR 239.10. 

71 17 CFR 239.11. 

72 17 CFR 239.25. 

73 17 CFR 239.18. 

74 17 CFR 240.14a–1 et seq. 

75 17 CFR 240.14a–101. 

76 17 CFR 240.14c–1 et seq. 

77 17 CFR 240.14c–101. 

78 17 CFR 249.210. 

79 17 CFR 249.210b. 

80 17 CFR 249.310. 

81 17 CFR 249.310b. 

82 17 CFR 239.14 and 274.11a–1. 

83 15 U.S.C. 77a et seq. 

84 15 U.S.C. 78a et seq. 

85 15 U.S.C. 80a–1 et seq. 

86The pertinent annual reports are those filed on 

Form 10–K and Form 10–KSB. 

issuers. Are these results appropriate? 

Should this disclosure also be required, 

on either an aggregate or grant-by-grant 

basis by Regulation S–B companies, 

either as a footnote or in the narrative 

disclosure to the Summary 

Compensation Table? 62 As a footnote or 

in narrative disclosure to the Director 

Compensation Table? 63

• In circumstances where 

compensation cost with respect to an 

award is first recognized in the financial 

statements in the year before the award 

is granted, should disclosure in the 

Grants of Plan-Based Awards Table also 

be required in the year before the award 

is granted to eliminate potential 

inconsistency between these tables? 

What modifications would be required 

to reflect that the terms of the award 

have not yet been finalized? 

• Should footnote or narrative 

disclosure be required to identify in the 

Grants of Plan-Based Awards Table and 

the Regulation S–B narrative disclosure 

to the Summary Compensation Table 

equity awards with performance 

conditions that are not considered 

probable of achievement and therefore 

are not reflected in the Summary 

Compensation Table disclosure? If so, 

what level of detail should we require? 

IV. Transition Guidance 

Because FAS 123R became effective 

for companies in 2006, it did not apply 

to stock and option awards that were 

granted in earlier years. Consequently, 

we are providing transition guidance for 

application of the Summary 

Compensation Table and Director 

Compensation Table amendments to 

disclosure of awards that were granted 

before 2006, including both equity 

awards that are not yet vested and 

liability awards that are not yet 

settled.64 In this regard, we are requiring 

companies to utilize the FAS 123R 

modified prospective transition 

method 65 for Item 402 disclosure 

purposes, without regard to whether 

they have adopted that method for 

financial statement reporting 

purposes.66 Under the modified 

prospective transition method, a 

proportionate share of the grant date fair 

value determined under Financial 

Accounting Standards Board Statement 

of Financial Accounting Standards No. 

123, Accounting for Stock-Based 

Compensation, of equity awards that are 

outstanding at the date FAS 123R was 

adopted will be recognized in the 

financial statements over those awards’

remaining vesting periods, if any. 

Liability awards that are outstanding at 

the date FAS 123R was adopted will be 

recognized in the financial statements 

until those awards are settled, based on 

the fair values of those awards at each 

financial statement reporting period 

under FAS 123R as well as the portion 

of the awards that have vested. The 

same approach will apply for 

presentation of the corresponding 

information in the Summary 

Compensation Table and Director 

Compensation Table for fiscal 2006 and 

later fiscal years. 

V. Paperwork Reduction Act 

A. Background 

The interim final rules contain 

‘‘collection of information’’

requirements within the meaning of the 

Paperwork Reduction Act of 1995.67 We 

are submitting these to the Office of 

Management and Budget for review and 

approval in accordance with the 

Paperwork Reduction Act. 68 The titles 

for the collection of information are: 69

(1) ‘‘Regulation S–B’’ (OMB Control 

No. 3235–0417); 

(2) ‘‘Regulation S–K’’ (OMB Control 

No. 3235–0071); 

(3) ‘‘Form SB–2’’ 70 (OMB Control No. 

3235–0418); 

(4) ‘‘Form S–1’’ 71 (OMB Control No. 

3235–0065); 

(5) ‘‘Form S–4’’ 72 (OMB Control 

Number 3235–0324); 

(6) ‘‘Form S–11’’ 73 (OMB Control 

Number 3235–0067); 

(7) ‘‘Regulation 14A 74 and Schedule 

14A’’ 75 (OMB Control Number 3235–

0059); 

(8) ‘‘Regulation 14C76 and Schedule 

14C’’ 77 (OMB Control Number 3235–

0057); 

(9) ‘‘Form 10’’ 78 (OMB Control No. 

3235–0064); 

(10) ‘‘Form 10–SB’’ 79 (OMB Control 

No. 3235–0419) 

(11) ‘‘Form 10–K’’ 80 (OMB Control 

No. 3235–0063); 

(12) ‘‘Form 10–KSB’’ 81 (OMB Control 

No. 3235–0420); and 

(13) ‘‘Form N–2’’ 82 (OMB Control No. 

3235–0026). 

We adopted all of the existing 

regulations and forms pursuant to the 

Securities Act of 1933 (‘‘Securities 

Act’’) 83 and the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’),84 except for 

Form N–2, which we adopted pursuant 

to the Securities Act and the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’).85 These regulations 

and forms set forth the disclosure 

requirements for annual 86 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. 

The amendments adopted as interim 

final rules are intended to provide 

investors a fuller and more useful 

picture of executive compensation. In 

particular, they are intended to provide 

a more complete perspective of the 

compensation decisions made with 

respect to the last completed fiscal year, 

facilitate Compensation Discussion and 

Analysis disclosure of the company’s 

policies and decisions regarding named 

executive officers’ compensation, and 

provide investors with a clearer view of 

the annual compensation earned by 

executives and directors and the annual 

compensation costs to a company 

consistent with the timing of financial 

statement reporting. 

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 


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78346 Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 

87Comments are requested pursuant to 44 U.S.C. 

3506(c)(2)(B). 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number. 

The information collection 

requirements related to annual and 

current reports, registration statements, 

proxy statements and information 

statements are mandatory. However, the 

information collection requirements 

relating exclusively to proxy and 

information statements will apply only 

to issuers subject to the proxy rules. 

There is no mandatory retention period 

for the information disclosed, and the 

information disclosed will be made 

publicly available on the EDGAR filing 

system. 

B. Summary of Information Collections 

The amendments will affect existing 

disclosure burdens for affected filings as 

follows: 

• The dollar value reported in the 

Stock Awards and Option Awards 

columns of the Summary Compensation 

Table and Director Compensation Table 

is revised to disclose the compensation 

cost of those awards over the requisite 

service period, as described in FAS 

123R, but will not reflect the estimate 

for forfeitures related to service-based 

vesting used for financial statement 

reporting purposes; 

• The Stock Awards and Option 

Awards columns of the Summary 

Compensation Table and Director 

Compensation Table are revised to 

require footnote disclosure of forfeitures 

during the last completed fiscal year; 

• The Grants of Plan-Based Awards 

Table is revised to require disclosure of 

the grant date fair value of each 

individual equity award, computed in 

accordance with FAS 123R, and the 

Item 402 of Regulation S–K Director 

Compensation Table is revised to 

require footnote disclosure of the same 

information; and 

• The Grants of Plan-Based Awards 

Table is revised to require disclosure of 

any option or SAR that was repriced or 

otherwise materially modified during 

the last completed fiscal year, including 

the incremental fair value, computed as 

of the repricing or modification date in 

accordance with FAS 123R, and the 

Item 402 of Regulation S–K Director 

Compensation Table is revised to 

require footnote disclosure of the same 

incremental fair value information. 

C. Paperwork Reduction Act Burden 

Estimates 

For purposes of the Paperwork 

Reduction Act, we estimate no annual 

incremental increase in the paperwork 

burden for companies to comply with 

our amended collection of information 

requirements. We base this estimate on 

the fact that the revised approach is 

substantially the same as the approach 

companies already apply when 

complying with financial reporting 

requirements, most of the information 

that will be required to be disclosed will 

be collected to comply with financial 

reporting requirements, and any 

necessary modifications will not impose 

additional burdens compared to the 

burdens associated with applying the 

currently required disclosure. We also 

base this estimate on the likelihood that 

the revised approach will make 

companies’ identification of named 

executive officers more consistent from 

year-to-year, thereby possibly reducing 

the burden of tracking the compensation 

of all executive officers in order to 

determine which executive officers are 

the most highly compensated. 

D. Request for Comment 

We invite comment on this estimate 

and its assumptions. 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.87

VI. Cost-Benefit Analysis 

A. Background 

We are adopting, as interim final 

rules, amendments to our rules 

governing disclosure of executive 

compensation. The amendments 

adopted as interim final rules are 

intended to provide investors a fuller 

and more useful picture of executive 

compensation. In particular, they are 

intended to provide a more complete 

perspective of the compensation 

decisions made with respect to the last 

completed fiscal year, facilitate 

Compensation Discussion and Analysis 

disclosure of the company’s policies 

and decisions regarding named 

executive officers’ compensation, and 

provide investors with a clearer view of 

the annual compensation earned by 

executives and directors and the annual 

compensation costs to a company 

consistent with the timing of financial 

statement reporting. 

B. Summary of Amendments 

Under the amendments adopted as 

interim final rules, a measure based on 

the dollar amount recognized for 

financial statement reporting purposes 

with respect to the fiscal year in 

accordance with FAS 123R will become 

the measure for reporting in the Stock 

Awards and Option Awards columns in 

the Summary Compensation Table and 

the Director Compensation Table. 

However, this measure does not include 

an estimate of forfeitures related to 

service-based vesting conditions, and 

the amendments require footnote 

disclosure of awards forfeited during the 

last completed fiscal year. The new 

measure, which is included in total 

compensation disclosed in the 

Summary Compensation Table, could 

affect the determination of most highly 

compensated executive officers for 

purposes of identifying named 

executive officers other than the 

principal executive officer and principal 

financial officer. 

Under the interim final rules, the 

Grants of Plan-Based Awards Table is 

amended to add a column showing the 

grant date fair value of each equity 

award computed in accordance with 

FAS 123R, and information for repriced 

options, stock appreciation rights and 

similar option-like instruments, 

including the incremental fair value 

computed as of the repricing or 

modification date in accordance with 

FAS 123R. The interim final rules also 

amend the Director Compensation Table 

in Item 402 of Regulation S–K to 

provide footnote disclosure of the same 

grant date fair value and incremental 

fair value information. 

C. Benefits 

Basing Stock and Options Award 

disclosure in the Summary 

Compensation Table and Director 

Compensation Table on the amount 

recognized for financial statement 

purposes, as required by the interim 

final rules, will provide investors with 

a fuller and more useful picture of 

executive compensation. Measuring 

compensation in a manner more 

consistent with FAS 123R recognition 

will provide investors with a clearer 

view of the annual compensation costs 

to a company. The amended 

presentation in some circumstances will 

reduce the possibility of overstating 

compensation related to service 

rendered for the year that could result 

from disclosing the full grant date fair 

value, particularly with respect to 

liability awards, which are subject to 


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88 15 U.S.C. 78w(a)(2). 

89 15 U.S.C. 77b(b). 

90 15 U.S.C. 78c(f). 

91 15 U.S.C. 80a–2(c). 

remeasurement, and will better reflect 

the possibility that some awards may be 

forfeited. Potentially reducing the 

variability in the identity of named 

executive officers from year-to-year may 

result in compensation disclosure that is 

more meaningful to investors due to the 

ability to track year-to-year changes in 

the same executive’s compensation. 

For companies subject to Item 402 of 

Regulation S–K, grant date fair value 

information is moved to the Grants of 

Plan-Based Awards Table, where it is 

presented on a more comprehensible 

grant-by-grant basis. This should 

provide investors a more complete 

perspective of the compensation 

decisions made with respect to the last 

completed fiscal year and facilitate 

Compensation Discussion and Analysis 

disclosure of the company’s policies 

and decisions regarding named 

executive officers’ compensation. 

Amending the Director Compensation 

Table in Item 402 of Regulation S–K to 

provide footnote disclosure of the same 

grant date fair value and incremental 

fair value information also will present 

this information on a more 

comprehensible grant-by-grant basis. 

Conforming Summary Compensation 

Table disclosure of equity-based awards 

to the timing mandated for the 

company’s financial statements, 

together with the fair value disclosure in 

the Grants of Plan-Based Awards Table, 

will provide more disclosure, 

potentially making it easier for investors 

and analysts to analyze compensation 

for top executives. 

Although difficult to quantify, 

disclosure under the amendments will 

benefit investors in terms of the 

transparency, completeness and 

accessibility of executive compensation 

disclosure. Making Summary 

Compensation Table and Director 

Compensation Table disclosure of stock 

and option awards more comparable to 

the approach used for financial 

accounting recognition purposes will 

make executive compensation 

disclosure more transparent by 

providing investors a clearer picture of 

annual compensation costs. Moving 

grant date fair value information to the 

Grants of Plan-Based Awards Table, 

where it is presented on a more 

comprehensive grant-by-grant basis, and 

requiring the same disclosure in a 

footnote to the Director Compensation 

Table, makes this disclosure more 

complete and accessible for investors in 

companies that report under Item 402 of 

Regulation S–K. To the extent that the 

amendments facilitate Compensation 

Discussion and Analysis disclosure of 

the company’s policies and decisions 

regarding named executive officers’

compensation, investors will obtain a 

more complete perspective of the 

compensation decisions made with 

respect to the last completed fiscal year. 

D. Costs 

In our view, the amendments to the 

executive compensation disclosure rules 

adopted as interim final rules do not 

significantly increase the costs of 

complying with the Commission’s rules. 

In order to implement the amendments, 

companies will need to incur costs to 

revise their disclosure controls. 

However, we believe that these costs 

will be incurred principally on a 

transitional basis as companies and 

their advisors determine how best to 

compile and report information in 

response to the amended disclosure 

requirements. We base this view on the 

fact that the amended approach for 

Summary Compensation Table and 

Director Compensation Table disclosure 

is substantially the same as the 

approach companies already apply 

when complying with financial 

reporting requirements, most of the 

information that will be required to be 

disclosed will have been collected to 

comply with financial reporting 

requirements, and any necessary 

modifications will impose minimal 

additional costs compared to the costs 

associated with applying the formerly 

required disclosure. We also base this 

view on the likelihood that the amended 

approach will make companies’

identification of named executive 

officers more consistent from year-toyear, thereby possibly reducing the costs 

of tracking the compensation of all 

executive officers in order to determine 

which executive officers are the most 

highly compensated. 

The amendments also may generate 

costs if they affect the compensation 

practices of companies or executives’

preferences with respect to executive 

compensation. Under the amendments, 

the Item 402 of Regulation S–B 

Summary Compensation Table and 

Director Compensation Table no longer 

will provide the full grant date fair 

value of equity awards to named 

executive officers. Similarly, neither of 

these tables will provide disclosure of 

the incremental fair value of awards that 

are repriced or materially modified. To 

the extent that the loss of this 

information will reduce the value of 

executive compensation disclosure to 

investors, the amendments could 

impose costs on investors. 

E. Request for Comment 

• We solicit quantitative data to assist 

our assessment of the benefits and costs 

of the revised disclosure requirements. 

• What, if any, additional work and 

costs are involved in collecting the 

information necessary to comply with 

the amendments? What are the types of 

costs, and in what amounts? In what 

way can the amendments be modified to 

mitigate the costs? 

• Does identification of named 

executive officers based on the portion 

of equity compensation earned during 

the fiscal year result in more meaningful 

identification of named executive 

officers than under the former method 

based on the aggregate grant date fair 

value of awards? 

• Will the interim final rules have an 

effect on companies’ choice of 

compensation packages, or executives’

preferences with respect to equity 

awards? 

• Assuming the interim final rules are 

retained, 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 amendments will 

require to be disclosed. 

VII. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition and Capital 

Formation 

Exchange Act Section 23(a)(2) 88

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),89 Exchange Act Section 3(f) 90 and 

Investment Company Act Section 2(c) 91

require us, when engaging in 

rulemaking where we are required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation. 

We have also discussed other impacts 

of the amendments adopted as interim 

final rules in our Cost-Benefit, 

Paperwork Reduction Act and Final 

Regulatory Flexibility Act Analyses. The 

amendments to Regulations S–K and S–

B are intended to make executive 

compensation disclosure more 

consistent with financial statement 

disclosure, which should promote 


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78348 Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 

92See the 2006 Executive Compensation Release. 

93 17 CFR 230.157. 

94 17 CFR 240.0–10(a). 

95 17 CFR 270.0–10. 

96Business 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). 

97 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. 

efficiency. The amendments should 

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. In particular, measuring 

executive and director compensation in 

a manner more consistent with financial 

accounting recognition, along with 

disclosure of the grant date fair value of 

equity awards on a grant-by-grant basis, 

should provide investors with a fuller 

and more useful picture of executive 

compensation. This would include a 

clearer view of a company’s 

compensation decisions and the annual 

compensation costs to a company. 

The amendments may have the effect 

of reducing the likelihood of 

inconsistencies in the identity of named 

executive officers from year-to-year. To 

this extent, the number of executives for 

whom competitors could potentially 

gain insights with respect to a 

company’s executive compensation 

practices through the required 

disclosure over a period of years may be 

reduced. However, we do not expect the 

incremental effect of the amendments 

overall to affect competition materially. 

In adopting the amendments, we have 

considered their effect on capital 

formation and believe that the 

amendments will have little effect on 

capital formation. 

We request comment on whether the 

amendments will 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. 

VIII. Final Regulatory Flexibility Act 

Analysis 

This Final Regulatory Flexibility Act 

Analysis has been prepared in 

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

to revisions to the rules and forms under 

the Securities Act and Exchange Act, 

adopted as interim final rules, that will 

provide investors with a presentation of 

compensation for the fiscal year that is 

more comparable to the approach used 

for financial accounting purposes. 

A. Need for the Amendments 

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. 

Recently, the Commission adopted 

comprehensive amendments to improve 

the clarity and completeness of 

executive compensation disclosure.92

The interim final rules principally 

modify two aspects of those 

comprehensive amendments: modifying 

the timing of reporting option and stock 

awards in the Summary Compensation 

Table and Director Compensation Table 

so that it is more comparable to 

financial accounting recognition; and, in 

Item 402 of Regulation S–K, requiring 

Grants of Plan-Based Awards Table 

reporting of the full grant date fair value 

of equity awards and information 

regarding option, SAR and similar 

option-like awards that are repriced or 

materially modified during the fiscal 

year, and Director Compensation Table 

footnote disclosure of the same 

information. The overall goal of the 

amendments is to increase the 

transparency and completeness of 

executive compensation disclosure by 

providing investors a fuller and more 

useful picture of executive 

compensation. In particular, they are 

intended to provide a more complete 

perspective of the compensation 

decisions made with respect to the last 

completed fiscal year, facilitate 

Compensation Discussion and Analysis 

disclosure of the company’s policies 

and decisions regarding named 

executive officers’ compensation, and 

provide investors with a clearer view of 

the annual compensation earned by 

executives and directors and the annual 

compensation costs to a company 

consistent with the timing of financial 

statement reporting. 

B. Significant Issues Raised by Public 

Comment 

As summarized in Section I above, 

several commenters expressed the view 

that Summary Compensation Table 

disclosure of equity awards should be 

presented on a basis that is generally 

consistent with financial statement 

reporting. We have taken these 

comments into account in adopting the 

amendments that would apply to small 

entities. 

C. Small Entities Subject to the 

Amendments 

For purposes of the Regulatory 

Flexibility Act, Securities Act Rule 

15793 and Exchange Act Rule 0–10(a) 94

define an issuer to be a ‘‘small business’’

or ‘‘small organization’’ for purposes of 

the Regulatory Flexibility Act if it had 

total assets of $5 million or less on the 

last day of its most recent fiscal year. 

These are the types of entities that we 

refer to as small entities in this section. 

We believe that the amendments will 

affect small entities that are operating 

companies. We estimate that there are 

approximately 2,500 issuers, other than 

investment companies, that may be 

considered small entities. Under Rule 

0–10 under the Investment Company 

Act,95 an investment company is a small 

entity 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. 

We believe that the amendments will 

affect small entities that are investment 

companies. Specifically, we believe that 

the amendments will affect small 

entities that are business development 

companies.96 We estimate that there are 

53 business development companies 

that qualify as small entities. 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

We note that small business issuers,97

which is a broader category of issuers 

than small entities, in certain 

circumstances may provide the 

executive compensation disclosure 

specified in Item 402 of Regulation S–

B, rather than the corresponding 

disclosure specified in Item 402 of 

Regulation S–K. 

The amendments adopted as interim 

final rules will affect small business 

issuers as follows: 

• The dollar value reported in the 

Stock Awards and Option Awards 

columns of the Summary Compensation 

Table and Director Compensation Table 

is revised to disclose the compensation 

cost of those awards over the requisite 

service period, as described in FAS 

123R, but will not reflect the estimate 

for forfeitures related to service-based 

vesting used for financial statement 

reporting purposes; and 

• The Stock Awards and Option 

Awards columns of the Summary 

Compensation Table and Director 

Compensation Table are revised to 

require footnote disclosure of forfeitures 

during the last completed fiscal year. 

Because Item 402 of Regulation S–B 

does not include the Grants of PlanBased Awards Table, the amendments 

to Item 402 of Regulation S–B do not 

include the following disclosures that 


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Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 78349 

are required for named executive 

officers and directors by the 

amendments to Item 402 of Regulation 

S–K: 

• Disclosure of the grant date fair 

value of each individual equity award, 

computed in accordance with FAS 

123R; and 

• Disclosure of the incremental fair 

value, computed as of the repricing or 

modification date in accordance with 

FAS 123R, of any option or SAR that 

was repriced or otherwise materially 

modified during the last completed 

fiscal year. 

As a result, the amendments to Item 

402 of Regulation S–B do not result in 

the same level of incremental increase 

in costs or burdens to small businesses 

as do the amendments to Item 402 of 

Regulation S–K. 

E. Agency Action To Minimize Effect on 

Small Entities 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish the stated 

objectives, while minimizing any 

significant adverse impact on small 

entities. In connection with the 

amendments, we considered the 

following alternatives: 

1. Establishing different compliance 

or reporting requirements which take 

into account the resources available to 

smaller entities; 

2. The clarification, consolidation or 

simplification of disclosure for small 

entities; 

3. Use of performance standards 

rather than design standards; and 

4. Exempting smaller entities from 

coverage of the disclosure requirements, 

or any part thereof. 

We have considered different changes 

to our rules and forms to achieve our 

regulatory objectives, and where 

possible, have taken steps to minimize 

the effect of the rules on smaller 

entities. The amendments are unlikely 

to have a significant impact on smaller 

entities because their principal effect is 

to make Summary Compensation Table 

and Director Compensation Table 

disclosure of stock and option awards 

more comparable to the financial 

statement presentation of those 

compensation items. The amendments 

do not affect the abbreviated format of 

the Regulation S–B Summary 

Compensation Table, which requires 

disclosure with respect to the principal 

executive officer and two most highly 

compensated executive officers for the 

small business issuer’s last two 

completed fiscal years. Because Item 

402 of Regulation S–B does not include 

a Grants of Plan-Based Awards Table, 

the amendments to that table do not 

apply. 

F. General Request for Comments 

We solicit written comments 

regarding this analysis. We request 

comment on whether the amendments 

adopted as interim final rules 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. 

IX. Statutory Authority and Text of the 

Amendments 

We are adopting rule amendments 

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

19(a) of the Securities Act, as amended, 

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

the Exchange Act, as amended, Section 

38 of the Investment Company Act, and 

Section 3(a) of the Sarbanes-Oxley Act 

of 2002. 

List of Subjects 

17 CFR Part 228 

Reporting and recordkeeping 

requirements, Securities, Small 

businesses. 

17 CFR Part 229 

Reporting and recordkeeping 

requirements, Securities. 

■ For the reasons set out in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations is amended 

as follows: 

PART 228—INTEGRATED 

DISCLOSURE SYSTEM FOR SMALL 

BUSINESS ISSUERS 

■ 1. The authority citation for part 228 

continues to read in part as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 

77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll, 

78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b–

11, and 7201 et seq.; and 18 U.S.C. 1350. 

* * * * * 

■ 2. Section 228.402 is amended by 

revising Instruction 2 to Item 

402(b)(2)(iii) and (iv), paragraphs 

(b)(2)(v), (b)(2)(vi) and the Instructions 

to Item 402(b)(2)(v) and (b)(2)(vi), 

paragraph (b)(2)(ix)(G), paragraphs 

(f)(2)(iii), (f)(2)(iv) and (f)(2)(vii)(I), and 

Instruction to Item 402(f) to read as 

follows: 

§ 228.402 (Item 402) Executive 

compensation. 

* * * * * 

(b) * * * 

(2) * * * 

Instructions to Item 402(b)(2)(iii) and (iv). 

* * * * * 

2. Small business issuers shall include in 

the salary column (column (c)) or bonus 

column (column (d)) any amount of salary or 

bonus forgone at the election of a named 

executive officer under which stock, equitybased or other forms of non-cash 

compensation instead have been received by 

the named executive officer. However, the 

receipt of any such form of non-cash 

compensation instead of salary or bonus 

must be disclosed in a footnote added to the 

salary or bonus column and, where 

applicable, referring to the narrative 

disclosure to the Summary Compensation 

Table (required by paragraph (c) of this Item) 

where the material terms of the stock, option 

or non-equity incentive plan award elected 

by the named executive officer are reported. 

(v) For awards of stock, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (e)); 

(vi) For awards of options, with or 

without tandem SARs, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (f)); 

Instruction to Item 402(b)(2)(v) and (vi). 

For awards reported in columns (e) and (f), 

disregard the estimate of forfeitures related to 

service-based vesting conditions. Include a 

footnote describing all forfeitures during the 

year, and disclosing all assumptions made in 

the valuation. Disclose 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. 

* * * * * 

(ix) * * * 

(G) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 

were not factored into the grant date fair 

value for the stock or option award; and 

* * * * * 

(f) * * * 

(2) * * * 

(iii) For awards of stock, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (c)); 

(iv) For awards of stock options, with 

or without tandem SARs, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (d)); 

* * * * * 

(vii) * * * 

(I) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 


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78350 Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 

were not factored into the grant date fair 

value for the stock or option award; and 

* * * * * 

Instruction to Item 402(f). 

In addition to the Instruction to paragraph 

(f)(2)(vii) of this Item, the following apply 

equally to paragraph (f) of this Item: 

Instructions 2 and 4 to paragraph (b) of this 

Item; the Instructions to paragraphs (b)(2)(iii) 

and (iv) of this Item; the Instruction to 

paragraphs (b)(2)(v) and (vi) of this Item; the 

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

Item; the Instruction to paragraph (b)(2)(viii) 

of this Item; the Instructions to paragraph 

(b)(2)(ix) of this Item; and paragraph (c)(7) of 

this Item. These Instructions apply to the 

columns in the Director Compensation Table 

that are analogous to the columns in the 

Summary Compensation Table to which they 

refer and to disclosures under paragraph (f) 

of this Item that correspond to analogous 

disclosures provided for in paragraph (b) of 

this Item to which they refer. 

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 

■ 3. The general authority citation for 

part 229 is revised 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, 80a–8, 80a–9, 

80a–20, 80a–29, 80a–30, 80a–31(c), 80a–37, 

80a–38, 80av39, 80b–11, and 7201 et seq.; 

and 18 U.S.C. 1350, unless otherwise noted. 

* * * * * 

■ 4. Section 229.402 is amended by 

revising Instruction 2 to Item 

402(c)(2)(iii) and (iv), paragraphs 

(c)(2)(v) and (c)(2)(vi), the Instructions 

to Item 402(c)(2)(v) and (c)(2)(vi), and 

paragraph (c)(2)(ix)(G), revising the 

Grants of Plan-Based Awards Table in 

paragraph (d)(1), removing ‘‘and’’ at the 

end of paragraph (d)(2)(vi), removing 

the period at the end of paragraph 

(d)(2)(vii) and adding ‘‘and’’ in its place, 

adding paragraph (d)(2)(viii) and 

Instruction 7 to Item 402(d), revising 

paragraphs (k)(2)(iii), (k)(2)(iv), the 

Instruction to Item 402(k)(2)(iii) and 

(iv), and revising paragraph (k)(2)(vii)(I) 

and Instruction to Item 402(k), to read 

as follows: 

§ 229.402 (Item 402) Executive 

compensation. 

* * * * * 

(c) * * * 

(2) * * * 

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

* * * * * 

2. Registrants shall include in the salary 

column (column (c)) or bonus column 

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

forgone at the election of a named executive 

officer under which stock, equity-based or 

other forms of non-cash compensation 

instead have been received by the named 

executive officer. However, the receipt of any 

such form of non-cash compensation instead 

of salary or bonus must be disclosed in a 

footnote added to the salary or bonus column 

and, where applicable, referring to the Grants 

of Plan-Based Awards Table (required by 

paragraph (d) of this Item) where the stock, 

option or non-equity incentive plan award 

elected by the named executive officer is 

reported. 

(v) For awards of stock, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (e)); 

(vi) For awards of options, with or 

without tandem SARs, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (f)); 

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

awards reported in columns (e) and (f), 

disregard the estimate of forfeitures related to 

service-based vesting conditions. Include a 

footnote describing all forfeitures during the 

year, and disclosing all assumptions made in 

the valuation. Disclose 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. 

* * * * * 

(ix) * * * 

(G) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 

were not factored into the grant date fair 

value required to be reported for the 

stock or option award in column (l) of 

the Grants of Plan-Based Awards Table 

required by paragraph (d)(2)(viii) of this 

Item; and 

* * * * * 

(d) * * * 

GRANTS OF PLAN-BASED AWARDS

Name Grant 

date 

Estimated future payouts under 

non-equity incentive plan awards 

Estimated future payouts under 

equity incentive plan awards All other 

stock 

awards: 

Number 

of shares 

of stock 

or units 

(#) 

All other 

option 

awards: 

Number 

of securities underlying 

options 

(#) 

Exercise 

or base 

price of 

option 

awards 

($/Sh) 

Grant 

date fair 

value of 

stock and 

option 

awards 

Threshold 

($) 

Target 

($) 

Maximum 

($) 

Threshold 

(#) 

Target 

(#) 

Maximum 

(#) 

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

PEO 

PFO 

A 

B 

C 

(2) * * * 

(viii) The grant date fair value of each 

equity award computed in accordance 

with FAS 123R (column (l)). If at any 

time during the last completed fiscal 

year, the registrant has adjusted or 

amended the exercise or base price of 

options, SARs or similar option-like 

instruments 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 incremental 

fair value, computed as of the repricing 

or modification date in accordance with 

FAS 123R, with respect to that repriced 

or modified award, shall be reported. 

Instructions to Item 402(d). 

* * * * * 


rmajette on PROD1PC72 with RULES
Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Rules and Regulations 78351 

7. Options, SARs and similar option-like 

instruments granted in connection with a 

repricing transaction or other material 

modification shall be reported in this Table. 

However, the disclosure required by this 

Table does 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. 

* * * * * 

(k) * * * 

(2) * * * 

(iii) For awards of stock, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (c)); 

(iv) For awards of stock options, with 

or without tandem SARs, the dollar 

amount recognized for financial 

statement reporting purposes with 

respect to the fiscal year in accordance 

with FAS 123R (column (d)); 

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

For each director, disclose by footnote to 

the appropriate column: the grant date fair 

value of each equity award computed in 

accordance with FAS 123R; for each option, 

SAR or similar option like instrument for 

which the registrant has adjusted or amended 

the exercise or base price during the last 

completed fiscal year, whether through 

amendment, cancellation or replacement 

grants, or any other means (‘‘repriced’’), or 

otherwise has materially modified such 

awards, the incremental fair value, computed 

as of the repricing or modification date in 

accordance with FAS 123R; and the aggregate 

number of stock awards and the aggregate 

number of option awards outstanding at 

fiscal year end. However, the disclosure 

required by this Instruction does not apply to 

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

award that results in the periodic adjustment 

of the option or 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. 

* * * * * 

(vii) * * * 

(I) The dollar value of any dividends 

or other earnings paid on stock or 

option awards, when those amounts 

were not factored into the grant date fair 

value for the stock or option award; and 

* * * * * 

Instruction to Item 402(k). 

In addition to the Instruction to paragraphs 

402(k)(2)(iii) and (iv) and the Instructions to 

paragraph (k)(2)(vii) of this Item, the 

following apply equally to paragraph (k) of 

this Item: Instructions 2 and 4 to paragraph 

(c) of this Item; Instructions to paragraphs 

(c)(2)(iii) and (iv) of this Item; the Instruction 

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

Instructions to paragraph (c)(2)(vii) of this 

Item; Instructions to paragraph (c)(2)(viii) of 

this Item; and Instructions 1 and 5 to 

paragraph (c)(2)(ix) of this Item. These 

Instructions apply to the columns in the 

Director Compensation Table that are 

analogous to the columns in the Summary 

Compensation Table to which they refer and 

to disclosures under paragraph (k) of this 

Item that correspond to analogous 

disclosures provided for in paragraph (c) of 

this Item to which they refer. 

Dated: December 22, 2006. 

By the Commission. 

J. Lynn Taylor, 

Assistant Secretary. 

[FR Doc. 06–9932 Filed 12–26–06; 2:29 pm] 

BILLING CODE 8011–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9308] 

RIN 1545–BF75 

Reporting Rules for Widely Held Fixed 

Investment Trusts 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

the temporary regulations. 

SUMMARY: This document contains final 

regulations amending § 1.671–5 which 

provides reporting rules for widely held 

fixed investment trusts (WHFITs). These 

final regulations clarify and simplify 

reporting for trustees and middlemen of 

non-mortgage widely held fixed 

investment trusts (NMWHFITs). These 

final regulations also provide temporary 

safe harbor reporting rules for widely 

held mortgage trusts (WHMTs) that are 

outside the WHMT safe harbor. The 

preamble to these regulations also 

provides that trustees of WHFITs are to 

indicate on the Form 1041, ‘‘U.S. 

Income Tax Return for Estates and 

Trusts,’’ filed for a WHFIT’s 2006 

calendar year that the return is a final 

return. 

DATES: Effective Date: These regulations 

are effective December 29, 2006. 

Applicability Date: For date of 

applicability see § 1.671–5(n). 

FOR FURTHER INFORMATION CONTACT: 

Faith Colson, (202) 622–3060 (not a tollfree number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been previously reviewed and approved 

by the Office of Management and 

Budget in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507) under control number 

1545–1540. The collection of 

information in these final regulations is 

in § 1.671–5. This information is 

required to be reported to beneficial 

owners of trust interests to enable them 

to correctly report their share of the 

items of income, deduction, and credit 

of the WHFIT in which they have 

invested. This information is also 

required to be reported to the IRS to 

enable the IRS to verify that trustees and 

middlemen are accurately reporting 

information to beneficial owners of trust 

interests and that beneficial owners are 

properly reporting their ownership of a 

trust interest. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number. 

The estimated annual burden per 

recordkeeper varies from 1 to 4 hours, 

depending on individual circumstances, 

with an estimated average of 2 hours. 

Comments concerning the accuracy of 

this burden estimate should be sent to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington DC 

20224, and to the Office of Management 

and Budget, Attn: Desk Officer for the 

Department of Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503. 

Books or records relating to a 

collection of information must be 

retained as long as their contents might 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document contains amendments 

to 26 CFR part 1. On January 24, 2006, 

the Internal Revenue Service (IRS) and 

the Treasury Department published the 

WHFIT reporting rules in the Federal 

Register (TD 9241) (71 FR 4002) under 

§ 1.671–5 (WHFIT reporting rules). On 

August 3, 2006, in response to 

comments received subsequent to the 

publication of the WHFIT reporting 

rules, the IRS and the Treasury 

Department published final and 

temporary regulations (TD 9279) (71 FR 

43968) (temporary regulations) as well 

as proposed regulations that, in part, 

cross-referenced the temporary 

regulations (71 FR 43998) (proposed 

regulations) (REG–125071–06) in the 

Federal Register. No public hearing was 

requested or held with respect to the 

temporary or proposed regulations. 


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