03.20.2007
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Updates
Last week the SEC Division of Corporation Finance released much-anticipated new Staff guidance on the rest of its new proxy disclosure requirements under amended Regulation S-K, completing its interpretations of the new rules and complementing its guidance on the new executive compensation disclosure requirements released in January 2007. This new SEC Staff guidance addresses a wide variety of topics covering a diverse set of specific circumstances and replaces or revises prior Staff interpretation of Items 201, 403, 404, and 407 of Regulation S-K as previously published in the SEC's Manual of Publicly Available Telephone Interpretations and its supplements.
This Update provides key highlights of the Staff's interpretive guidance and offers practical advice to help companies comply with these new disclosure requirements.
Consult the New SEC Guidance Before Filing Disclosure Under the New Rules New SEC Guidance Applies to Current Filings. Because some of the SEC's guidance provides new, sometimes non-intuitive interpretations of the new rules that apply to current filings, companies and their advisors should review recent Staff guidance on the new requirements before finalizing and filing the proxy statement for the annual shareholders meeting (or Form 10-K/A) under the new disclosure rules. This is especially true for companies recently involved in certain types of transactions, like an IPO, spin-off or merger. Handy Reference Chart. See Appendix A to this Update for a chart that outlines the issues addressed in the recent SEC guidance on Items 201, 403, 404, and 407 of Regulation S-K to help you quickly identify whether any of the new interpretations and clarifications apply to a current or anticipated situation. SEC Guidance on Executive and Director Compensation Disclosure. For information on recent Staff guidance on the new executive and director compensation disclosure requirements, see our February 28, 2007 Update at https://www.perkinscoie.com/en/news-insights/now-are-you-ready-for-the-new-rules-special-preview-of-the.html. New Executive Compensation Disclosure Handbook. The Executive Compensation Disclosure Handbook: A Practical Guide to the SEC's New Rules, written by Perkins Coie attorneys, provides a practical, plain English guide for public company management, directors and general counsel on the SEC's new requirements for public company disclosure and reporting of executive officer and director compensation and related issues. The revised February 2007 edition of the Handbook includes all the significant changes and requirements under the new rules, amendments and guidance through February 2007, and offers practical advice to help companies understand, and comply with, the new disclosure requirements. |
Key Highlights from the Staff's Guidance
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Item 2.01(d) – Securities Authorized for Issuance Under Equity Compensation Plans
Confirmed Equity Compensation Plan Information Table Location. The Staff confirmed its previous guidance that if a company is not seeking shareholder approval for any equity or cash compensation plan, the company may choose to provide this table in its annual report on Form 10-K under Part III, Item 12 of Form 10-K (and NOT under Part II, Item 5 of Form 10-K), instead of including the table in the company's proxy statement. For more information on the previous guidance, see our February 19, 2004 Update at https://www.perkinscoie.com/en/news-insights/sec-issues-interpretive-guidance-on-item-201-d-equity.html.
Footnote Table to Disclose Shares Currently Subject to Purchase under ESPP. In addition to disclosing the number of shares available for purchase under a company's employee stock purchase plan in a footnote to the column disclosing the number of shares available for grant as of fiscal year end, the company should also disclose the number of shares subject to purchase during any then-current ESPP purchase period.
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Item 403 – Security Ownership of Certain Beneficial Owners and Management
Include Only Current Directors in Beneficial Ownership Table. The Staff confirmed that a company should include in the beneficial ownership table all directors who are serving in that capacity as of the date the company uses for that table, including any director serving a term that will not continue after the date of the annual shareholders meeting.
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Item 404 – Transactions with Related Persons, Promoters and Certain Control Persons
All Companies Must Disclose Related Transaction Policies and Procedures. All companies must disclose their policies for the review, approval or ratification of the types of transactions that they would be required to disclose as "related person transactions" even if no transactions required disclosure as related person transactions for the applicable period.
Clarifies When In-Laws and Step-Relatives Are "Immediate Family Members." The guidance clarifies that "any immediate family member" includes only persons related by blood or step relationship to the primary reporting person or her spouse (for example, a director's spouse's sister is a sister-in-law, but the sister-in-law's husband is not a brother-in-law).
Compensation Earned by a Related Person's Immediate Family Member. Where a company employs the child of one of its directors for compensation that exceeds $120,000 per year, and the child is not a named executive officer, officer or director, the company should disclose the child's compensation as a related person transaction in which the director has a material interest.
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Item 407 – Corporate Governance
Must Disclose All Compensation Consultants. Companies must disclose the identity and role played by all compensation consultants with any role in determining or recommending the amount or form of executive of director compensation, not just for consultants who consulted with the board of directors or compensation committee.
Some May Omit Caption for "Compensation Committee Interlocks and Insider Participation." Companies with no required disclosure of compensation committee interlocks, insider participation or related person transactions with compensation committee members may omit the caption for "Compensation Committee Interlocks and Insider Participation."
Must Separately Caption Compensation Committee Report. Companies must include a separate caption for the Compensation Committee Report that clearly identifies it, and, if multiple board committees share responsibility for named executive officer compensation decisions, each committee must provide the required Compensation Committee Report.
Additional Information
You can find the full text of the new SEC Staff guidance on Regulation S-K at the following links.
Item 201: http://www.sec.gov/divisions/corpfin/guidance/execcomp201interp.htm
Item 403: http://www.sec.gov/divisions/corpfin/guidance/execcomp403interp.htm
Item 404: http://www.sec.gov/divisions/corpfin/guidance/execcomp404interp.htm
Item 407: http://www.sec.gov/divisions/corpfin/guidance/execcomp407interp.htm
You can find discussions of other recent cases, laws, regulations and rule proposals of interest to public companies on our website, http://www.perkinscoie.com.
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Appendix A: SEC Staff Guidance on Regulation S-K Items 201, 403, 404 and 407
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Item 201 of Regulation S-K: Market Price of and Dividends on the Registrant’s Common Equity and Related Shareholder Matters |
Question or Interpretative Response Number[*] |
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Equity Compensation Plan Information Table (Item 201(d)) |
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Location of information regarding securities authorized for issuance under equity compensation plans in Item 12, Part III of Form 10-K. Note: Part III information may be incorporated by reference into the Form 10-K from the company’s proxy statement for the annual shareholders meeting to be filed within 120 days. |
Q 4.01 |
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Whether and how to include restricted stock subject to forfeiture. |
Q 4.02 |
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Whether and how to include performance share awards and phantom shares. |
Q 4.03 |
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Whether and how to include employee stock purchase plan shares. |
Q 4.04 |
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Reporting weighted-average price information when some rights to purchase stock can be exercised for no consideration. |
Q 4.05 |
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How to include equity compensation plan that has received Bankruptcy Court approval but not shareholder approval. |
I 4.01 |
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How to include compensation plans that permit awards to be settled in either cash or stock, or cash only. |
I 4.02 |
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How to treat foreign employee benefit plans that are similar to plans meeting the IRS 401(a) requirements (i.e., broad-based, compensatory and non-discriminatory). Exhibit filing requirements for these plans. |
I 4.03 |
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How to treat stock appreciation rights exercisable for an amount of stock with a value equal to increase in value of common stock. |
I 4.04 |
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Performance Graph (Item 201(e)) |
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Plotting monthly or quarterly returns. |
Q 5.01 |
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Weighting returns of component entities in a self-constructed peer or market capitalization index. |
Q 5.02 I 5.11 |
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Excluding the issuer from a self-constructed peer or market capitalization index. |
Q 5.03 |
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Correct choice of trading price for performance graphs including the issuer’s initial public offering. |
Q 5.04 |
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Ability to exclude performance graph from 10-K report/requirement to include in annual report to shareholders. |
Q 5.05 |
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Including performance graph in proxy statement. |
Q 5.07 |
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Disclosure of change in entities comprising self-constructed index. |
I 5.01 |
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Change in listing exchange. |
I 5.02 |
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Last trade data for a fiscal year. |
I 5.03 |
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Performance Graph for a spin-off entity. |
I 5.04 |
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Treatment of spin-off of a portion of a company’s business. |
I 5.05 |
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Impact of merger or acquisition involving the reporting company. |
I 5.06 |
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Peer group indexes for companies with several distinct lines of business. |
I 5.07 |
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Change in company’s selection as its own peer group. |
I 5.08 |
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Companies with a short fiscal year (e.g., following an IPO, resulting from a spin-off or emerging from bankruptcy). |
I 5.09 |
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Preparation of a “published industry or line-of-business index” by the reporting company and use of self-constructed indices. |
I 5.11 |
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Item 403 of Regulation S-K: Security Ownership of Certain Beneficial Owners and Management |
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Beneficial ownership of general partners and limited partners who will receive shares within 60 days following a public offering. |
I 1.01 |
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Reports of “investment discretion” on 13-F reports vs. “beneficial ownership.” Reliance on Schedule 13D or Schedule 13G by issuers. |
I 1.02 |
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Impact of IRS Section 409A tax consequences on determination of “beneficial ownership” under Rule 13d-3(d)(1). |
I 2.01 |
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How to treat directors whose terms will not continue beyond next annual meeting. |
Q 2.01 |
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Phantom stock units held in a nonqualified deferred compensation plan – right to settle in stock at election of holder vs. election of issuer. |
Q 2.02 |
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Named executive officer who died since beginning of issuer’s last fiscal year. |
Q 2.03 |
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Treatment of negative pledges (i.e., covenants by borrower to not transfer or encumber shares) as “pledges.” |
Q 2.04 |
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Item 404 of Regulation S-K: Transactions with Related Persons, Promoters and Certain Control Persons |
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No need to restate disclosure reported under old rules for fiscal years ended prior to December 15, 2006. |
Q 1.01 |
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Disclosure of 404(a) information pursuant to new rules in S-1 or Form 10 for fiscal years ended prior to December 15, 2006. |
Q. 1.02 |
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Transactions with a value in excess of $120,000 with person who became a 5% shareholder after the beginning of the transaction. |
Q 2.01 |
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Valuing unexercised, in-the-money stock options for determining whether $120,000 threshold is met. |
Q 2.02 |
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Treatment of loans by banks to their employees for purposes of “comparable loans with persons not related to the lender” test. |
Q 2.03 |
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Disclosure of related person transaction review, approval or ratification in absence of any disclosable transactions. |
Q 3.01 |
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Treatment of in-laws and other extended relationships under “any immediate family member” test. |
I 2.01 |
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Transactions with “immediate family members” of officers and directors of subsidiaries of the reporting company. |
I 2.01 |
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Transactions with a value of less than $120,000 that are related to transactions with a value in excess of $120,000. |
I 2.03 |
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Disqualifications from use of exclusion where rates or charges are based on competitive bids where bid awarded to related party who was not the lowest bidder or where the bidding process did not involve the use of formal procedures normally associated with competitive bidding procedures. |
I 2.04 |
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Disclosure of contract with fund manager. |
I 2.06 |
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Disclosure of salary paid to employee who is an immediate family member of an officer or director. |
I 2.07 |
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Agreement with related person to repurchase company shares from related person’s estate with the proceeds of a life insurance policy. |
I 2.08 |
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Disclosure of program to repurchase and resell homes of all employees affected by move of company’s headquarters. |
I 2.09 |
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Reporting “nonaccrual, past due, restructured and potential problem loans” in proxy statements. |
I 2.10 |
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Disclosure of split-fee arrangements where parent and subsidiary are both reporting companies and executives split duties between companies. |
I. 2.11 |
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Item 407 of Regulation S-K: Corporate Governance |
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Disclosure of compliance by non-listed issuer with independence definitions of a national securities exchange or the issuer’s own, more restrictive definitions. |
Q 1.01 |
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Disclosure of nominating committee’s processes, policies or minimum director nominee qualifications must appear in its proxy statement. |
Q 3.01 |
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Treatment of director not previously elected by shareholders under requirement to disclose information about persons or entities recommending nominee for director. |
Q 3.02 |
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Period covered by Audit Committee Report. |
Q 4.01 |
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Disclosure regarding compensation consultants with role in determining compensation of executives or directors. |
Q 5.01 |
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No requirement for consents of compensation consultants. |
Q 5.02 |
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Identifying the compensation committee members for the Compensation Committee Report. |
Q 5.03 |
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Calculating director’s attendance at meetings of the board of directors without including actions by written consent. |
I 2.01 |
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Caption for “Compensation Committee Interlocks and Insider Participation” not required where no reportable transactions or relationships. |
I 5.01 |
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Disclosure obligations where multiple board committees have responsibility for different components of compensation (e.g., a stock option committee). |
I 5.02 |
[*] The SEC Staff guidance in the interpretative releases includes interpretations stated in both a question-and-answer format and in a more narrative format
