Insight Center: Publications

Amended SEC Disclosure Requirements: Practice Pointers to Facilitate Compliance in 2010

Corporate and Securities Law Update

Authors: Robert A. Friedel and Scott R. Jones


On December 16, 2009, the Securities and Exchange Commission amended disclosure requirements for public company proxy statements and Forms 10-K1 in an effort to enhance disclosures related to compensation and corporate governance. The amendments become effective February 28, 2010, which means they will affect the 2010 proxy season. However, with proper planning and some moderate adjustments to disclosure control procedures, public companies may find the transition is easier than they may anticipate.

Risk in Compensation Programs

Following the effective date, companies will be required to disclose in their proxy statement or Form 10-K whether any of the company’s compensation policies and practices (for all employees, not just executives) create risks that are reasonably likely to have a material adverse effect on the company. The disclosure should include a discussion of the risk as well as the compensation program making the risk reasonably likely. In determining whether this disclosure is required, a company may consider any controls or other elements that mitigate or balance the risk. This disclosure is intended to be a narrative apart from the Compensation Discussion and Analysis or any other executive compensation disclosure.

Practice Pointer: Don’t reinvent the wheel.

For the first time, companies will be required to disclose the risks inherent in their compensation disclosure practices. The failure of financial institutions in 2008 that led to the decline in the financial markets has been blamed, in part, on compensation policies that led financial firm employees to subject their companies to excessive risks, in the hope that a favorable outcome would lead to large incentive compensation payments. Companies already assess and disclose business risks as part of the risk factors disclosure required in periodic reports, but now you will need to evaluate, among other things, whether compensation is payable upon achievement of short-term results, while the income and risk to the company from this achievement extend over a significantly longer period of time. Once you’ve identified any risks enhanced or arising from your compensation programs, you will be in a position to assess the likelihood of these risks having a material adverse effect on the company (which includes consideration of mitigating factors) and, if necessary, craft adequate disclosures.

Valuation of Equity Awards

Equity awards shown in the Summary Compensation Table and Director Compensation Table included in proxy statements or Forms 10-K filed after the effective date must be valued using the grant date fair value of such award,2 as opposed to the current requirement to report only the accounting expense recognized during the covered year for such awards.3 Where there is a performance component tied to the equity award, in the relevant table, the grant date fair value to be included in the Summary Compensation Table (which is factored into the total compensation reported for the named executive officers) will be required to be based on the probable outcome of the performance conditions; the grant date fair value of the award assuming that the maximum performance conditions are satisfied will be relegated to a footnote. Amounts related to prior years in the current year Summary Compensation Table will need to be recalculated in accordance with the amended requirements, but a company need not amend any prior year reports or proxy statements to make adjustments based on the new rules.

Practice Pointer: Get your finance and accounting departments involved early.

Though the disclosures are intertwined, many companies view the proxy statement as an afterthought to the Form 10-K. Finance personnel are not as intimately involved in the preparation of the proxy statement; after the filing of the Form 10-K they usually take time off or focus on other items that have piled up on their desk since the end of the year. As accounting-related disclosures required in proxy statements become more complicated, such as with the new valuation methodology discussed above, your finance function should be advised of what is required of them for the proxy statement well before the Form 10-K is filed and their attention to disclosure issues begins to wane. Make sure your finance and accounting personnel know exactly what is required and fully understand how to get you the figures you need well before you begin to prepare the proxy statement.

Compensation Consultants

Proxy statements or Forms 10-K filed after the effective date must include certain disclosures related to compensation consultants engaged to provide advice to the company’s board or compensation committee regarding executive or director compensation. This requirement is triggered when the fees paid to the compensation consultant exceed $120,000. In addition to including the fees paid, the disclosure should also identify the compensation consultant and its role in determining or recommending the amount or form of executive or director compensation must be described.

Practice Pointer: Gather the necessary information.

While the disclosure requirements are relatively straightforward, you should ensure your company has appropriate disclosure controls in place to track fees paid to compensation consultants, to determine whether or not disclosures are necessary and to make sure you have all the information necessary to prepare appropriate disclosures.

Expanded Biographical and Legal Proceeding Disclosure for Directors and Officers

The biographical information of directors, director nominees and executive officers included in proxy statements or Forms 10-K filed after the effective date will need to disclose any public company board of directors on which any company director or executive officer has served during the previous five years. In addition, the types of disclosable legal proceedings involving directors and executive officers have been expanded, and the look-back period related to legal proceedings has been extended from five to ten years prior to the date of the relevant filing.

Practice Pointer: Make sure you elicit all necessary information from your directors and executive officers.

The amended disclosure requirements are easy to comply with, provided that you have the information you need to disclose. Before sending out your D&O questionnaires this year, be sure to review and revise them to ensure they capture all the information you will need for the required disclosures. Be sure to send the questionnaires as soon as possible, to give recipients enough time to consider and properly respond to the new information requirements.

Board Leadership Structure and Risk Oversight Role

The leadership structure of the board must be disclosed, as well as reasons why this structure is appropriate for the company. Disclosures should include whether the same person fills the roles of chairperson of the board and chief executive officer and, if so, whether there is a lead independent director and his or her role. In addition, the role of the board in risk oversight at the company must be disclosed. The disclosure should include an explanation of how the risk oversight role is handled and of how the board coordinates this function across all its committees. This disclosure should focus on the risk oversight role and not risk management.

Practice Pointer: Start thinking now.

At first glance, compliance with this new requirement may appear straightforward, but look more closely at what the commission is looking for and you will find this disclosure is a bit more complicated. The commission wants transparency as to why the board leadership is set up as it is, and is not looking for boilerplate, conclusory statements on the board leadership structure. The rule requires a company to disclose the specific characteristics and circumstances of the company, making the structure appropriate for it. Care should be given to preparing this disclosure, which also means that you should starting considering it sooner, rather than later.

Director and Director Nominee Qualifications

In the relevant filings, new disclosures must be included regarding the experience, qualifications, attributes and skills of directors and director nominees that led to the conclusion that such persons should serve as a director or on a particular committee of the board of directors.

Practice Pointer: Express yourself.

Most boards and nominating committees already consider the experience, qualifications, attributes and skills of director nominees and directors when looking to fill empty board or committee seats, but the process may not lend itself to disclosure in its current state. Companies should look at the process for considering board and committee candidates, and put procedures and controls in place to ensure that the required disclosures can be generated as the process operates. For instance, those tasked with considering candidates for committee seats or director nominations should understand the relevant rules so that when they make their decisions, the basis for those decisions can be articulated in a way that satisfies the new disclosure requirements. In addition, D&O questionnaires should be revised in order to ensure the information necessary to satisfy the new requirements is elicited from directors and nominees.

Board Diversity

Whether and how the nominating committee considers diversity in identifying director nominees must be disclosed. If a diversity policy related to the board is in place, a discussion of how this policy is implemented and how its effectiveness is determined must also be included in relevant filings. The commission does not require any particular definition of diversity. Rather, diversity should be defined in a way most appropriate for a given company; any number of factors may be considered in defining diversity including, without limitation, professional experience, education, race, gender or national origin.

Practice Pointer: Express yourself, again.

As above, most companies already have a process in place to make the analysis necessary to support this new disclosure requirement, but the process in its current form may not currently lend itself to proper disclosures. The commission’s goal is transparency, so consider the processes in place related to board diversity and determine where procedures and controls can be put in place to ensure that proper disclosures about the process are generated. While a board diversity policy is not required, as you consider the approach to board diversity for disclosure purposes, you may consider whether it would make sense to implement such a policy.


Companies should start considering the new and amended disclosure requirements as soon as possible, to develop and implement procedures, controls and policies designed to ensure compliance and to be able to discuss with their boards the nature and scope of the new disclosures. In addition to seeking compliance with the new and amended requirements, companies should examine D&O questionnaires, board committee charters and board policies that relate to issues being disclosed, to determine if revisions are necessary in light of the new disclosures.


1 The commission also adopted an amendment requiring companies to disclose the results of shareholder votes on Form 8-K within four business days after the relevant shareholder meeting. To the extent final results are not available, preliminary results must be filed by the fourth business day after the relevant meeting, with final results disclosed on an amendment to the Form 8-K filed within four business days after determining such final results. Companies with meetings scheduled after February 28, 2010 should note this new requirement as it may affect disclosures directing shareholders to where voting results will be reported.

2 Determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718.

3 This change effectively restores the disclosure requirement to that which was first included in the July 2006 overhaul of the compensation disclosure requirements, which was reversed in the surprise December 2006 SEC release that led to the current practice of disclosing only the accounting expense recognized during the fiscal year.

Robert A. Friedel and Scott R. Jones

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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