New SEC Rules Require Heightened Compensation Disclosures By Publicly Traded Companies

Questions and Answers on the SEC Rules

On January 27, 2006, the Securities and Exchange Commission unveiled a 370-page set of proposed rules substantially altering the current disclosure requirements for executive and director compensation applicable to publicly-traded companies. The SEC finalized these rules – now more than 430 pages long – on August 11, 2006

The new compensation disclosure rules apply to Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006 and for registration, proxy, and information statements filed on or after December 15, 2006 that are required to include executive compensation or related person transaction disclosures (Items 402 and 404) for fiscal years ending on or after December 15, 2006.

The most significant change mandated by the rules is the creation of a new Compensation Disclosure & Analysis ("CD&A") that is filed (rather than furnished) to the SEC. The CD&A is intended to be a plain-English, narrative description providing an overview of the material factors underlying the company's executive compensation decision and policies and that addresses all materials elements of compensation, including severance and change-of-control arrangements. The SEC has repeatedly cautioned companies that "boilerplate" disclosures are unacceptable.

The CD&A is required to be accompanied by the following seven compensation tables:

• Summary Compensation Table: illustrating the total compensation of certain named executive officers ("NEOs") over the past three years;

• Grants of Plan Based Awards: providing additional details on grants of equity or cash-based awards made to NEOs during the last fiscal year, including the terms of awards, grant dates and estimated future payouts;

• Outstanding Equity Awards of Fiscal Year-End providing information about option and stock awards granted in previous years that have not been exercised or become vested.

• Option Exercises and Stock Vested: showing the number of option and stock awards exercised or vesting during the most recent fiscal year.

• Pension Benefits: listing each plan providing for the payment of retirement benefits under company pension plans (including supplemental plans), including and disclosing the actuarial present value of accumulated benefits under the plans and the years of services credited to the NEOs.

• Nonqualified Deferred Compensation: listing all nonqualified deferred compensation plans in which the NEOs participate, and showing the amounts of both company and participant contributions, earnings, withdrawals, distributions and account balances at fiscal year end.

• Directors Compensation: showing director compensation, including consulting fees and perquisites, for the most recent fiscal year. This table must also disclose and value any director legacy and charitable awards programs.

Each table of the CD&A must be accompanied by its own narrative description, describing and explaining the specific type of compensation being disclosed.

In addition, to the CD&A, the company must also furnish a separate Compensation Committee Report ("CCR") that, at a minimum, addresses whether: (1) the compensation committee has reviewed and discussed the CD&A with management; and (2) based on this review, the committee recommended to the board that the CD&A be included in the company's annual report and proxy statement. Unlike the CD&A, the CCR is furnished to the SEC.

Some of the most significant changes made by the SEC in the new CD&A are:

• Defining "bonus" compensation only to include discretionary or guaranteed bonus payments (and omitting performance and incentive payments, which are now separately reported);

• Requiring that stock and option awards be valued consistently with FAS 123R;

• Requiring the disclosure of "other compensation", such as perquisites, with an aggregate value of $10,000 or more (as opposed to $50,000 under the former rules);

• Requiring the narrative disclosure of all severance and change of control arrangements (rather than only arrangements providing benefits in excess of $100,000); and

• Requiring that the total amount of nonqualified deferred compensation be disclosed (rather that only the above-market earnings).