An Overview of and Practical Guidance on the SEC’s New Rules Amending Executive Compensation, Related Party, Governance and Form 8-K Disclosure Requirements

September 1, 2006

The Securities and Exchange Commission (“SEC”) has issued its new rules comprehensively revising the disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters.  The final rules also modify the requirements for disclosing executive compensation actions and arrangements on Form 8-K.  With a few notable exceptions, the final rules as adopted are substantially similar to the SEC’s proposal from January 2006. 

The new rules will be effective for fiscal years ending on or after December 15, 2006, and therefore apply to disclosures of 2006 compensation in calendar-year companies’ 2007 proxy statements.  The new rules applicable to disclosure of executive compensation arrangements on Form 8-K become effective in early November 2006, 60 days after the new rules are published in the Federal Register, applying to executive compensation events that occur on or after that date. 

This Client Alert is intended to provide an initial detailed review of the new disclosure rules and compensation tables required under them.  We highlight a number of areas where these new rules require careful attention or raise significant interpretive issues, and throughout this Client Alert we note actions that companies should be taking now to prepare for the new rules.  Given the comprehensive nature of the rule revisions, we expect that additional interpretive issues will arise and that the SEC staff will provide its views on these issues.  Nevertheless, companies should begin to prepare their disclosures well in advance of filing their proxy statement. 

Among the significant aspects of the rule changes that require companies’ attention now are the following:

  • The SEC adopted the new requirement for a Compensation Disclosure and Analysis (“CD&A”).  The CD&A is intended to differ significantly from the former Board Compensation Committee Report on Executive Compensation by comprehensively addressing the design and bases for a company’s compensation of each of its named executive officers.  The CD&A will need to describe the operation and material features of each element of named executive officer compensation and the interaction of each of those elements (or lack of interaction) with one another.  The CD&A is company disclosure that is covered by the chief executive officer’s and chief financial officer’s certifications; yet, the board’s compensation committee will need to remain closely involved in the preparation and review of this disclosure.  We expect that most companies will not be able to use the Board Compensation Committee Report as a model for drafting the CD&A and that the CD&A drafting process will necessitate extensive and careful coordination between the human resources and legal departments with the input of the board’s compensation committee.  Companies will need to determine who are their named executive officers and will need to prepare drafts of the tabular and narrative compensation disclosures required under the rules in order to be best positioned to draft the CD&A. 
  • The characterization, presentation and calculation of some forms of compensation differ significantly from the present rules and are not always intuitive.  For example, some annual bonuses will no longer be reported in the Bonus column of the Summary Compensation Table but instead will be reported as Stock Awards or as Non-Equity Incentive Plan Compensation.  Careful review is necessary to determine how and where to report various forms of compensation. 
  • It may be necessary to retain outside actuaries and consultants to perform some of the calculations required under the new rules.  Companies should make arrangements with those outside advisers now. 
  • Careful descriptions and calculations of benefits payable under severance and change of control arrangements will be necessary.  Companies should begin now to identify each form of benefit and triggering event encompassed by this disclosure requirement and to determine whether any of these arrangements should be revised before the end of their fiscal year.  Given the extensive disclosure that will be required at some companies, companies should begin now to evaluate how to most clearly present the required benefit amounts and narrative descriptions. 
  • Revised related party and director independence disclosure rules reinforce the need to have procedures in place to monitor on a current basis transactions between a company and its directors, executives and immediate family members of directors and executives.  Companies that do not have written procedures for identifying and approving or ratifying related party transactions should consider adopting them.  Companies also need to revise their director and officer questionnaires. 
  • Amendments to Form 8-K generally reduce the number of executive compensation related events that trigger Form 8-K filings and eliminate the need for Form 8-K reports on most director compensation related matters, but there are also some new Form 8-K triggering events that will go into effect in the near future.  Companies should revise their disclosure controls to ensure that reportable events are timely identified. 

The entire alert is available in PDF format:

Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing questions they may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work, or

John F. Olson (202-955-8522, [email protected]),
Ronald Mueller (202-955-8671, [email protected]),
Brian Lane (202-887-3646, [email protected]),
Amy L. Goodman (202-955-8653, [email protected]),
Stephen Fackler (650-849-5385, [email protected]),
James Moloney (949-451-4343, [email protected]), or
Elizabeth Ising (202-955-8287, [email protected]).

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.