Proposed Rule: Executive Compensation And Related Party .

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SECURITIES AND EXCHANGE COMMISSION17 CFR PARTS 228, 229, 239, 240, 245, 249 AND 274RELEASE NOS. 33-8655; 34-53185; IC-27218; FILE NO. S7-03-06RIN 3235-AI80EXECUTIVE COMPENSATION AND RELATED PARTY DISCLOSUREAGENCY: Securities and Exchange Commission.ACTION: Proposed rule.SUMMARY: The Securities and Exchange Commission is proposing amendments tothe disclosure requirements for executive and director compensation, related partytransactions, director independence and other corporate governance matters and securityownership of officers and directors. These amendments would apply to disclosure inproxy and information statements, periodic reports, current reports and other filings underthe Securities Exchange Act of 1934 and to registration statements under the ExchangeAct and the Securities Act of 1933. We also propose to require that disclosure under theamended items generally be provided in plain English. The proposed amendments areintended to make proxy statements, reports and registration statements easier tounderstand. They are also intended to provide investors with a clearer and morecomplete picture of the compensation earned by a company’s principal executive officer,principal financial officer and highest paid executive officers and members of its board ofdirectors. In addition, they are intended to provide better information about key financialrelationships among companies and their executive officers, directors, significantshareholders and their respective immediate family members.

DATES: Comments should be received on or before April 10, 2006.ADDRESSES: Comments may be submitted by any of the following methods:Electronic Comments: Use the Commission’s Internet comment form(; or Send an e-mail to Please includeFile Number S7-03-06 on the subject line; or Use the Federal Rulemaking Portal ( Follow theinstructions for submitting comments.Paper Comments: Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities andExchange Commission, 100 F Street, NE, Washington, DC 20549-9303.All submissions should refer to File Number S7-03-06. This file number should beincluded on the subject line if e-mail is used. To help us process and review yourcomments more efficiently, please use only one method. The Commission will post allcomments on the Commission’s Internet Web site( Comments are also available for publicinspection 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 donot edit personal identifying information from submissions. You should submit onlyinformation that you wish to make publicly available.2

FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Carloyn Sherman,or Daniel Greenspan, at (202) 551-3500, in the Division of Corporation Finance, U.S.Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-3010 or,with respect to questions regarding investment companies, Kieran Brown in the Divisionof Investment Management, at (202) 551-6784.SUPPLEMENTARY INFORMATION: We propose to amend: Items 201,1 306,2401,3 402,4 4035 and 4046 of Regulations S-K7 and S-B,8 Item 6019 of Regulation S-K,Item 110710 of Regulation AB,11 and Rule 10012 of Regulation BTR.13 We also proposeto add new Item 407 to Regulations S-K and S-B. In addition, we propose to amendRules 13a-11,14 14a-6,15 14c-5,16 15d-1117 and 16b-318 under the Securities Exchange Actof 1934.19 We propose to add Rules 13a-20 and 15d-20 under the Exchange Act. We117 CFR 229.201 and 17 CFR 228.201.217 CFR 229.306 and 17 CFR 228.306.317 CFR 229.401 and 17 CFR 228.401.417 CFR 229.402 and 17 CFR 228.402.517 CFR 229.403 and 17 CFR 228.403.617 CFR 229.404 and 17 CFR 228.404.717 CFR 229.10 et seq.817 CFR 228.10 et seq.917 CFR 229.601.1017 CFR 229.1107.1117 CFR 229.1100 et seq.1217 CFR 245.100.1317 CFR 245.100 et seq.1417 CFR 240.13a-11.1517 CFR 240.14a-6.1617 CFR 240.14c-5.1717 CFR 240.15d-11.1817 CFR 240.16b-3.1915 U.S.C. 78a et seq.3

further propose to amend Schedule 14A20 under the Exchange Act, as well as ExchangeAct Forms 8-K,21 10,22 10SB,23 10-Q,24 10-QSB,25 10-K,26 10-KSB27 and 20-F.28 Finally,we propose to amend Forms SB-2,29 S-1,30 S-3,31 S-432 and S-1133 under the SecuritiesAct, Forms N-1A,34 N-2,35 and N-336 under the Securities Act and the InvestmentCompany Act of 1940,37 and Form N-CSR38 under the Investment Company Act and theExchange Act.2017 CFR 240.14a-101.2117 CFR 249.308.2217 CFR 249.210.2317 CFR 249.210b.2417 CFR 249.308a.2517 CFR 249.308b.2617 CFR 249.310.2717 CFR 249.310b.2817 CFR 249.220f.2917 CFR 239.10.3017 CFR 239.11.3117 CFR 239.13.3217 CFR 239.25.3317 CFR 239.18.3417 CFR 239.15A and 274.11A.3517 CFR 239.14 and 274.11a-1.3617 CFR 239.17a and 274.11b.3715 U.S.C. 80a-1 et seq.3817 CFR 249.331 and 274.128.4

Table of ContentsI.Background and Overview of the ProposalsII.Executive and Director Compensation DisclosureA.B.Compensation Discussion and Analysis1.Intent and Operation of the Proposed Compensation Discussionand Analysis2.Proposed Instructions to Compensation Discussion and Analysis3.“Filed” Status of Compensation Discussion and Analysis4.Proposed Elimination of the Performance Graph and theCompensation Committee ReportCompensation Tables1.Compensation to Named Executive Officers in the Last ThreeCompleted Fiscal Years -- The Summary Compensation Table andRelated Disclosurea.Total Compensation Columnb.Salary and Bonus Columnsc.Plan-Based Awardsi.Stock Awards and Option Awards Columnsii.Non-Stock Incentive Plan Compensation Columnd.All Other Compensation Columni.Earnings on Deferred Compensationii.Increase in Pension Valueiii.Perquisites and Other Personal Benefitsiv.Additional All Other Compensation Column Itemse.Captions and Table Layout2.Supplemental Annual Compensation Tablesa.Grants of Performance-Based Awards Tableb.Grants of All Other Equity Awards Table3.Narrative Disclosure to Summary Compensation Table andSupplemental Tables4.Exercises and Holdings of Previously Awarded Equitya.Outstanding Equity Awards at Fiscal Year-Endb.Option Exercises and Stock Vesting5.Post-Employment Compensationa.Retirement Plan Potential Annual Payments and BenefitsTableb.Nonqualified Defined Contribution and Other DeferredCompensation Plans Tablec.Other Potential Post-Employment Payments6.Officers Covereda.Named Executive Officers5

b.C.D.E.III.Identification of Most Highly Compensated Officers;Dollar Threshold for Disclosure7.Interplay of Items 402 and 4048.Other Proposed Changes9.Compensation of DirectorsTreatment of Specific Types of Issuers1.Small Business Issuers2.Foreign Private Issuers3.Business Development CompaniesConforming AmendmentsGeneral Comment Requests on the Item 402 ProposalsProposed Revisions to Form 8-K and the Periodic Report Exhibit RequirementsA.B.C.D.Proposed Revisions to Items 1.01 and 5.02 of Form 8-KProposed Extension of Limited Safe Harbor under Section 10(b) andRule 10b-5 to Item 5.02(e) of Form 8-K and Exclusion of that Item fromForm S-3 Eligibility RequirementsGeneral Instruction D to Form 8-KForeign Private IssuersIV.Beneficial Ownership DisclosureV.Certain Relationships and Related Transactions DisclosureA.B.C.D.E.F.Transactions with Related Persons1.Broad Principle for Disclosurea.Indebtednessb.Definitions2.Disclosure Requirements3.ExceptionsProcedures for Approval of Related Person TransactionsPromotersCorporate Governance DisclosureTreatment of Specific Types of Issuers1.Small Business Issuers2.Foreign Private Issuers3.Registered Investment CompaniesConforming Amendments1.Regulation Blackout Trading Restriction2.Rule 16b-3 Non-Employee Director Definition3.Other Conforming AmendmentsVI.Plain English DisclosureVII.Transition6

VIII.Paperwork Reduction ActA.B.C.D.IX.BackgroundSummary of Information CollectionsPaperwork Reduction Act Burden Estimates1.Securities Act Registration Statements, Exchange Act RegistrationStatements and Exchange Act Annual Reports2.Exchange Act Current ReportsRequest for CommentCost-Benefit AnalysisA.B.C.D.E.BackgroundSummary of ProposalsBenefitsCostsRequest for CommentX.Consideration of Burden on Competition and Promotion of Efficiency,Competition and Capital FormationXI.Initial Regulatory Flexibility Act AnalysisA.B.C.D.E.F.G.H.Reasons for the Proposed ActionObjectivesLegal BasisSmall Entities Subject to the Proposed AmendmentsReporting, Recordkeeping and Other Compliance RequirementsDuplicative, Overlapping or Conflicting Federal RulesSignificant AlternativesSolicitation of CommentXII.Small Business Regulatory Enforcement Fairness ActXIII.Statutory Authority and Text of the Proposed Amendments7

I.Background and Overview of the ProposalsWe are proposing revisions to our rules governing disclosure of executivecompensation, director compensation, related party transactions, director independenceand other corporate governance matters and current reporting regarding compensationarrangements. The proposed revisions to the compensation disclosure rules are intendedto provide investors with a clearer and more complete picture of compensation toprincipal executive officers, principal financial officers, the other highest paid executiveofficers and directors.Closely related to executive officer and director compensation is the participationby executive officers, directors, significant shareholders and other related persons infinancial transactions and relationships with the company. We are also proposing torevise our disclosure rules regarding related party transactions and director independenceand board committee functions.Finally, some compensation arrangements must be disclosed under our recentlyrevised rules relating to current reports on Form 8-K. We propose to reorganize andmore appropriately focus our requirements on the type of compensation information thatshould be disclosed on a real-time basis.Since the enactment of the Securities Act and the Exchange Act,39 the39Initially, disclosure requirements regarding executive and director compensation were set forth inSchedule A to the Securities Act and Section 12(b) of the Exchange Act, which list the type ofinformation to be included in Securities Act and Exchange Act registration statements. Item 14 ofSchedule A called for disclosure of the “remuneration, paid or estimated to be paid, by the issueror its predecessor, directly or indirectly, during the past year and ensuing year to (a) the directorsor persons performing similar functions, and (b) its officers and other persons, naming themwherever such remuneration exceeded 25,000 during any such year.” Section 12(b) of theExchange Act as enacted required disclosure of “(D) the directors, officers, and underwriters, andeach security holder of record holding more than 10 per centum of any class of any equity securityof the issuer (other than an exempted security), their remuneration and their interests in thesecurities of, and their material contracts with, the issuers and any person directly or indirectly8

Commission has on a number of occasions explored the best methods for communicatingclear, concise and meaningful information about executive and director compensationand relationships with the issuer.40 The Commission also has had to reconsiderexecutive and director compensation disclosure requirements in light of changing trendsin executive compensation. Most recently, in 1992, the Commission adoptedamendments to the disclosure rules that eschewed a mostly narrative disclosure approachadopted in 1983 in favor of formatted tables that captured all compensation, whilecategorizing the various elements of compensation and promoting comparability fromyear to year and from company to company.41We believe this tabular approach remains a sound basis for disclosure. However,especially in light of the complexity of and variations in compensation programs, the veryformatted nature of the current rules results in too many cases in disclosure that does notinform investors adequately as to all elements of compensation. In those cases investorsmay lack material information that we believe they should receive.We are thus today proposing an approach that builds on the strengths of thecurrent requirements rather than discarding them. However, today’s proposals docontrolling or controlled by, or under direct or indirect common control with the issuer;” and “(E)remuneration to others than directors and officers exceeding 20,000 per annum.”40In 1938, the Commission promulgated its first executive and director compensation disclosurerules for proxy statements. Release No. 34-1823 (Aug. 11, 1938). At different times thereafter,the Commission has adopted rules mandating narrative, tabular, or combinations of narrative andtabular disclosure as the best method for presenting compensation disclosure in a manner that isclear and useful to investors. See e.g., Release No. 34-3347 (Dec. 18, 1942) [7 FR 10653](introducing first tabular disclosure); Release No. 34-4775 (Dec. 11, 1952) [17 FR 11431](introducing separate table for pensions and deferred remuneration); Uniform and IntegratedReporting Requirements: Management Remuneration, Release No. 33-6003 (Dec. 4, 1978) [43 FR58151] (expanding tabular disclosure to cover all forms of compensation); and Disclosure ofExecutive Compensation, Release No. 33-6486 (Sept. 23, 1983) [48 FR 44467] (the “1983Release”) (limiting tabular disclosure to cash remuneration).9

represent a thorough rethinking of our current rules that would combine a broader-basedtabular presentation with improved narrative disclosure supplementing the tables. Thisproposed approach would promote clarity and completeness of numerical informationthrough an improved tabular presentation, continue to provide the ability to makecomparisons using tables, and call for material qualitative information regarding themanner and context in which compensation is awarded and earned.The proposals that we publish for comment today would require that all elementsof compensation must be disclosed. We also seek to structure the revised requirementssufficiently broadly so that, if they are adopted, they will continue to operate effectivelyas new forms of compensation are developed in the future.Under our proposals, compensation disclosure would begin with a narrativeproviding a general overview. Much like the overview that we have encouragedcompanies to provide with their Management’s Discussion and Analysis of FinancialCondition and Results of Operations (MD&A),42 the proposed Compensation Discussionand Analysis would call for a discussion and analysis of the material factors underlyingcompensation policies and decisions reflected in the data presented in the tables. Thisoverview would address in one place these factors with respect to both the separateelements of executive compensation and executive compensation as a whole.Following the Compensation Discussion and Analysis, we propose to organizedetailed disclosure of executive compensation into three broad categories:41Executive Compensation Disclosure, Release No. 33-6962 (Oct. 16, 1992) [57 FR 48125] (the“1992 Release”); See also Executive Compensation Disclosure; Securityholder Lists and MailingRequests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010], at Section II.42Item 303 of Regulation S-K [17 CFR 229.303]. See also Commission Guidance RegardingManagement’s Discussion and Analysis of Financial Condition and Results of Operations, ReleaseNo. 33-8350 (Dec. 19, 2003) [68 FR 75055], at Section III.A.10

compensation with respect to the last fiscal year (and the two preceding fiscalyears), as reflected in a revised Summary Compensation Table that presentscompensation paid currently or deferred (including options, restricted stock andsimilar grants) and compensation consisting of current earnings or awards that arepart of a plan, and as supplemented by two tables providing back-up informationfor certain data in the Summary Compensation Table; holdings of equity-related interests that relate to compensation or are potentialsources of future gains, with a focus on compensation-related equity interests thatwere awarded in prior years (and disclosed as current compensation for thoseyears) and are “at risk,” as well as recent realization on these interests, such asthrough vesting of restricted stock and similar instruments or the exercise ofoptions and similar instruments; and retirement and other post-employment benefits, including retirement and definedcontribution and other deferred compensation plans, other retirement benefits andother post-employment benefits, such as those payable in the event of a change incontrol.We propose to require improved tabular disclosure for each of the above three categoriesthat would be supplemented by appropriate narrative that provides material informationnecessary to an understanding of the information presented in the individual tables.43 We43As discussed in more detail below, this narrative disclosure, together with the CompensationDiscussion and Analysis noted above, would replace the currently required CompensationCommittee Report and the Performance Graph. Unlike the current requirements under which boththe report and the graph, although physically included in the proxy statement, need only befurnished to the Commission, the proposed narrative disclosure, along with the rest of theproposed executive officer and director compensation, would be company disclosure filed with theCommission.11

are also proposing a new disclosure requirement of the total compensation and jobdescription of up to an additional three most highly compensated employees who are notexecutive officers or directors but who earn more than the highest paid executive officers.Finally, we propose a director compensation table that is similar to the proposedSummary Compensation Table.44We also propose to modify some of the recently expanded Form 8-K requirementsregarding compensation. Form 8-K requires disclosure on a current basis of the entryinto, amendment of, and termination of, material definitive agreements entered intooutside the ordinary course of business within four business days of the triggering event.Under our pre-existing definitions of material contracts, many agreements regardingexecutive compensation are deemed to be material agreements entered into outside theordinary course, and when, for purposes of consistency, we adopted those definitions foruse in the expanded Form 8-K requirements, we incorporated all of these executivecompensation agreements into the current disclosure requirements. Therefore, manyagreements regarding executive compensation, including some not related to namedexecutive officers, are required to be disclosed within four business days of the applicabletriggering event. Consistent with our intent in adopting the expanded Form 8-K toCurrent Item 402(a)(9) of Regulation S-K provides that the Compensation Committee Report andPerformance Graph “shall not be deemed to be ‘soliciting material’ or to be ‘filed’ with theCommission or subject to Regulations 14A or 14C [17 CFR 240.14a-1 et seq. or 240.14c-1 etseq.], other than as provided in this item, or to the liabilities of section 18 of the Exchange Act[15 U.S.C. 78r], except to the extent that the registrant specifically requests that such informationbe treated as soliciting material or specifically incorporates it by reference into a filing under theSecurities Act or the Exchange Act.”44We made similar proposals, which we did not act on, regarding director compensation in 1995.Streamlining and Consolidation of Executive and Director Compensation Disclosure, Release No.33-7184 (Aug. 6, 1995) [60 FR 35633] (the “1995 Release”), at Section I.B.12

capture only events that are unquestionably or presumptively material to investors, webelieve it is appropriate to modify the Form 8

2. Proposed Instructions to Compensation Discussion and Analysis 3. “Filed” Status of Compensation Discussion and Analysis 4. Proposed Elimination of the Performance Graph and the Compensation Committee Report B. Compensation Tables 1. Compensation to Named Executive Officers in the Last Three

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