February 5, 2010– In anticipation of the 2010 proxy season, the staff of the SEC’s Division of Corporation Finance has announced a new proxy statement review initiative and related more assertive staff positions to accompany new substantive disclosure items.

New SEC Review Policies

Expanded executive compensation disclosure, particularly compensation disclosure and analysis, has been required in proxy statements for two proxy seasons, and the staff has indicated that it is dissatisfied with the results. This dissatisfaction is no doubt influenced by the continuing public outcry respecting executive compensation at major financial institutions, the government bailout, and a broad downturn in the economy. In the past, many SEC staff comments have been addressed toward future compliance with the comments, requiring a substantive response as to how the company may respond to the comment in future filings, but not requiring an amendment to the current proxy statement. The staff has announced that this year it will ask for amendments to proxy statements, in some cases notwithstanding the fact that the stockholders’ meeting may have already been held. This, of course, highlights the fact that the proxy statement is important disclosure about the company for the entire year and, in fact, is incorporated into the annual report on Form 10-K for a full business and financial picture of the company. Post-proxy solicitation amendments to the proxy statement raise interesting theoretical questions as to whether or not the proxies were obtained through a solicitation that was in some way inaccurate or incomplete. In the absence of substantial material revisions, it would seem that the validity of action taken at the meeting would not be brought into question, however.
In addition to the published releases, Compliance and Disclosure Interpretations, and previous comments from the staff of the SEC on the company’s filings, companies are also expected to be guided by the comments made by the staff of the SEC on the filings of other companies. Those comments are now publicly available, but by no means easy to access and search. We will forward a compilation of principal comments from staff letters on other companies when they are available.

Substantively the staff’s overarching comment reiterates the importance of disclosing why specific compensation was awarded, not the mere mechanism by which it was determined.

Expanded Proxy Statement Disclosures
Effective February 28, 2010, the SEC’s release of December 23, 2009, Release No. 33-9089; 34-61175, announced significant proxy disclosure enhancements, particularly respecting corporate governance. In summary, the expanded disclosures require:

(1) discussion of compensation policies or practices as they relate to risk management and risk-taking incentives that can affect the company’s risk and management of that risk;

(2) reporting of the aggregate grant fair date value of stock awards and option awards granted in the fiscal years, rather than the dollar amount recognized for financial statement purposes for that year, which will generally result in a large lump sum amount reported in the initial year of grant, rather than having the amount spread over the term of vesting, grant, or other applicable criteria;

(3) a specific, person by person discussion of the qualifications of directors and nominees;

(4) new disclosure respecting any directorships held by each director and nominee at any time during the preceding five years of any public company or registered investment adviser;

(5) new disclosure regarding the consideration for diversity in the selection of candidates for nomination for director election;
(6) additional disclosure respecting legal actions involving the company’s executive officers, directors, and nominees and expanding the time during which such disclosure is required from five to ten years;

(7) new disclosures about a company’s board leadership structure and the board’s role in the oversight of risk;

(8) new disclosure about the relationship between the company and compensation consultants, including fees for various levels of service; and

(9) disclosure of the vote results from the meeting of stockholders on Form 8-K within four business days of the meeting.
In related Compliance and Disclosure Interpretations recently released, the SEC clarifies that the disclosure about each director’s “specific experience, qualification, attributes or skills,” that led the board to select a person to become a director must be stated for each director and cannot be stated generally respecting a particular group. This disclosure needs to be provided for each member of the board of directors, notwithstanding the fact that a particular director may not be up for reelection because of a classified board. The SEC believes that the composition of the board is important disclosure on all directors. Therefore, for a director who is not up for election, the evaluation of such director’s particular and specific experience, qualifications, attributes, and skills, and the conclusion as to why the director should continue serving on the board, should be included because it informs the shareholders about the full complement of skills on the board.

As a result of the requirement for an annual discussion of director qualifications, boards that do not conduct annual self-evaluations, but defer such evaluations until classified board members come up for reelection every three years, may need to implement an annual review policy to support the annual disclosures required in the proxy statement.
SEC Updates represent our efforts to provide our clients and friends with information about relevant current events. They do not constitute an opinion or legal advice. Please direct questions about the 2010 proxy season or any other securities compliance matters to members of our Corporate/Securities Section, including James R. Kruse, Lyndon L. Ricks, Kevin C. Timken, or Paula W. Faerber.