SEC Disclosure Changes for 2010 Proxy Season

On December 16, 2009, the Securities and Exchange Commission ("SEC") adopted final rules that require registrants to make new or revised disclosures in their proxy statements concerning:

• Compensation policies and practices that present material risks to the company;
• Stock and option awards of executives and directors;
• Director qualifications and legal proceedings;
• Board leadership structure and the board's role in risk oversight; and
• Potential conflicts of interest of compensation consultants.

The new rules amend Regulation S-K Items 401, 402 and 407 and add new Item 5.07 to Form 8-K and are effective for filings made on or after February 28, 2010 by companies with fiscal years ending after December 19, 2009.

Compensation Policies and Practices that Present Material Risks to the Company

A new paragraph has been added to Item 402 of Regulation S-K (Item 402(s)) which requires disclosure of any risks arising from compensation policies and practices if such risks are reasonably likely to have a material adverse effect on the company. Item 402(s) requires a company to address its compensation policies and practices for all employees, including non-executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. If disclosure is required, the company should discuss incentives in the company's compensation policies and practices that would create such risks. Disclosure is only required if the compensation policies and practices are reasonably likely to have a material adverse effect on the company, as opposed to any material effect on the company. This new disclosure is not to be contained in the compensation discussion and analysis ("CDA") but in another section of the discussion of executive compensation. However, to the extent that risk considerations are a material aspect of the company's compensation policies or decisions for named executive officers, the company is required to discuss them as part of its CDA under the current rules.

Situations that would require disclosure of risks arising from compensation policies and practices vary depending on the particular company and its compensation program. Examples of situations that could trigger discussion include, among others, compensation policies and practices:

• At a business unit that carries a significant portion of the company's risk profile;
• At a business unit with compensation structured significantly differently than other units within the company;
• At a business unit that is significantly more profitable than others within the company;
• At a business unit where the compensation expense is a significant percentage of the unit's revenues; and
• That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.

If disclosure is required, examples given by the SEC of issues that companies may need to address regarding their compensation policies or practices include the following:

• The general design philosophy of the company's compensation policies and practices for employees whose behavior would be most affected by the compensation incentives;
• The company's risk assessment or incentive considerations, if any, in structuring its compensation policies and practices or in awarding and paying compensation;
• How the company's compensation policies and practices relate to the realization of risks resulting from the actions of employees in both the short term and the long term, such as through policies requiring claw backs or imposing holding periods;
• The company's policies regarding adjustments to its compensation policies and practices to address changes in its risk profile;
• Material adjustments the company has made to its compensation policies and practices as a result of changes in its risk profile; and
• The extent to which the company monitors its compensation policies and practices to determine whether its risk management objectives are being met with respect to incentivizing its employees.

Stock and Option Awards of Executives and Directors

The following changes were made to the Summary Compensation Table and the Director Compensation Table by amended Regulation S-K Item 402:

• Companies must disclose the aggregate grant date fair value of stock and option awards granted during the year, computed in accordance with FASB Accounting Standards Codification ("ASC") Topic 718 (formerly FAS 123R). This disclosure replaces the current disclosure in the table of the dollar amount recognized for the year as an accounting expense under ASC Topic 718.
• Awards that are subject to performance conditions must be computed based upon the probable outcome of the performance conditions as of the grant date. A performance award will also require a footnote that discloses the grant date fair value assuming the achievement of the highest level of performance.
• Stock and option award disclosures that are included in the table for past years, including total compensation amounts, also must be revised in accordance with these new computation rules. If a named executive officer ("NEO") for 2009 was not an NEO for a previous year in the table, his or her compensation for the previous year must now be reported.

Director Qualifications and Legal Proceedings

Amended Regulation S-K Item 401 requires disclosure of:

• The particular experience, qualifications, attributes or skills that led the board of directors to conclude that the director nominee should serve as a director for the company in light of the company's business and structure. This disclosure must be made each year for all director nominees. Disclosure about a director's qualifications to serve on committees is not required; however, if a director was appointed or nominated because of a particular qualification, attribute or experience related to a specific board committee, then this should be disclosed under the amended rule;
• Any public company or investment company directorships held by a director or director nominee during the past five years. This differs from the current rule, which requires disclosure of directorships currently held;
• Legal proceedings involving directors, director nominees and executive officers for the last ten years, rather than the current five-year requirement. In addition, the types of legal proceedings requiring disclosure have been expanded to include proceedings based on violations of securities, commodities or laws and regulations respecting financial institutions or insurance companies (including settlements of such actions), proceedings involving mail or wire fraud, and disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization; and
• The consideration of diversity (in whatever manner the company determines to define "diversity") in the process by which candidates for director are considered for nomination by a company's nominating committee.

Board Leadership Structure and Role in Risk Oversight

Item 407 of Regulation S-K has been amended to require with respect to the board of directors:

• A brief description of the company's board leadership structure (e.g., whether the positions of CEO and Chairman are combined or split) and why the company believes that such a structure is appropriate considering the specific characteristics or circumstances of the company. If the company has a combined Chairman/CEO and a Lead Independent Director, then the company must also provide disclosure about the specific role of the Lead Independent Director in the board leadership structure; and
• • The board's role in the risk oversight of the company (e.g., how the board administers its oversight function). In its adopting release, the SEC stated that it is seeking disclosure regarding the internal mechanics of how a board is made aware of the material financial, operational and reputational risks faced by its company.

Potential Conflicts of Interest of Compensation Consultants

Item 407 of Regulation S-K was also amended in order to provide investors with information that will enable them to better assess the potential conflicts of interests of compensation consultant in recommending executive compensation. Many compensation consultants, or their affiliates, are retained by a company to provide a broad range of services in addition to advising on executive and director compensation, such as benefits administration, human resources consulting and actuarial services. The fees generated by these additional services may be more significant than the fees earned for executive and director compensation services and may create a risk of a conflict of interest that could call into question the objectivity of the consultant's advice and recommendations on executive and director compensation.

Amended Item 407 requires companies to disclose, under certain circumstances, the aggregate annual fees paid to outside compensation consultants for executive and director compensation consulting services and for non-executive compensation consulting services. This disclosure is in addition to the current rule which requires that companies describe the role of compensation consultants in determining or recommending executive and director compensation. The new disclosure rule focuses on engagements of compensation consultants that are subject to a potential conflict of interest.
If the compensation consultant was engaged by the compensation committee to provide advice on executive or director compensation, and such compensation consultant also received more than $120,000 from the company for non-executive compensation services during the last completed fiscal year, the following must be disclosed:

• Aggregate fees paid to the consultant for both the executive compensation advisory services to the compensation committee and the non-executive compensation services to the company;
• Information as to whether the decision to engage the compensation consultant for the non-executive compensation services was made or recommended by management; and
• Information as to whether the compensation committee or board approved the consultant's engagement.
• If the compensation committee did not engage its own compensation consultant, but management engaged a compensation consultant to provide to the company executive compensation advisory services, and such compensation consultant also received more than $120,000 from the company for non-executive compensation services during the last completed fiscal year, the aggregate fees paid to the consultant for both the executive compensation advisory services and the non-executive compensation services provided to the company must be disclosed.

No disclosure relating to the role of a compensation consultant is required:

• When the compensation consultant's role is limited to consulting on broad-based plans that do not discriminate, in scope, terms or operation, in favor of executive officers or directors; and
• When the compensation consultant's role is limited to providing information (but not providing any advice on such information) that either is not customized for a particular company or that is customized based on parameters developed by others, such as survey information.

New Item 5.07 to Form 8-K

The rules adopted on December 16, 2009, created a new Item 5.07 to the Current Report on Form 8-K to require disclosure on Form 8-K (rather than on Form 10-Q) of the results of the shareholder votes within four business days after the meeting at which the shareholders voted. If votes are not certified within the four business day period, companies must, nevertheless, make a disclosure of preliminary voting results within the four business day period and then amend the Form 8-K within four business days of the final results.