On December 16, 2009, the U.S. Securities and Exchange Commission (“SEC”) approved substantial revisions to its disclosure rules for information statements, proxies, annual reports and registration statements aimed at enhancing executive compensation and corporate governance disclosure. The enhanced disclosure requirements were designed to continue the SEC’s recent trend of reforming executive compensation policies while increasing board accountability to shareholders.

The new requirements include information about the relationship of a company’s overall compensation policies to risk, valuation of equity compensation awards, director and nominee qualifications, company leadership structure and oversight, conflicts of interests of compensation consultants, and amendments adding a new Form 8-K disclosure item for reporting shareholder voting results. To review the full text of the final rules go to http://www.sec.gov/rules/final/2009/33-9089.pdf.

Effective Dates of the New Requirements

Issuers with a Fiscal Year End before December 20, 2009 – For an issuer with a fiscal year ending before December 20, 2009, the new disclosure requirements will not be applicable to its 2009 Form 10-K and related proxy statement, even if those filings are made on or after February 28, 2010.

Issuers with a Fiscal Year End on or after December 20, 2009 – For an issuer with a fiscal year ending on or after December 20, 2009, its 2009 Form 10-K and proxy statement must comply with the new requirements if filed on or after February 28, 2010. In addition, if an issuer whose fiscal year ends on or after December 20, 2009 is required to file a preliminary proxy statement and expects to file its definitive proxy statement on or after February 28, 2010, then the preliminary proxy statement must comply with the new requirements, even if filed before February 28, 2010.

The New Requirements

The new proxy disclosure requirements will require the following disclosure in proxy and information statements, annual reports and registration statements.

Risks Arising from Compensation Policies and Practices

The new regulations add a new paragraph to Item 402 of Regulation S-K to require a company, other than a smaller reporting company, to include a narrative discussion of the company’s compensation policies and practices for all employees, if those compensation policies and practices create risks that are “reasonably likely to have a material adverse effect on the company.” The disclosure standard is now consistent with the standard used in Management’s Discussion and Analysis for disclosing material trends and uncertainties. The adopting release provides a non-exhaustive list of situations that could potentially trigger the enhanced disclosure, including the following situations:

• Where a particular business unit accounts for a significant portion of the company’s risk profile;
• Where the compensation of a particular business unit is structured significantly differently from that of other units;
• Where a particular business unit is significantly more profitable than others within the company;
• Where the compensation expense of a particular business unit represents a significant percentage of the unit’s revenues; or
• Where the compensation policies or practices vary significantly from the company’s overall risk and reward structure, such as when the timing for performance-based bonuses or incentives awards occurs significantly before receipt of anticipated income or expiration of associated risk to the company.

The new disclosure will not be part of a company’s Compensation Discussion and Analysis (“CD&A”), as the SEC had originally proposed; therefore, companies affected will make the appropriate disclosure in the compensation section of their proxy statement and Form 10-K.

Value of Option and Stock Awards Included in Summary

Amended Item 402 of Regulation S-K requires a company to disclose the aggregate grant date fair market value of equity-based awards granted during the fiscal year to named executive officers and directors (as computed in accordance with FASB ASC 718, Stock Compensation (“SFAS 123R”)). This alters the existing requirement, under which a company is required to report the dollar amount recognized for financial statement reporting purposes for the fiscal year with respect to all awards granted to such individuals. Smaller reporting companies are not required to provide a Grants of Plan-Based Awards Table or a CD&A, but are required to provide a Summary Compensation Table and Director Compensation Table.

Enhanced Director, Nominee and Executive Officer Disclosure

Item 401 of Regulation S-K, as amended, requires discussion of the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the company. The amendment also requires disclosure of any directorships held by each director and nominee at any time during the past five years at any public company or registered investment company.

The new rules require disclosure of involvement in legal proceedings during the past 10 years (rather than during the past five years) and expand the types of legal proceedings that must be disclosed.

Board Leadership Structure and the Board’s Role in Oversight

Item 407 of Regulation S-K and corresponding Item 7 of Schedule 14A under the proxy rules, as amended, require disclosure about the company’s “leadership structure”. Specifically, a company is required to disclose whether it has chosen to combine or separate the positions of principal executive officer and board chairman. If the company has combined the roles of principal executive officer and board chairman, and a lead independent director is designated to chair meetings of the independent directors, the company must provide its reasons for such decisions.

The new rules also require disclosure of the board’s role in risk oversight, such as how the board administers its oversight function, and the effect that this has on the board’s leadership structure. This disclosure includes information regarding whether the persons who oversee risk management report directly to the board as whole or to a committee; and whether and how the board, or board committee, monitors risk.

Potential Conflicts of Interests of Compensation Consultants

The amended Item 407 will now require disclosure of fees paid to compensation consultants in situations in which the company employs the consultant for recommendations on the amount or form of executive and director compensation and also for additional services. Disclosure is required only if the fees for the additional services exceed $120,000 during the year with respect to which the disclosure is made.

Reporting of Voting Results on Form 8-K

The new rules eliminate the Form 10-Q and 10-K requirements to disclose shareholder voting results, and provide for such disclosure in Item 5.07 of Form 8-K. The rule requires disclosure of these results within four business days following the completion of the relevant shareholder meeting. If the final results cannot be reported in the original Form 8-K, the final results must be reported in an amendment to the original report within four business days after the final voting results are shown.

If you have questions about the new SEC disclosure requirements, contact any member of Clark Wilson LLP’s Corporate Finance & Securities Group.