SEC Adopts Amendments To Proxy Statement Disclosure Rules

On December 16, 2009 the SEC adopted amendments to the proxy statement disclosure rules. The new rules, which affect compensation and corporate governance disclosures, are effective for definitive proxy statements filed on or after February 28, 2010 by companies whose fiscal year ends on or after December 20, 2009. The key changes made by the amendments are described below.

Compensation Policies And Practices Relating To Risk Management

Under the new rules, companies (other than "smaller reporting companies") will be required to discuss their compensation policies and practices for employees as they relate to risk management and risk-taking incentives if such policies and practices create risks that are "reasonably likely to have a material adverse effect" on the company. The requirement applies to all employees, not just executive officers.

In response to comments on the rule initially proposed, the threshold triggering this disclosure has been tightened from "may have" to "reasonably likely to have" the requisite effect, and the rule has been clarified so that only material "adverse" effects will trigger the disclosure. The adopting release makes clear that, in determining whether a particular compensation structure is reasonably likely to have a material adverse effect, companies are permitted to consider policies that mitigate risk-taking incentives and controls that are designed to limit the risks of the compensation structure. In another change from the form of the rule as initially proposed, the disclosure for employees (other than the named executive officers) will not be part of the CD&A.

The rule sets forth a non-exclusive list of the types of situations in which compensation programs may have the potential to incentivize employees to create material risks for a company. These situations include compensation policies and programs at a business unit of the company:

that carries a significant portion of the company's risk profile; that has compensation structured in a significantly different manner from the rest of the company; that is significantly more profitable than the rest of the company; where the compensation expense is a significant portion of the unit's revenues; or where compensation practices vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon completion of a task while the company's income and risk from the task extend over a significantly longer period of time. The scope of the required disclosure is somewhat open-ended. The requirement is to "discuss" the company's compensation policies and practices "as they relate to risk management practices and risk-taking incentives." In an approach similar to that of the CD&A, this...