Final SEC Rules Bring Significant Changes To Executive Compensation Disclosure

On July 26, 2006, the SEC adopted sweeping amendments to the current executive compensation disclosure rules in response to investor concerns about the quality and transparency of executive compensation disclosure. The SEC’s new proxy disclosure and Form 8-K rules are effective November 7, 2006 and apply to the upcoming 2007 proxy season. This Alert summarizes the new rules and provides guidance on how they may affect executive compensation decisions.

CHANGES FROM PROPOSAL

Although the new rules as adopted are generally consistent with the proposal issued in January 2006, the SEC did make some substantive changes, including:

Option Granting Practices.

The new rules simplify the disclosure of incentive plan awards, so that non-stock grants, stock-based grants and performance-based awards are all contained in one table. In the wake, however, of recent publicity regarding option backdating and "spring-loading", the new rules require increased disclosure of a company’s option granting practices, including the timing of stock option grants and the determination of exercise prices.

Retention of Compensation Committee Report and Performance Graph

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Originally slated to be eliminated, both the Compensation Committee Report and the Performance Graph have been retained, but in modified forms.

Resubmission of Proposal to include Non-Executive Officers.

The SEC decided to revise and resubmit for comment the so-called "Katie Couric" proposal to include up to three employees whose total compensation exceeds the compensation of any of the named executive officers. The modified proposal would exclude disclosure regarding employees who do not make significant policy decisions.

Determination of Named Executive Officers.

Consistent with the proposal, the named executive officers will be determined based on their total compensation. However, the final rules exclude from total compensation the sum of an executive’s increase in pension values and earnings on deferred compensation. Corporate, M&A and Securities 09.2006 | 01 The SEC decided to revise and resubmit for comment the so-called "Katie Couric" proposal to include up to three employees whose total compensation exceeds the compensation of any of the named executive officers.

TRANSITION PERIOD

While the new proxy disclosure rules are effective for the 2007 proxy season, companies will not be required to "restate" compensation or related party disclosure for 2005 or prior fiscal years. The transition rules require the new Summary Compensation Table and other disclosures only for the most recent fiscal year, meaning fiscal 2006 for calendar year-end companies. The phase-in period for the new rules will be completed over three years, and over two years for small business issuers.

THE "COMPENSATION DISCUSSION AND ANALYSIS" — CD&A

A significant feature of the new rules is the requirement for a narrative "Compensation Discussion and Analysis." The CD&A’s purpose is to provide an overview of the company’s compensation objectives and policies and to put into perspective the numbers and narrative that follow it, without boilerplate. Its scope is broad and calls for a discussion of compensation for the last fiscal year and post-termination compensation that should be precise enough to identify material differences in compensation policies and decisions among each named executive officer, as well as compensation policies that the company will apply on an on-going basis. The SEC expects the CD&A to read much like the overview the SEC has encouraged companies to include in their Management’s Discussion and Analysis of financial statements. In a departure from the proposal, the CD&A will be "filed," not "furnished" and will not replace the Compensation Committee Report and the Performance Graph, each of which have been retained, although in modified forms. Because the CD&A is "filed", it will be incorporated by reference into registration statements filed under the Securities Act of 1933, covered by CEO and CFO certifications and subject to the more stringent liability provisions that apply to "filed" information. The modified Compensation Committee Report, similar in scope to the current Audit Committee Report, will be "furnished", rather than "filed."

CD&A — A Broad Discussion of Compensation Objectives and Policies

As a result of the SEC’s dissatisfaction with what it considers to be the boilerplate language found in many companies’ past Compensation Committee Reports, the rules specify a number of points that the CD&A should address, including:

• What are the objectives of the company’s compensation programs?
• What are the compensation programs designed to reward?
• What is each element of compensation?
• Why does the company choose to pay each element?
• How does the company determine the amount, and where applicable, the formula, for each element of compensation?
• How do each element and the company’s decisions regarding that element fit into the company’s overall compensation objectives?

In a departure from the proposal, companies will not have to discuss what the compensation program is designed not to reward. The adopting release also lists twelve examples of issues that might be appropriate for companies to discuss in the CD&A, including:

• policies for allocating between long-term and current compensation, between cash and non-cash compensation and among various types of non-cash compensation;
• the impact of accounting and tax treatments of certain types of compensation, including a company’s IRC 162(m) policy;
• how specific elements of compensation are structured and implemented to reflect company and individual performance, and the factors to increase or decrease compensation materially;
• stock ownership guidelines;
• whether and how actual and potential profits from prior compensation (e.g. gains from options exercised and the paper gain from in-the-money options) are considered in setting other compensation elements (e.g. retirement benefits);
• whether the company has used benchmarking, identifying the benchmark and if applicable, its components; and
• the role of executive officers in the compensation process.

The examples are not exhaustive and are intended to be broad enough to encompass future forms of compensation. The CD&A also must include disclosure of some actions taken after the fiscal year’s end, such as the adoption of new programs and policies.

Discussion of Option Granting Practices Required in CD&A

In the wake of the massive publicity regarding option backdating and "spring-loading" by some issuers, the new rules require increased disclosure of a company’s option granting practices, including the timing of stock option grants and the determination of exercise prices. If a company has, or intends to have, a program, plan or practice to select option grant dates for executive officers in coordination with the release of material non-public information, a discussion of that program, plan or practice must be discussed in the CD&A. This requirement applies both to anticipated increases and decreases in market value. The adopting release also encourages companies to provide a discussion in the CD&A regarding any practice used to determine an exercise price other than the market price on the actual grant date. Detailed information about each grant is required in the Grants of Plan-Based Awards Table, including the exercise price and grant date, as described below.

THE NEW COMPENSATION TABLES

Following the overview provided in the CD&A, the new rules require detailed executive compensation disclosure in three general categories: (1) compensation over the past three years; (2) exercises and holdings of previously awarded equity compensation; and (3) postemployment compensation. With a few narrow exceptions for de minimis amounts, disclosure of all compensation is required. These new disclosure obligations are likely to affect some companies’ fundamental compensation decisions and will also affect in more mundane ways virtually every public company. Companies will need to coordinate the efforts of their human resources and employee benefits, payroll and finance departments to ensure that appropriate records are readily available and kept up-to-date. Compiling and tracking the required information will involve an intensive inter-departmental effort for many companies.

The Summary Compensation Table

A reformatted Summary Compensation Table will remain the primary source of detailed compensation disclosure and will continue to require information for the last three fiscal years, subject to the transition rules. The final column of the reformatted table will require a "Total Compensation" figure, which will be a dollar-value sum of the other columns in the table. This highly visible final column will likely receive much attention from investors, the press and other interested parties. Each element of compensation is counted only once in the Summary Compensation Table, although it may be disclosed again in the other tables.

Two new columns in the Summary Compensation Table require disclosure of the dollar value of (1) stock-based awards that do not have option-type features, but which still derive their value from the company’s equity securities, or which permit settlement by issuance of the company’s equity securities (e.g., restricted stock), and (2) stock-based compensation instruments that have option-type features. In each case, the company must disclose the entire fair value of the equity award as of the grant date (irrespective of vesting) as a total dollar amount, calculated in accordance with FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (FAS 123R). FAS 123R itself, in contrast, calls for the compensation cost of an equity-based award to be spread over its vesting period in the company’s financial statements. Under the new SEC rules, if an award is materially modified, for example, to change the exercise price, the incremental fair value of the award, as modified, must be disclosed. Reload options, on the other hand, which are treated as new grants under FAS 123R, will require disclosure of the total grant fair value.

The Summary Compensation Table also requires disclosure in a separate column of the dollar amount of all non-stock incentive plan compensation earned during the fiscal year. This column includes performance-based compensation under a long-term plan that may not be settled in company securities and is not tied to the performance of the company’s stock, but rather to other measures such as return on equity, return on assets, or performance of a particular division.

An additional column requires disclosure of the annual change in actuarial value of defined benefit plans and earnings on nonqualified deferred compensation. This disclosure must be footnoted to identify and quantify the full amount of each element. Disclosure of nonqualified deferred compensation earnings will be limited to any above-market or preferential portion of the earnings. The amounts disclosed in this column are not included in the determination of the most highly compensated executive officers for the fiscal year, to address comments that these amounts would be heavily weighted towards officers with many years of service.

Finally, the All Other Compensation column of the Summary Compensation Table requires disclosure of all compensation not required to be disclosed in one of the other columns. Every item of compensation that is greater than $10,000 in value must be identified and quantified in a footnote to the table. Items of compensation appropriately disclosed in the All Other Compensation column include, among other things:

• perquisites, unless below $10,000 in the aggregate (discussed in greater detail below);
• amounts paid or accrued in connection with a termination of employment or a change in control;
• annual company contributions to vested and unvested defined contribution plans;
• the dollar value of any insurance premiums paid by the company for life insurance for the benefit of the executive officer;
• gross-ups or other amounts reimbursed for taxes; and
• the dollar value (computed in accordance with FAS 123R) of any discount for securities of the company purchased from the company, unless available to all stockholders or employees of the company.

Grants of Plan-Based Awards Table

An additional table entitled Grants of Plan-Based Awards replaces the Option/SAR Grants and Option/SAR Exercises tables currently required, and will supplement the Summary Compensation Table. This table will show the terms of grants for both equity incentive plans and non-equity incentive plans, whether or not performance-based, with separate disclosure for each grant made during the last fiscal year and an estimated future payout.

The grant date of each award must be reported and aggregation of option grants with the same exercise price is no longer permitted. The "grant date" is the grant date determined for financial statement reporting purposes pursuant to FAS 123R. If the date on which the compensation committee takes action or "is deemed to take action" (a phrase that is not explained) to grant an equity-based award is different from the "grant date", a column must be added to disclose the date of action.

In addition, if the per-share exercise price of options, stock appreciation rights or similar equity instruments is less than the market price of the underlying securities on the grant date, a separate column disclosing the market price on the date of grant must be included. A description of the methodology used to determine the exercise price is required in a footnote or in the narrative description following the tables.

For incentive plan awards, threshold, target and maximum payout information should be provided, but if the award provides only for a single estimated payout, that amount is to be reported as the payout. Awards granted in connection with a repricing are not reported in this table, but rather are included in the Summary Compensation Table.

The Summary Compensation Table and Grants of Plan-Based Awards Table will be followed by narrative disclosure, separate from the CD&A, of factors necessary to an understanding of the information provided in the tables. These may include material terms of employment agreements or modifications to equity awards, including a repricing, extension or change in vesting criteria, as well as information regarding award terms, such as the criteria for determining the amounts payable, vesting schedules and performance-based conditions.

Exercises and Holdings of Previously Awarded Equity Tables

Two tables illustrate how much of a named executive officer’s previous equity-based awards is still at risk, and the amounts realized from this type of compensation in the past year. The first table, Outstanding Equity Awards at Fiscal Year-End, requires disclosure of the number of shares that are subject to outstanding equity awards and the number of securities that are exercisable and unexercisable, whether or not "in-the-money," along with vesting schedules and expiration dates. Individual exercise prices and expiration dates must be disclosed and different instruments may not be aggregated. This table also requires disclosure of restricted stock or units. The second table, Option Exercises and Stock Vested, requires disclosure of amounts "realized" by the named executive officers as a result of the exercise of options or vesting of restricted stock during the last fiscal year, based on the market price on the exercise or vesting date. This table is similar to a portion of the current Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values table, but adds the vesting of restricted stock and similar equity compensation.

Post-Employment Compensation Tables

Companies will now be required to disclose in tabular form the value and terms of retirement packages and other post-termination compensation for named executive officers in two new tables and a supplemental narrative.

• Pension Benefits Table

The first post-employment compensation table, Pension Benefits, requires disclosure of the actuarial present value of each named executive officer’s accumulated benefit under each company pension plan in which he or she participates, and the number of years of credited service. The purpose of this disclosure is to provide investors with an understanding of the cost of promised future benefits in present value terms. Narrative disclosure following the table will discuss, among other things, the material terms of benefits under the plans, including the formula for benefits and early retirement arrangements, the value of a lump sum distribution if the named executive officer may make an election to receive a lump sum, the elements of the named executive officer’s compensation used to determine such officer’s benefits, why the company has multiple retirement plans if named executive officers may participate in more than one, and company policies regarding crediting extra years of service.

• Nonqualified Deferred Compensation Table

A second table, Nonqualified Deferred Compensation, will require disclosure of company and officers’ contributions, and all earnings and year end balances under nonqualified defined contribution and other deferred compensation plans. Footnote disclosure will clarify that certain amounts are also included in the Summary Compensation Table, which is intended to reduce the risk of double-counting by investors. This table will be followed by narrative disclosure of, among other things, the types of compensation which may be deferred, the measures of calculating interest or other earnings and material terms regarding payouts, withdrawals and other distributions.

POST-TERMINATION ARRANGEMENTS

Companies must expand significantly the discussion of arrangements (written or unwritten) for payments to a named executive officer in connection with his or her resignation, severance, retirement or other termination, change in responsibilities, or a change in control. This narrative disclosure must discuss:

• specific circumstances that will result in payments or other benefits;
• estimated payments and benefits resulting from each type of termination, and whether the amounts payable would or could be paid in a lump sum, including by
• specific factors used to determine appropriate payment amounts and benefit levels for each type of termination;
• any material conditions or obligations upon which the named executive officer’s receipt of payments or benefits is conditioned, for example, entry into a noncompetition or confidentiality agreement; and
• any other material information necessary to understand the provisions. Companies are required to provide quantitative disclosure even if uncertainties exist. In calculating the quantitative disclosure, companies are instructed to assume that:
• the triggering event took place on the last business day of the company’s last completed fiscal year; and
• the price per share of the company’s securities is the closing price as of that date.

Compensation committees should consider now how these calculations with respect to existing post-employment arrangements will look. Some compensation committees might conclude that changes to existing post-termination arrangements are warranted prior to the end of this fiscal year.

DETERMINATION OF NAMED EXECUTIVE OFFICERS

Under the new rules, the determination of the "named executive officers," other than the principal executive officer and principal financial officer (who are required to be included regardless of their compensation), is based on the aggregate figure in the Total Compensation column of the Summary Compensation Table, but excluding the amounts in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column. Previously, the determination of the named executive officers was based on combined salary and bonus amounts only, and companies were allowed to exclude from the calculations for a particular executive officer an unusually large and non-recurring payment. The new rules could result in unanticipated disclosure consequences if, for example, a newly hired executive officer is given a large equity grant upon joining the company. Companies should be aware that the named executive officers are now more likely to change from year to year.

REPROPOSAL OF "KATIE COURIC" DISCLOSURE

The SEC did not adopt its so-called "Katie Couric" proposal and instead resubmitted a modified version for additional comments. The original version would have required disclosure for up to three employees who were not executive officers during the last fiscal year but whose total compensation exceeded that of the named executive officers. The modified proposal would be limited to "large accelerated filers" and would exclude employees having no responsibility for significant policy decisions. The SEC’s stated purpose for this modified proposal is to provide investors with information regarding the most highly compensated employees who exert significant policy control over the company or one of its major subsidiaries, such as a director of a news division of a major network or a principal creative leader of the entertainment function of a media conglomerate, while excluding those highly compensated employees who do not have responsibility for significant policy decisions, such as sales people, entertainment personalities and investment professionals. Comments to the modified proposal are due by October 23, 2006.

DIRECTOR COMPENSATION TABLE

The new rules require a Director Compensation Table, similar in form and content to the Summary Compensation Table, but containing information regarding director compensation for the prior fiscal year only. Like the Summary Compensation Table, this table contains a Total Compensation column which includes the entire dollar value of directors’ equity compensation, measured in accordance with FAS 123R. An All Other Compensation column requires disclosure of perquisites (if above the $10,000 de minimis threshold), tax reimbursements, company contributions to vested and unvested defined benefit contribution plans, consulting fees, awards under director legacy or charitable awards programs, and any other director compensation not appropriately included in another column. To the extent all elements and amounts of compensation are the same for more than one director, these directors may appear in the table in a single row. The aggregate numbers of stock awards and option awards outstanding as of the fiscal year end must be disclosed in a footnote. The table will be followed by narrative disclosure which may include, among other things, a breakdown of the various types of director fees.

NEW COMPENSATION COMMITTEE REPORT

The Compensation Committee Report has been retained in a modified form and will be similar in form and content to the existing Audit Committee Report. The compensation committee must state in this report that it has reviewed and discussed the CD&A with management and has recommended to the Board of Directors that the CD&A be included in the company’s annual report on Form 10-K and/or proxy statement. The name of each member of the compensation committee must appear below the disclosure. This report will be "furnished" rather than "filed".

PERFORMANCE GRAPH RETAINED

In response to objections to the proposed elimination of the Performance Graph, the final rules retain it but no longer link it with executive compensation disclosure. The Performance Graph will continue to be "furnished" but will now be part of a company’s annual report as part of the item entitled "Market Price of and Dividends on the Registrant’s Common Equity and Related

DISCLOSURE REGARDING THE COMPENSATION COMMITTEE

The new rules require additional disclosure about the compensation committee itself. Most significantly, the company also must describe its processes and procedures for the consideration and determination of executive officer and director compensation, including:

• the scope of the compensation committee’s authority;
• the extent to which the committee may delegate authority to other people, specifying what authority may be delegated and to whom;
• any role of executive officers in determining or recommending the amount or form of executive and director compensation; and
• any role of compensation consultants in determining or recommending the amount or form of executive officer and director compensation, identifying the consultant and stating whether the consultant is engaged directly by the compensation committee or by another person, describing the nature and scope of the consultant’s assignment, and the material elements of instructions or directions given to the consultant.

This compensation committee disclosure, while required in the proxy statement, is separate from the CD&A and the Compensation Committee Report.

Guidance Regarding Perquisites

Disclosure of the dollar value of "perks" - personal benefits provided by a company to its named executive officers - has been required for decades. Exactly what this broad term encompasses, however, and how various perks are to be valued has been unclear. The SEC has provided some guidance in its new rules and release.

As before, the SEC did not provide a bright-line definition of perquisites out of concern that such a definition might become dated or lend itself to "reverse engineering" of benefits that escape the bright lines.

According to the new guidance, an item is not a perquisite or other personal benefit if it is "integrally and directly related" to the performance of a person’s job responsibilities. If it is not "integrally and directly related" to the performance of the person’s job responsibility, and if it "confers a direct or indirect benefit that has a personal aspect", even if it is provided for a general business purpose or at the company’s insistence, it is a perquisite, unless it is generally available to all employees of the company on a nondiscriminatory basis.

The SEC views "integrally and directly related" to performance of job responsibilities rather narrowly. Examples of benefits cited by the SEC which may be considered integrally and directly related to performance of job responsibilities, and which thus may not be perquisites include:

• office space at a company facility, even if it is larger than the offices of other employees;
• a reserved parking space which is closer to the company’s facility but not otherwise preferential to the executive;
• additional secretarial services which are devoted to company business;
• general business travel, including travel to and from business meetings;
• business entertainment;
• security provided during business travel; and
• itemized expense accounts which are limited to business purposes.

Conversely, the SEC does not consider items that merely "facilitate" job performance to be "integrally and directly related" to performance of job responsibilities. Further, whether a company has determined an expense to be an "ordinary" or "necessary" business expense for tax or other purposes does not determine whether it is a disclosable perquisite. Finally, the SEC stated that a company’s decision to provide an item of personal benefit for security purposes does not affect whether the item is a perquisite. Thus, the following items which might facilitate performance of job responsibilities or perhaps even be required by company policy for security or other purposes, generally are considered perquisites:

• personal travel using vehicles owned or leased by the company, and personal travel otherwise financed by the company;
• commuting expenses;
• personal investment management services or tax or financial advice;
• clerical services devoted to personal matters;
• club memberships not used exclusively for business entertainment;
• personal use of company-owned or leased property;
• housing or other living expenses, including relocation assistance and payments for the executive to stay at his or her own residence;
• security at a residence or during personal travel; and
• discounts on the company’s products or services if not generally available to all employees on a non-discriminatory basis.

Beyond these specified items, the SEC believes that companies and their advisors who are most familiar with the detailed facts of particular situations are in the best position to assess whether or not an arrangement is a perquisite.

The value of perquisites for disclosure purposes is the incremental cost of the perquisite to the company and is not based on current market values. Footnote disclosure of the methodology for computing the aggregate incremental cost for the perquisite is required.

The new rules require disclosure of perks with an aggregate value of $10,000 per named executive officer. Once the $10,000 threshold is exceeded, all perquisites must be identified (but not valued) in a footnote, and if the value of a particular perquisite exceeds the greater of $25,000 or 10% of the total of all perquisites for that named executive officer, that perquisite’s value also must be disclosed.

REVISED FORM 8-K DISCLOSURE OF EXECUTIVE COMPENSATION

The new rules modify the requirements for disclosing new employment compensation arrangements on Form 8-K. The SEC’s stated goal is to quell the growth of executive compensation filings that are not "unquestionably or presumptively material" and restore a more balanced approach to Form 8-K disclosure. The SEC recognizes that certain executive compensation information may be material to investors, but considers a company’s annual report on Form 10-K and/or proxy statement as the more appropriate vehicle for delivering complete executive compensation disclosure.

Under the new rules, all executive compensation disclosure requirements appear under Item 5.02. The new rules do this by:

• Eliminating employment compensation arrangements from the scope of Items 1.01 and 1.02.
• Expanding Item 5.02(b) regarding retirement, resignation or termination to include all named executive officers for the company’s previous fiscal year.
• Expanding Item 5.02(c) disclosure beyond employment agreements to require a brief description of any material plan, contract or arrangement to which a covered officer or director is a party, or which is materially amended in connection with the triggering events specified in Items 5.02(c) and (d).
• Adding a new Item 5.02(e) to require disclosure as to any named executive officer (as identified in the company’s most recent proxy statement) of:
• Any material new compensatory plan, contract or arrangement, or any new grant or award thereunder, whether or not written; and
• Any material amendment to a material compensatory plan, contract or arrangement, whether or not in connection with a triggering event specified in Item 5.02.
• Grants or awards need not be disclosed if they are consistent with previously disclosed plans or arrangements and they are disclosed the next time the company is required to provide disclosure under Item 402.
• Adding a new Item 5.02(f) to require disclosure of salary or bonus for the most recent fiscal year that was not available to the last practicable date in connection with disclosure under Item 402, as well as a recalculation of the new Total Compensation column.

The new rules eliminate the presumption that every compensatory arrangement with a named executive officer is per se material and must be disclosed. Instead, companies should undertake a materiality analysis to decide whether disclosure is required. In addition, unlike the previous rules, which were interpreted to require 8-K disclosure of compensatory arrangements with non-named executive officers (unless immaterial in amount or significance) and with directors, no disclosure will be required of a compensatory arrangement with an executive officer who is not the principal executive officer, principal financial officer or a named executive officer or with a director (unless entered into or amended in connection with a triggering event under Item 5.02).

The SEC also extended a safe harbor to maintain Form S-3 eligibility in the event a company fails to timely file a Form 8-K required by Item 5.02(e), which requires the disclosure of the adoption or material amendment of a compensatory arrangement with a principal executive officer, principal financial officer or named executive officer.

The adopting release sends a message that companies have, in some cases, set the materiality standard too low and disclosed compensation information on Form 8-K that goes beyond the SEC’s intent when it adopted the August 2004 Form 8-K amendments.

OTHER CHANGES

The new rules make other changes, including:

Certain Relationships and Related Party Transactions.

The new rules modify this item in a variety of ways. The threshold for related party transactions has increased to $120,000 from $60,000. New Item 404(b) requires a company to disclose its policies and procedures for reviewing and approving related party transactions.

Corporate Governance Disclosure

. In an effort to streamline certain corporate governance disclosure, new Item 407 consolidates disclosure regarding the independence of directors, requiring companies to specify the independence of each director and director nominee and to disclose director relationships not disclosed pursuant to Item 404.

Interplay of Items 402 and 404

. The new rules amend Item 402, Executive Compensation, to require disclosure of all transactions between the company and a third-party that have a primary purpose of providing compensation to an executive officer, even if the compensation was reported pursuant to Item 404, Certain Relationships and Related Party Transactions. Although this new requirement could result in duplicative disclosure, the SEC expressed its view that duplication is preferable to not fully disclosing compensation under Item 404.

Beneficial Ownership Table

. Shares that have been pledged by any executive officer or director must be disclosed in a footnote to a company’s Beneficial Ownership Table.

Plain English

. The new rules require that disclosure about compensation, beneficial ownership, related party transactions and corporate governance matters be provided in "Plain English" (which will challenge some companies). This means, among other things, that companies should use clear, concise sentences, avoid jargon, use heading, subheadings, tables and bullet lists and write in the active voice.

SMALL BUSINESS ISSUERS AND FOREIGN PRIVATE ISSUERS

Recognizing that small business issuers generally have simpler compensation arrangements and the relative increased administrative burden to them of complying with the new rules, the SEC extended only portions of the new rules to small business issuers, as follows:

• inclusion of a Summary Compensation Table, but only for the last two fiscal years;
• inclusion of the Outstanding Equity Awards at Fiscal Year-End table;
• inclusion of the Director Compensation Table; and
• named executive officers will include only the principal executive officer and the two other most highly compensated officers.

Small business issuers will not be required to include a CD&A or a Compensation Committee Report.

The new rules generally do not apply to foreign private issuers, which should continue to look to Item 6 of Form 20-F to determine their disclosure requirements. Generally, a foreign private issuer must provide more detailed compensation disclosure if the information is otherwise made publicly available in its home country or under its listing requirements. The new rules do amend the exhibit requirements of Form 20-F to require an employment or compensation agreement only if it is required to be filed in the foreign private issuer’s home country or is otherwise publicly disclosed.

CONCLUSION

Following are some steps that companies should think about now in preparation for the upcoming 2007 proxy season:

Director Action

. Companies should begin to discuss with their directors, in particular those on the compensation committee, the new information that will be required under the new rules, especially the information regarding their own processes and decisions.

Compensation Tracking

. Because the rules require a new column disclosing the total compensation for each named executive officer, companies that have not yet done so should begin to implement systems that track all components of compensation, including the value of perks, amounts to be paid in connection with the termination of employment and the value of equity awards. This may require increased coordination between a company’s payroll, human resources and legal departments. Companies may find it worthwhile to hire outside advisors to assist in the calculation of change-in-control and termination benefits, including "golden parachute" excise tax gross-up payments.

Review Option Granting Practices

. Companies should review their option granting practices in fiscal 2006 to determine if any special disclosures will be necessary. With respect to future grants, companies should consider their practices in granting options and other awards to their executive officers in light of the new rules and the lessons to be learned from the ongoing options dating furor (a related but separate topic).

In drafting the 2007 proxy statement, companies should be aware of the following significant new disclosures resulting from the new rules:

Compensation Discussion and Analysis

. An entirely new section - the Compensation Discussion and Analysis - should be an expansive but detailed discussion of the company’s compensation philosophy for its executive officers and directors for the last fiscal year.

Emphasis on Option Granting Practices

. Separate disclosure of each stock (and non stock) grant of an incentive award to a named executive officer will be required. Additional disclosure is required if the exercise price of an option differs from the market price of the stock on the grant date, or if the approval or "deemed approval" of the grant did not occur on the grant date. In addition, companies must disclose any program, practice or policy regarding the coordination of grant dates and the release

Revised Compensation Committee Report

. The Compensation Committee Report has changed in form and content and must state whether the compensation committee has reviewed the CD&A with management and recommended its inclusion in the proxy statement.

Reorganized Summary Compensation Table

. The Summary Compensation Table will include new columns, most notably "Total Compensation."

Named Executive Officers

. The named executive officers (other than the automatically required principal executive officer and principal accounting officer) will be determined based on the total compensation (with one adjustment) in the last fiscal year, and not on salary and bonus as in previous years.

Director Compensation Table

. Director compensation will be disclosed in a new Director Compensation Table, which includes similar information to the Summary Compensation Table.

Detailed Post-Employment Compensation

. Companies must quantify potential post-employment compensation, including potential payments to executive officers in the event of a change of control.

Higher Related Party Transaction Thresholds

. The threshold for disclosure of related party transactions has increased to $120,000 from $60,000.

Beneficial Ownership Table

. Any stock pledged by an executive officer, director or director nominee must be disclosed in a footnote to the Beneficial Ownership Table.

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