Jenner & Block

Malik and Shuman Provide Outline of New Executive Compensation Disclosure Requirements

Public companies should bear in mind new amendments made to the Securities and Exchange Commission (SEC) rules relating to the disclosure of executive compensation when setting timetables for drafting their 2007 proxy statements, according to a recent article published by Jenner & Block Partner Thaddeus J. Malik and Associate Jeffrey R. Shuman in the Corporate Compliance & Regulatory Newsletter.

The amendments, adopted by the SEC in July 2006, will affect SEC filings and reports for fiscal years ending on or after December 15, 2006.  The article cautioned that a potentially large amount of additional information will need to be collected prior to drafting the 2007 proxy statements, and offered the following suggestions to facilitate corporate compliance with the new rules. 

First, the article suggests that in preparing the 2007 proxy statement, companies should review their disclosure controls to confirm that they are collecting all of the information necessary to be considered for disclosure pursuant to the amended rules. 

In addition, Messrs. Malik and Shuman advised that companies implement procedures to facilitate cooperation.  “The revised rules will require companies to adopt a multidisciplinary approach to disclosure that will be dependent upon increased cooperation among different core competencies within the organization, and the expansion of the disclosure preparation process beyond the company’s legal and human resource departments,” the attorneys wrote.

Among other things, the article mentioned that accountants and actuaries will have an increased role in the disclosure process.  The article also recommended that legal staff should be present during Compensation Committee meetings to ensure that appropriate weight is given to the new Compensation Discussion & Analysis (CD&A) section of the 2007 proxy statement.

According to the article, the SEC has indicated that the CD&A section should provide “material information and analysis to investors about the methodology underlying the company’s compensation decisions and policies in a manner that is meaningful, avoids boilerplate disclosure and complies with the SEC’s rules on plain English disclosure.”  As such, the article stated that companies will have to be careful to build sufficient time into the drafting process to ensure that the CD&A section will receive the appropriate amount of review from the applicable constituencies within the organization.

Also, the article noted that companies may start to make policy changes as a result of the SEC rule changes.  For instance, the article noted, companies may start making different choices when deciding which benefits to offer to their executives in order to avoid the disclosure requirements. 

Finally, the article warned companies to be prepared for the public and shareholders to become privy to certain compensation information upon the filing of their 2007 proxy statement.  Companies should expect increased scrutiny of their salary and benefit decisions, and be ready to answer questions about them.

Please click here to view the article.