On December 16, 2009, the U.S. Securities and Exchange Commission (“SEC”) approved and adopted a number of rule changes that will require enhanced risk, compensation and governance disclosure in proxy and other information statements. The new rules will be effective on February 28, 2010, and the SEC’s interpretations provide for the following compliance schedule:

The SEC adopted the new rules to provide investors more relevant and useful information when making voting decisions, which includes information relating to compensation, director qualifications and board leadership structure. Below is a summary of the new rules as reported in the SEC’s release, available at:
http://www.sec.gov/rules/final/2009/33-9089.pdf.

NEW COMPENSATION DISCLOSURE

Disclosure of Compensation and Risk
In light of the recent financial crisis, the SEC has adopted a new rule requiring disclosure of a company’s compensation policies and practices applicable to all employees if there is a risk these policies and practices are reasonably likely to have a material adverse effect on the company. In preparation, a company should conduct a risk assessment of compensation policies and practices that apply to all employees, not just named executive officers. The final SEC rule includes a non-exhaustive list of situations where programs may cause material adverse risk to a company. Compensation programs implemented in the following business units are such examples:

If a company determines that its compensation program is reasonably likely to have a material adverse effect on the company, the company must discuss the policies or practices as they relate to risk management and risk-taking incentives. The SEC rules include the following illustrative list of the types of issues a company should address if disclosure is required:

Smaller reporting companies need not provide the risk disclosure described above.

Compensation Tables
When the executive compensation rules were last amended in 2006, the SEC changed the reporting of equity awards in the Summary Compensation Table and Director Compensation Table. Since 2006, companies have been required to include in these tables the compensation expense associated with outstanding equity awards in the fiscal years presented rather than the grant date fair value of the awards made during such fiscal years. This approach created a disconnect between the value of compensation reported and the compensation decisions actually made in the fiscal years covered by the tables. As such, the 2009 rule amendments now require the disclosure of the grant date fair value of awards made during the covered fiscal years in the “Option Awards” and “Stock Awards” columns of the Summary Compensation Table and Director Compensation Table.

The amounts reported in the tables should reflect the grant date fair values calculated in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, which was formerly known as FAS 123R. Companies should calculate the fair value of performance-based awards using the probable outcome of performance conditions rather than the maximum potential value of the awards (the maximum value is to be disclosed in footnotes to the Summary Compensation Table and Director Compensation Table).

Companies will still be required to report the full grant date fair value of each equity award made during the fiscal year covered in the Grants of Plan-Based Awards Table, which should also be calculated based on the probable outcome of meeting any applicable performance conditions.

In order to transition to the new presentation of the value of equity awards, companies with a fiscal year ending on or after December 20, 2009 must restate the prior two fiscal years included in the Summary Compensation Table to reflect the new reporting requirements. Companies are not: however, required to determine if different named executive officers should be included in the Summary Compensation Table based on the new reporting requirements even though total compensation will be affected and may result in a change in those who qualified as named executive officers in prior fiscal years.

Compensation Consultants
The new SEC rules require additional disclosure regarding the retention of compensation consultants if certain potential conflicts of interest exist. Specifically, if the board of directors or compensation committee (or persons performing an equivalent function) has retained its own consultant to provide advice regarding executive and director compensation and the consultant or its affiliate has provided other services to the company that do not involve executive compensation advice for an amount that exceeds $120,000 during the last fiscal year, the company must disclose the aggregate fees paid to the consultant for all services rendered. It must also disclose whether the decision to retain the consultant for the non-executive compensation services was made or recommended by management and approved by the board of directors.

Even if the board of directors has not retained its own consultant, disclosure is required if a consultant is engaged to provide both executive compensation consultation services and non-executive compensation consultation services to the company and the fees for the non-executive compensation services exceeded $120,000 during the prior fiscal year. In this instance, the company must disclose the aggregate fees paid to the consultant for both executive and non-executive compensation consultation services.

Disclosure under the new rules will not be required in the following situations:

NEW CORPORATE GOVERNANCE DISCLOSURE

Qualifications of Directors and Nominees
The new rules amend Item 401 of Regulation S-K, which relates to the disclosure requirements for the backgrounds of executive officers, directors and nominees for director. Under the new rules, companies must disclose for each director and nominee for director the specific experience, qualifications, attributes or skills that led the board of directors to determine that the individual should serve as a director of the company. The SEC noted in the final rule release that a company should disclose if a director or nominee was chosen because of a certain expertise relevant to serving on one of the committees of the board.

Other Directorships
The SEC expanded the time period relevant to the disclosure of outside directorships held by directors and nominees. Under the old rules, companies were only required to disclose current public company directorships held by directors and nominees. Compliance with the new rules requires companies to disclose public company directorships held by directors and nominees over the past five years, even if the individual is no longer serving as a director of the other public company.

Legal Proceedings
The SEC has also extended the look-back period applicable to the disclosure of director, nominee or executive officer involvement in certain legal proceedings (if material to an evaluation of such individual’s ability or integrity) as required by Item 401(f) of Regulation S-K from five years to ten years. Furthermore, the SEC expanded the list of relevant legal proceedings to include:

Director Diversity
The new rules require companies to disclose whether and how the nominating committee (or persons performing an equivalent function) considers diversity in identifying director nominees. If the company has a policy with regard to the consideration of diversity in nominating directors, it must disclose how the policy is implemented and evaluated. The SEC did not define “diversity” in the rules or the adopting release, allowing companies to define the term as they deem appropriate.

Board Leadership Structure
Under the new rules, companies are required to disclose whether and why the roles of principal executive officer and chairman of the board are either separate or combined and why they believe existing leadership structures are appropriate. If a company has combined the positions of principal executive officer and board chairman but also established a lead independent director, it must explain this action. It must also explain the particular role the lead independent director plays in board and company leadership.

Risk Oversight
In light of the recent financial crisis and the SEC’s heightened focus on risk, companies must discuss the board’s involvement in the oversight of the company’s risk management process. While specific disclosure is not mandated, the SEC has indicated companies may want to discuss how the oversight role is exercised (i.e., whether through whole board involvement or a committee), to whom individuals carrying out these duties report and how the board or responsible committee receives information from such individuals.

FORM 8-K AMENDMENT REQUIRING DISCLOSURE OF VOTING RESULTS

Prior to the adoption of the new rules, voting results from annual or special meetings were required to be disclosed in the Form 10-Q or Form 10-K covering the period in which the meeting took place. To provide for more immediate disclosure of voting results, the SEC has adopted new Item 5.07 of Form 8-K, which requires companies to report voting results within four business days after the day of the meeting at which the vote was held. The requirement to report such results in the Form 10-Q or Form 10-K has been eliminated.

Instructions to Item 5.07 provide that if final voting results are not available within four business days after the annual or special meeting, companies should file a Form 8-K within this time frame reporting the preliminary voting results. Once the final results have been tabulated, companies should file an amendment to the Form 8-K within four business days after the final results are known.

PREPARING FOR THE 2010 ANNUAL MEETING

We encourage companies to begin preparing for their 2010 annual meetings now due to the new disclosure requirements. Steps to take include: