Benefit News

SEC Adopts Changes to Executive Compensation and Related Party Disclosure Requirements

August 3, 2006 - The Securities and Exchange Commission (the "SEC") recently voted unanimously to adopt comprehensive changes to the rules requiring disclosure of executive and director compensation, related party transactions, director independence and other corporate governance matters, and securities ownership of officers and directors.

Section 409A was added to the Code by section 885 of the American Jobs Creation Act of 2004, Public Law 108-357, 118 Stat. 1418 (AJCA). Section 409A(a) generally provides that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. Section 409A(a) also provides rules under which deferrals of compensation will not result in such immediate and additional tax liability, including rules about the timing of initial elections to defer compensation, payments of deferred compensation, and changes to the time or form of a scheduled payment of previously deferred amounts.

The proposed rules generated over 20,000 comments from the public. In adopting the changes, the SEC noted, that in the 72 years of its history, these proposed rules have generated more interest than any other SEC proposal. The new rules will affect disclosure in proxy statements, registration statements, annual reports, and the current reporting of compensation arrangements. They will take effect for, among other SEC filings: (i) Form 10-Ks for companies with fiscal years ending on or after December 15, 2006, (ii) Form 8-Ks that are filed in connection with triggering events that occur 60 days or more after the new rules are published in the federal register, and (iii) proxy statements filed on or after December 15, 2006 which are required to include Regulation S-K, Item 402 and Item 404 disclosure for companies whose fiscal years end on or after December 15, 2006. Companies are not required to restate information regarding executive compensation and related party transactions for prior years that were previously disclosed in accordance with the then current rules.

As originally proposed, executive compensation disclosure will be organized into three broad categories: (i) compensation of the "named executive officers" over the last three (3) years, (ii) holdings of outstanding equity-related interests received as compensation which are the source of future gains, and (iii) retirement plans, deferred compensation and other post-employment payments and benefits. Certain controversial aspects of the proposed rules have been retained, including the requirement that the Compensation Discussion and Analysis (CD&A) be treated as "filed" with the SEC and subject to CEO and CFO certifications under the Sarbanes-Oxley Act of 2002.

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