

[Federal Register: September 8, 2006 (Volume 71, Number 174)]
[Proposed Rules]               
[Page 53267-53269]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se06-31]                         



[[Page 53267]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 229

[Release Nos. 33-8735; 34-54380; IC-27470; File No. S7-03-06]
RIN 3235-AI80

 
Executive Compensation Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Request for additional comment.

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SUMMARY: The Securities and Exchange Commission is requesting 
additional comment on a proposed amendment to the disclosure 
requirements for executive and director compensation. We are requesting 
comments regarding the proposal to require compensation disclosure for 
three additional highly compensated employees.

DATES: Comments should be received on or before October 23, 2006.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
): or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number S7-03-06 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.


Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington DC 20549-1090.

All submissions should refer to File Number S7-03-06. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed/shtml). Comments 

are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549. All comments received will be posted without change; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Carolyn Sherman, or 
Daniel Greenspan, at (202) 551-3500, in the Division of Corporation 
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-3010 or, with respect to questions regarding 
investment companies, Kieran Brown in the Division of Investment 
Management, at (202) 551-6784.

SUPPLEMENTARY INFORMATION: We solicit additional comments on a proposal 
to amend Item 402 \1\ of Regulation S-K.\2\
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    \1\ 17 CFR 229.402.
    \2\ 17 CFR 229.10 et seq.
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I. Background

    On January 27, 2006, we proposed revisions to our rules governing 
disclosure of executive compensation, director compensation, related 
party transactions, director independence and other corporate 
governance matters, current reporting regarding compensation 
arrangements and beneficial ownership.\3\ We received over 20,000 
comment letters in response to our proposals. In general, commenters 
supported the proposals and their objectives. On July 26, 2006 we 
adopted the rules and amendments substantially as proposed, with 
certain modifications to address a number of points that commenters 
raised.\4\
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    \3\ Executive Compensation and Related Party Disclosure, Release 
No. 33-8655 (Jan. 27, 2006) [71 FR 6542] (the ``Proposing 
Release'').
    \4\ Executive Compensation and Related Party Disclosure, Release 
No. 33-8732A (Aug. 29, 2006) (the ``Adopting Release'') published in 
this issue of the Federal Register.
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    We did not adopt the proposed disclosure requirement regarding the 
total compensation and job description of up to an additional three 
most highly compensated employees who are not executive officers or 
directors but who earn more than any of the named executive officers. 
Instead we are requesting additional comment. In particular, we have 
specific requests for comment as to whether the proposal should be 
modified to apply only to large accelerated filers who would disclose 
the total compensation for the most recent fiscal year and a 
description of the job position for each of their three most highly 
compensated employees whose total compensation is greater than any of 
the named executive officers, whether or not such persons are executive 
officers. Under this approach, employees who have no responsibility for 
significant policy decisions within either the company, a significant 
subsidiary or a principal business unit, division, or function, would 
be excluded from the determination of the three most highly compensated 
employees and no disclosure regarding them would be required.

II. Discussion

    As part of the Item 402 narrative disclosure requirements, we had 
proposed an additional item that would have required disclosure for up 
to three employees who were not executive officers during the last 
completed fiscal year and whose total compensation for the last 
completed fiscal year was greater than that of any of the named 
executive officers.\5\ We received extensive comment on this proposal. 
Some commenters supported the proposal or suggested that it should go 
further.\6\ Many commenters expressed concern that the benefits of this 
disclosure to investors would be negligible, yet compliance might 
require the outlay of considerable company resources.\7\ Some 
commenters expressed concern that the proposed disclosure would raise 
privacy issues or negatively impact competition for employees.\8\ While 
we continue to consider whether to adopt such a requirement as part of 
the executive compensation disclosure rules, we are requesting 
additional comment as to whether potential modifications would address 
the concerns that commenters have raised.
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    \5\ Proposed Item 402(f)(2).
    \6\ See, e.g., letters from the Corporate Library; The 
Greenlining Institute; Institutional Investor Group; and State Board 
of Administration (SBA) of Florida.
    \7\ See, e.g., letters from American Bar Association, Committee 
on Federal Regulation of Securities; Chamber of Commerce of the 
United States of America (``Chamber of Commerce''); Eli Lilly and 
Company (``Eli Lilly''); Leggett & Platt, Incorporated (``Leggett & 
Platt''); Nancy Lucke Ludgus; and Mercer Human Resource Consulting 
(``Mercer'').
    \8\ See, e.g., letters from American Bar Association, Joint 
Committee on Employee Benefits; Business Roundtable; jointly, CBS 
Corporation, The Walt Disney Company, NBC Universal, News 
Corporation, and Viacom, Inc. (``Entertainment Industry Group''); 
Committee on Corporate Finance of Financial Executives 
International; Chamber of Commerce; Cleary Gottlieb Steen & Hamilton 
LLP (``Cleary''); CNET Networks, Inc. (``CNET Networks''); Compass 
Bancshares, Inc. (``Compass Bancshares''); Compensia; Cravath, 
Swaine & Moore LLP (``Cravath''); DreamWorks Animation SKG 
(``DreamWorks''); Eli Lilly; Emerson Electric Co.; Fenwick & West 
LLP; The Financial Services Roundtable (``FSR''); Professor Joseph 
A. Grundfest, dated April 10, 2006; Investment Company Institute 
(``ICI''); Intel Corporation (``Intel''); Kellogg Company 
(``Kellogg''); Kennedy & Baris, LLP (``Kennedy''); Mercer; Peabody 
Energy Corporation (``Peabody Energy''); Pearl Meyer & Partners; 
Securities Industry Association (``SIA''); Sullivan & Cromwell LLP; 
Society of Corporate Secretaries & Governance Professionals 
(``SCSGP''); and WorldatWork.
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    We note in particular that some commenters questioned the 
materiality of the information that would have been required by the 
proposal, given that the covered employees would not be in policy-
making positions as executive

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officers.\9\ After considering the issues raised by these commenters, 
we remain concerned about disclosure with respect to employees, 
particularly within very large companies, whether or not they are 
executive officers, whose total compensation for the last completed 
fiscal year was greater than that of one or more of the named executive 
officers. If any of these employees exert significant policy influence 
at the company, at a significant subsidiary of the company or at a 
principal business unit, division, or function of the company, then 
investors seeking a fuller understanding of a company's compensation 
program may believe that disclosure of these employees' total 
compensation is important information.\10\ Knowing the compensation, 
and job positions within the organization, of these highly compensated 
policy-makers whose total compensation for the last fiscal year was 
greater than that of a named executive officer, should assist in 
placing in context and permit a better understanding of the 
compensation structure of the named executive officers and directors.
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    \9\ See, e.g., letters from California State Teachers' 
Retirement System; Cleary; CNET Networks; Compass Bancshares; 
DreamWorks; Entertainment Industry Group; Fried, Frank, Harris, 
Shriver & Jacobson LLP; FSR; Hewitt Associates LLC; ICI; Intel; 
Kellogg; Kennedy; Leggett & Platt; Peabody Energy; Pearl Meyer & 
Partners; SCSGP; SIA; Stradling Yocca Carlson & Rauth; Top Five Data 
Services, Inc.; Towers Perrin, dated April 10, 2006; and Walden 
Asset Management.
    \10\ The Commission expressed similar concerns in 1978, when it 
stated ``a key employee or director of a subsidiary might be the 
highest-paid person in the entire corporate structure and have 
managerial responsibility for major aspects of the registrant's 
overall operations.'' Uniform and Integrated Reporting Requirements: 
Management Remuneration, Release No. 33-6003 (Dec. 4, 1978) [43 FR 
58151] (the ``1978 Release''). See the Adopting Release at n. 327 
for a discussion of the term ``executive officer.'' In light of some 
of the comments that we received, we have clarified that the 
definition of ``executive officer'' includes all individuals in a 
registrant policy-making role. See, e.g., letters from SCSGP and 
Cravath.
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    Our intention is to provide investors with information regarding 
the most highly compensated employees who exert significant policy 
influence by having responsibility for significant policy decisions. 
Responsibility for significant policy decisions could consist of, for 
example, the exercise of strategic, technical, editorial, creative, 
managerial, or similar responsibilities. Examples of employees who 
might not be executive officers but who might have responsibility for 
significant policy decisions could include the director of the news 
division of a major network; the principal creative leader of the 
entertainment function of a media conglomerate; or the head of a 
principal business unit developing a significant technological 
innovation. By contrast, we are convinced by commenters that a 
salesperson, entertainment personality, actor, singer, or professional 
athlete who is highly compensated but who does not have responsibility 
for significant policy decisions would not be the type of employee 
about whom we would seek disclosure. Nor, as a general matter, would 
investment professionals (such as a trader, or a portfolio manager for 
an investment adviser who is responsible for one or more mutual funds 
or other clients) be deemed to have responsibility for significant 
policy decisions at the company, at a significant subsidiary or at a 
principal business unit, division or function simply as a result of 
performing the duties associated with those positions. On the other 
hand, an investment professional, such as a trader or portfolio 
manager, who does have broader duties within a firm (such as, for 
example, oversight of all equity funds for an investment adviser) may 
be considered to have responsibility for significant policy decisions.
    We continue to consider whether it is appropriate to require some 
level of narrative disclosure so that shareholders will have 
information about these most highly compensated employees. This 
consideration includes the appropriate level of information about these 
employees and their compensation in light of their roles.
    As to issues regarding privacy and competition for employees, to 
the extent that commenters objected that the disclosure could result in 
a competitor stealing a company's top ``talent,'' \11\ we have tried to 
address these concerns by focusing the disclosure on persons who exert 
significant policy influence within the company or significant parts of 
the company.
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    \11\ See, e.g., letter from Entertainment Industry Group. In 
addition, we note our intention is not to suggest that these 
additional employees, whether or not they are executive officers, 
are individuals whose compensation is required to be reported under 
the Exchange Act ``by reason of such employee being among the 4 
highest compensated officers for the taxable year,'' as stated in 
Internal Revenue Code Section 162(m)(3)(B) [26 U.S.C. 162(m)(3)(B)]. 
See letter from Cleary (expressing concern that the additional 
individuals not fall within the purview of Section 162(m) of the 
Internal Revenue Code).
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III. Request for Comment

    We request additional comment on the proposal to require 
compensation disclosure for up to three additional employees. In 
addition to general comment, we encourage commenters to address the 
following specific questions:
     Would the rule more appropriately require disclosure of 
the employees described above if it were structured in the following or 
similar manner:
    For each of the company's three most highly compensated employees, 
whether or not they were executive officers during the last completed 
fiscal year, whose total compensation for the last completed fiscal 
year was greater than that of any of the named executive officers, 
disclose each such employee's total compensation for that year and 
describe the employee's job position, without naming the employee; 
provided, however, that employees with no responsibility for 
significant policy decisions within the company, a significant 
subsidiary of the company, or a principal business unit, division, or 
function of the company are not included when determining who are each 
of the three most highly compensated employees for the purposes of this 
requirement, and therefore no disclosure is required under this 
requirement for any employee with no responsibility for significant 
policy decisions within the company, a significant subsidiary of the 
company, or a principal business unit, division, or function of the 
company?
     Would it be appropriate to determine the highest paid 
employees in the same manner that named executive officers are 
determined, by calculating total compensation but excluding pension 
plan benefits and above-market or preferential earnings on nonqualified 
deferred compensation plans, and by comparing that amount to the same 
amount earned by the named executive officers (excluding the amount 
required to be disclosed for those named executive officers pursuant to 
paragraph (c)(2)(viii) of Item 402)? If so, should the total amount 
disclosed include these amounts as it does for named executive 
officers? Should the pension benefit and above-market earnings be 
separately disclosed in a footnote so investors can calculate the 
amounts used in determining highest paid employees?
     Would modifying the proposed rule to apply only to large 
accelerated filers \12\ properly focus this disclosure obligation on 
companies that are more likely to have these additional highly 
compensated employees? Would that modification address concerns that 
the proposed rule would impose disproportionate compliance burdens by 
limiting the disclosure obligation to companies that are presumptively 
better able to track the covered employees?

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Would a different limitation as to applicability be appropriate?
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    \12\ The term large accelerated filer is defined in Exchange Act 
Rule 12b-2 [17 CFR 240.12b-2].
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     Is information regarding highly compensated employees, 
including those who are not executive officers, material to investors? 
In answering this question, commenters are encouraged to address the 
following additional questions:
    [cir] Would modifications limiting the disclosure to employees who 
make significant policy decisions within the company, a significant 
subsidiary of the company, or a principal business unit, division, or 
function of the company appropriately focus the disclosure on employees 
for whom compensation information is material to investors?
    [cir] Would the approach that we are considering provide investors 
with material information about how policy-making responsibilities are 
allocated within a company? Are the examples describing responsibility 
for significant policy decisions too broad or too narrow?
    [cir] Would the proposed rule, with the modifications described 
above, provide investors with material information necessary to 
understand the company's compensation policies and structure? How 
should we address those concerns?
    [cir] What is typically the role of the compensation committee in 
determining or approving the compensation of the additional employees 
if they are not executive officers? If the compensation committee does 
not oversee their compensation, is the additional employee compensation 
information material to investors? What types of decisions would 
investors make based on this information?
     Would the proposed rule, with the modifications described 
above, raise privacy issues or negatively impact competition for 
employees in a manner that would outweigh the materiality of the 
disclosure to investors?
     Should we require that the three additional employees be 
named? If not, what additional information should be required? Should 
more information be required regarding the employee's compensation or 
job position?
     Should we define ``responsibility for significant policy 
decisions'' ? Should we use another test to describe those employees 
who exert a significant policy influence on the company? Do the 
examples provided above help identify and delimit the number of 
employees whose compensation would be subject to disclosure under this 
provision? What would help companies identify these employees?
     What additional work and costs are involved in collecting 
the information necessary to identify the three additional employees? 
What are the types of costs, and in what amounts? In what way can the 
proposal be further modified to mitigate the costs?
     In connection with the original proposal, we solicited 
comment on all aspects of the proposal, including this one. No 
commenter supplied cost estimates. We are now considering whether to 
limit this provision to only large accelerated filers. For some large 
accelerated filers, the number of employees potentially subject to this 
requirement may already be known or easy to identify. Other, more 
complex companies may need to establish systems to identify such 
employees. Every large accelerated filer would need to evaluate whether 
any employees exerted significant policy influence at the company, at a 
significant subsidiary or at a principal business unit, division or 
function and would have to track their compensation in order to comply 
with the proposed requirement. These monitoring costs may be new to 
some companies. We believe the cost of actually disclosing the 
compensation would be incremental and minimal. The monitoring and 
information collection costs are likely to be greatest in the first 
year and significantly less in later years. We also assume that costs 
would largely be borne internally, although some companies may seek the 
advice of outside counsel in determining which employees meet the 
standard for disclosure. In that event, for purposes of seeking 
comment, we estimate that 1,700 \13\ companies will on average retain 
outside counsel for 8 hours in the first year and 2 hours in each of 
two succeeding years, at $400 per hour, for a total estimated average 
annual cost of approximately $3 million. Assuming all large accelerated 
filers spend 60 hours in the first year and 10 hours in each of the two 
succeeding years, with an average internal cost of $175 per hour, the 
total average annual burden of collecting and monitoring employee 
compensation would be approximately 45,000 hours, or approximately $8 
million. The total average annual cost is therefore estimated to be $11 
million. We invite comment on this estimate and its assumptions.
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    \13\ We estimate there are approximately 1,700 companies that 
are large accelerated filers. See Revisions to Accelerated Filer 
Definition and Accelerated Deadlines for Reporting Periodic Reports, 
Release No. 33-8644 (Dec. 21, 2005) [70 FR 76626], at Section V.A.2.

    Dated: August 29, 2006.
    By the Commission.
Nancy M. Morris,
 Secretary.
[FR Doc. 06-7405 Filed 9-7-06; 8:45 am]

BILLING CODE 8010-01-P
