SEC Issues New Regulations Regarding Narrative Disclosure of Compensation Packages

The SEC has issued new regulations and guidance on the disclosure of executive compensation as they relate to risk. The new requirements will apply to most public companies for the 2010 proxy season and are effective for filings made after February 28, 2010, with respect to fiscal years ending after December 20, 2009. Compensation committees will have to address these requirements while they are drafting their proxy statement disclosures.

The final rules require that, to the extent that a company’s compensation policies and practices for its employees (NOT just the named executive officers) create risks that are reasonably likely to have a material adverse effect on the company, the company must disclose these risks. The new disclosure, if required, should not be located in the CD&A. It should be in its own, separate section of the proxy statement.

If a company determines that its compensation policies and practices do not create unreasonable risks, the company is not required to provide any disclosure or statement in the absence of such risks, but in all events the company must undertake a risk assessment to make a determination.

Because affected companies must complete this review before filing their proxy statements, companies and their compensation committees should immediately:

  • Organize a team to review existing compensation programs in order to assess whether they present risks that are reasonably likely to have a material adverse effect on the company. The team should include members from all relevant departments such as accounting, risk management, legal and human resources.
  • Review compensation programs with particular attention to variations across business lines, employee function and management level.
  • Consider adopting a compensation risk management policy, if one is not yet in place.
  • Consider hiring independent counsel to represent only the compensation committee.
  • Address any existing risk going forward through the use of risk mitigation practices such as clawback provisions, stock ownership guidelines and stock holding period requirements.

For More Information

For information on how new SEC regulations may affect your proxy statement disclosures, contact Charles F. Harenza at 610.478.2091 or the Stevens & Lee attorney with whom you regularly speak.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.