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SEC moves to improve disclosure

Last December, the Securities and Exchange Commission (SEC)
approved rule changes that will force companies to provide more disclosure in
proxy and information statements regarding risk, corporate governance and

The rules are designed to provide investors with greater assurance about how
directors are chosen and how their remuneration is linked to the risk profile of
the business. Harriet Territt, of counsel in the financial and regulatory
compliance practice at US law firm Jones Day, says the new rules “are giving
investors more assurance on the ability of management to identify and manage
risks to the business, as well as more information on their backgrounds, so that
shareholders can judge whether they are appropriate people to act in that

The new rules, which come into force on 28 February 2010, require a company
to disclose:
• The relationship of its compensation policies and practices to its risk
• The background and qualifications of its directors and nominees
• Legal actions involving its executive officers, directors and nominees
• The process by which candidates for directorship are considered for nomination
and how the company tries to instil ‘diversity’ in the boardroom
• Its board leadership structure and the board’s role in risk oversight
• Stock and option awards to company executives and directors, and
• Potential conflicts of interests of compensation consultants.
The SEC hopes wider disclosure of compensation policies and practices will help
investors determine whether a company has incentivised excessive or
inappropriate risk-taking by employees. The new rules will also require a
narrative disclosure about the company’s compensation policies and practices for
all employees, not just executive officers.

Rules on directors
The SEC has also approved new rules to improve information about directors and
nominees for director positions. In particular, the regulator wants companies to
provide more information about:
• The particular experience, qualifications, attributes or skills of anyone
serving as a director of the company
• Any directorships at public companies and registered investment companies that
each director and director nominee held at any time during the past five years,
• Legal proceedings, such as SEC securities fraud enforcement actions against
the director or nominee, going back 10 years instead of the current five years,
as well as an expanded list of legal proceedings covered by the rule.
The SEC also wants to know:
• Whether the company has combined or separated the chief executive officer and
chairman position
• Why the company believes its structure is the most appropriate at the time of
the filing
• If – and why – a company has a lead independent director and the specific role
of such a director, and
• The extent of the board’s role in the risk oversight of the company.

Fast response
Given that the new rules will apply to many filings to be made this proxy
season, law firm Morrison & Foerster says companies must respond quickly to
the changes brought about by the SEC rules. Initial steps should include:
• Revising your director and officer questionnaire to capture more information
about directors, nominees and executive officers for longer timeframes
• Revising your disclosure controls and procedures to ensure information
required by the new rules is recorded, processed, summarised and reported in a
timely manner
• Considering whether changes should be made to the board’s leadership
structure, risk oversight, diversity policy or the use of compensation
consultants by the company and the board, and
• Considering how the new information regarding director qualifications will be
developed and presented in the proxy statement, given the significance of this
disclosure in the context of an ever-rising level of shareholder activism that
often targets specific directors for ‘withhold’ or ‘against vote’ campaigns.

The firm adds that companies should develop a process to evaluate the
relationship of compensation and risk for the entire organisation, as well as
specifically for the named executive officers. The steps in this process might
• Creating an inventory of known risks, which may go beyond the risks listed in
the ‘risk factors’ section of the company’s periodic reports
• Identifying and evaluating compensation policies and practices within the
organisation, and determining how those compensation policies and practices
relate to specific risks
• Determining if the risks are reasonably likely to have a material adverse
effect on the company; and
• Developing the disclosure to be included in the proxy statement, including
appropriate disclosure for situations where it is concluded that risks related
to compensation are not reasonably likely to have a material adverse effect on
the company.

Kristian Wiggert, partner in the corporate group at Morrison & Foerster,
believes it is still unclear what impact the rules will have on improving
corporate governance. “As ever with a disclosure-based regime, whether there
will be any major improvements in corporate governance will depend on what
market participants do with the new information,” he says. “There is a big
debate going on in the US about whether shareholders in US companies have
sufficient rights to exercise proper control over management, even with improved
information disclosure.”

Useful links
See the SEC rules

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