E&Y 2013 proxy statements reports

2013 proxy
statements
An overview of the requirements

Contents
1

Overview .................................................................................................................... 1-1
1.1 Section highlights ............................................................................................................... 1-2
1.2 Ernst & Young publications and checklists ............................................................................ 1-2
1.3 Other considerations in preparing proxy statements ............................................................. 1-4
1.4 Recent developments.......................................................................................................... 1-5
1.4.1
Shareholder proposals ............................................................................................. 1-5
1.4.2
Smaller reporting companies now required to hold “say-on-pay”
shareholder votes on executive compensation ........................................................... 1-6
1.4.3
SEC issues final rule on independent compensation committees and
compensation advisers............................................................................................. 1-7
1.4.4
Scaled executive compensation disclosures allowed for emerging growth companies ... 1-8
1.4.5
Expanded compensation disclosures not yet proposed ............................................... 1-8
1.4.6
SEC proxy concept release ....................................................................................... 1-9

2

General rules on solicitation of proxies ....................................................................... 2-1
2.1 Who must file a proxy statement.......................................................................................... 2-1
2.2 Furnishing proxy statements to shareholders ....................................................................... 2-1
2.2.1
Internet availability of proxy materials ...................................................................... 2-1
2.2.2
Beneficial owners .................................................................................................... 2-3
2.2.3
“Household” deliveries of proxy materials ................................................................. 2-4
2.3 Filing proxy information with the SEC................................................................................... 2-4
2.3.1
Preliminary materials ............................................................................................... 2-5
2.3.2
Definitive materials .................................................................................................. 2-6
2.3.3
Annual report to shareholders .................................................................................. 2-6
2.4 Information to be provided to shareholders .......................................................................... 2-6
2.5 Executive compensation votes and disclosures ..................................................................... 2-8
2.5.1
Shareholder say-on-pay vote .................................................................................... 2-8
2.5.2
Shareholder frequency vote ..................................................................................... 2-9
2.6 Shareholder proposals ........................................................................................................ 2-9
2.7 Proxies not solicited .......................................................................................................... 2-12
2.8 Form 8-K reporting ........................................................................................................... 2-12
2.9 Timing.............................................................................................................................. 2-13

3

Information in the typical annual meeting proxy statement ......................................... 3-1
3.1 General information requirements ....................................................................................... 3-2
3.2 Meeting to elect directors .................................................................................................... 3-2
3.3 Incorporation by reference into Form 10-K .......................................................................... 3-2
3.3.1
Executive officers .................................................................................................... 3-3
3.3.2
Audit committee financial experts ............................................................................. 3-3
3.3.3
Code of ethics ......................................................................................................... 3-4
3.3.4
Changes in shareholder nominating procedures ......................................................... 3-4
3.3.5
Authorized equity compensation............................................................................... 3-5

2013 proxy statements

i

Contents

4

Item 7 — Directors and executive officers ................................................................... 4-1
4.1 Identification of directors and executive officers ................................................................... 4-2
4.2 Independence of directors ................................................................................................... 4-3
4.3 Board meetings and committees; annual meeting attendance ............................................... 4-4
4.4 Nominating committee disclosures ...................................................................................... 4-4
4.5 Audit committee disclosures................................................................................................ 4-5
4.5.1
Audit committee charter .......................................................................................... 4-5
4.5.2
Minimum independence requirements for audit committee members .......................... 4-6
4.5.3
Non-independence of audit committee members ....................................................... 4-9
4.5.4
Audit committee report ............................................................................................ 4-9
4.5.5
Audit committee disclosures by listed issuers .......................................................... 4-11
4.6 Compensation committee disclosures ................................................................................ 4-11
4.6.1
Listing standards for compensation committees ...................................................... 4-12
4.6.2
Disclosures about consultants and conflicts of interest ............................................. 4-13
4.7 Security holder communications with directors .................................................................. 4-14
4.8 Board leadership structure and role in risk oversight........................................................... 4-14
4.9 Transactions with related persons ..................................................................................... 4-15
4.9.1
Review and approval of related person transactions ................................................. 4-16
4.10 Promoters and control persons.......................................................................................... 4-16
4.11 Insider trading and reporting ............................................................................................. 4-17

5

Item 8 — Compensation of directors and executive officers ......................................... 5-1
5.1 Overview ............................................................................................................................ 5-2
5.2 Definition of executive officer .............................................................................................. 5-3
5.3 Definition of named executive officers ................................................................................. 5-3
5.4 Definition of compensation .................................................................................................. 5-3
5.5 Executive compensation disclosures .................................................................................... 5-4
5.5.1
Compensation discussion and analysis ...................................................................... 5-4
5.5.2
Risk and compensation policies and practices ............................................................ 5-9
5.5.3
Summary compensation table ................................................................................ 5-10
5.5.4
Summary compensation table for 20X2, 20X1 and 20X0 ......................................... 5-10
5.5.5
Grants of plan-based awards table .......................................................................... 5-14
5.5.6
Narrative disclosures to the SCT and grants of plan-based awards table .................... 5-16
5.5.7
Outstanding equity awards at fiscal year-end table................................................... 5-17
5.5.8
Option exercises and stock vested table .................................................................. 5-19
5.5.9
Pension benefits table ............................................................................................ 5-19
5.5.10 Nonqualified deferred compensation table............................................................... 5-21
5.5.11 Other potential post-employment payments ............................................................ 5-22
5.6 Director compensation ...................................................................................................... 5-22
5.6.1
Director compensation table for 20X2 .................................................................... 5-23
5.6.2
Narrative disclosures to the DCT ............................................................................. 5-24
5.7 Other disclosures .............................................................................................................. 5-25
5.7.1
Board compensation committee report on executive compensation .......................... 5-25
5.7.2
Disclosure of compensation committee interlocks and insider participation................ 5-25


ii

Contents

6

Item 9 — Disclosures about independent public accountants ....................................... 6-1
6.1 Former auditors .................................................................................................................. 6-1
6.2 Newly engaged auditors ...................................................................................................... 6-3
6.3 Auditor fees ....................................................................................................................... 6-3
6.3.1
Basis of presentation ............................................................................................... 6-4
6.3.2
Audit fees ............................................................................................................... 6-4
6.3.3
Audit-related fees .................................................................................................... 6-4
6.3.4
Tax fees .................................................................................................................. 6-5
6.3.5
All other fees ........................................................................................................... 6-5
6.3.6
Description of nature of services............................................................................... 6-6
6.3.7
Sample auditor fee disclosure ................................................................................... 6-6
6.3.8
Disclosure of pre-approval policies and procedures .................................................... 6-7
6.3.9
De minimis exception ............................................................................................... 6-8
6.3.10 Disclosure of use of leased employees....................................................................... 6-8

7

Item 10 — Compensation plans ................................................................................... 7-1
7.1 General disclosure requirements about plans subject to security holder action ....................... 7-1
7.1.1
Pension or retirement plans ..................................................................................... 7-2
7.1.2
Options, warrants or rights ....................................................................................... 7-2
7.2 Information about plans and other arrangements not subject to security holder action ........... 7-2

8

Other proxy related disclosures .................................................................................. 8-1
8.1 Item 13. Financial and other information.............................................................................. 8-1
8.2 Mergers, consolidations, acquisitions and similar matters ..................................................... 8-2
8.2.1
Golden parachute disclosures and shareholder vote ................................................... 8-2
8.2.2
Financial statements ................................................................................................ 8-4
8.3 Registration statements on Form S-4 ................................................................................... 8-5
8.3.1
Non-reporting target and acquirer’s shareholders are voting ...................................... 8-5
8.3.2
Non-reporting target and acquirer’s shareholders are not voting................................. 8-5

9

Smaller reporting and emerging growth companies..................................................... 9-1
9.1
9.2
9.3
9.4
9.5
9.6

Definition of a smaller reporting company ............................................................................ 9-1
Proxy filing by a smaller reporting company ......................................................................... 9-2
Compensation of directors and executive officers ................................................................. 9-2
Certain relationships and related transactions ...................................................................... 9-3
Annual report to shareholders ............................................................................................. 9-4
Emerging growth companies ............................................................................................... 9-5

A Abbreviations ............................................................................................................. A-1


iii

1

Overview
The corporate proxy is the principal means by which shareholders exercise their voting rights. Because
most shareholders do not attend shareholders’ meetings, they vote their shares to elect directors and
approve or reject major transactions via solicited proxies. Companies preparing for the 2013 proxy
season may use this publication to understand new proxy rules (e.g., the new requirement for proxy
materials to include disclosures about whether the use of compensation consultants raised any conflicts of
interest) and as a guide to draft their proxy statements. The publication also provides insights into future
proxy rules, including enhanced compensation disclosures required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) that are not yet effective. We have included
example disclosures and observations throughout the text in shaded boxes.
Regulation 14A under the Securities Exchange Act of 1934 (Exchange Act) governs proxy solicitations
for most public companies. Schedule 14A sets forth the information required in a proxy statement.
Regulation 14A and Schedule 14A are collectively referred to in this publication as the “proxy rules.”
Proxy statements vary in complexity; for example, a proxy statement requesting shareholder action
on a business transaction, such as a merger, may be considerably longer and more complex than the
typical proxy statement for an annual meeting at which directors are elected and shareholder proposals
are considered.
The complexity of a proxy statement is determined primarily by the information shareholders need to
make an informed decision and depends on the registrant’s facts and circumstances. State laws,
corporate bylaws and stock exchange requirements, rather than SEC regulations, principally determine
what types of corporate actions are subject to shareholder vote. In addition to the specific proposals
included in the proxy statement, management may ask for discretionary authority to vote on any
unanticipated matters that may arise at the meeting.
This publication summarizes the requirements of Regulation 14A and Schedule 14A under the Exchange
Act for soliciting annual meeting proxies. This publication is not intended to provide complete coverage or
detailed explanations of all proxy requirements, or any legal interpretations, or the unique requirements
pertaining to investment companies registered under the Investment Company Act of 1940. It also isn’t
intended to address the requirements of more complex proxy statements, such as those dealing with
proxy fights.
Rule 14b of Regulation 14A establishes the obligations of broker/dealers, and fiduciaries such as banks,
in responding to proxy solicitations. Regulation 14C governs the information that must be provided to
shareholders of companies that choose not to solicit proxies. These rules and regulations are not
discussed in this publication.
The sample disclosures and recommendations made in this publication are based in part on our review of
leading corporate practices. Ernst & Young LLP does not provide legal advice, and we recommend that
you consult experienced securities or corporate law counsel for further guidance.


1-1

1 Overview

1.1

Section highlights
The following is an overview of how information is organized in this publication:
•

Section 1 highlights Ernst & Young resources and recent developments in proxy related rulemaking.

•

Section 2 discusses the general rules for proxy solicitations described in Regulation 14A under the
Exchange Act.

•

Section 3 describes the specific disclosures required by Schedule 14A in a typical annual meeting
proxy statement in which shareholders are asked to elect directors and adopt or amend a
compensation plan.

•

Section 4 addresses the requirements of Item 7 of Schedule 14A. It describes the required
disclosures about directors and executive officers, as well as the disclosures related to the
nominating committee, the compensation committee and the audit committee.

•

Section 5 addresses the requirements of Item 8 of Schedule 14A. It describes, in detail, the executive
compensation disclosure requirements for the named executive officers (NEOs) and directors.

•

disclosures about independent auditors and their fees.

•

disclosures about equity compensation plans.

•

Section 8 summarizes financial statement and other disclosure requirements when proxies are
solicited for certain purposes other than the annual election of directors.

•

Section 9 summarizes the proxy disclosure rules specific to smaller reporting companies and
emerging growth companies (EGCs).

This publication reflects proxy rules and SEC staff interpretive positions as of 31 October 2012.

1.2

Ernst & Young publications and checklists
Ernst & Young has a number of publications that provide interpretive guidance for preparing various SEC
reports and filings. These publications are available from any Ernst & Young representative. Many of
them also are available on Ernst & Young’s AccountingLink website,1 which provides access to publications
produced by our US Professional Practice Group. AccountingLink is available free of charge; registration
is required.
•

SEC annual reports (Ernst & Young No. CC0360) summarizes the SEC requirements for annual
reports on Form 10-K, as well as annual reports to shareholders that must be furnished under the
proxy rules. It provides guidance for preparing annual reports to shareholders and Form 10-K and
includes an example Form 10-K.

•

SEC quarterly reports (Ernst & Young No. CC0361) summarizes the rules and practices that apply
to quarterly financial accounting and reporting on Form 10-Q. It provides guidance for preparing
quarterly reports to shareholders and Form 10-Q and includes an example Form 10-Q.

•

SEC Comments and Trends (Ernst & Young No. CC0357) discusses the SEC staff’s comments on
public company filings to provide insights on the SEC staff’s concerns and areas of focus.

1

The Ernst & Young’s AccountingLink website is available at http://www.ey.com/US/Accountinglink.


1-2

1 Overview

•

SEC in Focus is a periodic newsletter summarizing current activities and regulatory developments at
the SEC. The newsletter provides an update on activities and events relating to SEC matters,
including Commission open meetings, final rules and rule proposals, SEC staff “hot buttons,”
SEC personnel changes and significant SEC enforcement actions.

•

Standard Setter Update highlights significant new rules and rule proposals affecting financial
accounting and reporting. Issued quarterly, it summarizes final, pending and proposed
pronouncements of the Financial Accounting Standards Board (FASB), the Securities and Exchange
Commission (SEC), the American Institute of Certified Public Accountants (AICPA), the Emerging
Issues Task Force (EITF), the Public Company Accounting Oversight Board (PCAOB), the AICPA
Auditing Standards Board (ASB) and the Governmental Accounting Standards Board (GASB).

•

SEC market risk disclosures (Ernst & Young No. BB0688) provides an overview and an in-depth
analysis of the SEC’s disclosure rules pertaining to derivatives and exposures to market risk that
arise from derivative financial instruments, other financial instruments and certain derivative
commodity instruments. These quantitative and qualitative market risk disclosures are required
outside the financial statements in annual reports and under Items 13 and 14 of Schedule 14A.

The following is a list of Ernst & Young checklists intended to help companies prepare annual shareholders’
reports and financial and other related information required under Items 13 and 14 of Schedule 14A:
•

GAAP disclosure checklist — Helps you determine that the financial statement disclosure
requirements of generally accepted accounting principles and Regulation S-X have been satisfied
(Ernst & Young Form No. A13).

•

Form 10-K and registration statement checklist supplement to GAAP disclosure checklist —
Helps you determine that the financial statement and financial statement schedule requirements
of Regulation S-X (as required by Items 13 and 14 of Schedule 14A) have been satisfied
(Ernst & Young Form No. A69).

•

SEC annual shareholders’ report checklist — Helps you determine certain nonfinancial statement
disclosures required for the annual shareholders’ report, many of which are identical to those of
Form 10-K, have been satisfied. Parts II and III of the checklist address the SEC’s requirements for
management’s discussion and analysis (Ernst & Young Form No. A150).

•

GAAP disclosure checklist supplement for health care organizations — Contains the disclosures
required by Accounting Standards Codification (ASC) 954 (Ernst & Young Form No. A68).

•

GAAP and Regulation S-X checklist supplement for insurance companies — Includes disclosures
required by ASC 944 and Article 7 of Regulation S-X (Ernst & Young Form No. A69B).

•

GAAP and Regulation S-X checklist supplement for bank holding companies, banks, savings
institutions and credit unions — Includes disclosures required by ASC 942, ASC 948, Part 563c,
Accounting Requirements of the Office of Thrift Supervision Rules and Regulations and Article 9
of Regulation S-X. It also summarizes the disclosure requirements of the SEC’s Industry Guide 3,
Statistical Disclosure by Bank Holding Companies (Ernst & Young Form No. A69C).

•

GAAP and Regulation S-X checklist supplement for oil and gas producing companies — Includes the
disclosures required by ASC 932, as well as financial statement and other disclosure requirements of
Regulation S-X and Regulation S-K Subpart 1200, Disclosure by Registrants Engaged in Oil and Gas
Producing Activities (Ernst & Young Form No. A69E).


1-3

1 Overview

1.3

Other considerations in preparing proxy statements
This publication is not a substitute for reading the proxy rules, the Schedule 14A instructions and the
disclosure instructions in Regulations S-K and S-X. In preparing proxy materials, registrants also should
consider the views of the SEC and its staff, including those in Financial Reporting Releases (FRs), the
related Codification of Financial Reporting Policies (FRC), Staff Accounting Bulletins (SABs), Staff Legal
Bulletins (SLBs), the Division of Corporation Finance’s Financial Reporting Manual (Corp Fin Manual),
Compliance and Disclosure Interpretations (C&DIs) and CF Disclosure Guidance Topics (CF Topics) and
the Center for Audit Quality (CAQ) SEC Regulations Committee meeting highlights. Brief descriptions of
these resources are as follows:
•

Regulation S-K contains standard instructions for nonfinancial statement disclosures required in
annual shareholders’ reports and various SEC filings, including proxy statements.

•

Regulation S-X provides the requirements for financial statements and schedules.

•

Commission interpretative guidance and certain revisions to Regulations S-K and S-X are reported
in FRs. The FRC contains the current interpretive guidance and rulemaking provided by the SEC relating
to financial reporting as published in the Accounting Series Releases (ASRs), and more recently, in FRs.

•

SABs are written accounting interpretations and practices issued by the SEC’s Division of
Corporation Finance or Office of the Chief Accountant. They are not official SEC rules or regulations,
but they do reflect accounting and reporting positions the SEC staff expects companies to follow.

•

SLBs are written interpretations of the requirements of the federal securities laws or related rules
and regulations published by the SEC’s legal staff. Like SABs, SLBs are not rules, regulations or
statements of the SEC, and the Commission neither approves nor disapproves of their content.
Nonetheless, SEC companies are expected to follow them.

•

The Corp Fin Manual2 is prepared by the staff of the Division of Corporation Finance. It is designed
to be an internal reference document and to provide general guidance to Division of Corporation
Finance staff only. However, because the information in the Corp Fin Manual has been useful to
registrants and their auditors, the SEC staff has posted it on the SEC’s website.

•

The Division of Corporation Finance C&DIs are staff interpretations and positions on various rules
and regulations including certain Regulation S-K matters applicable to proxy statements.3 They are
published primarily by the Division’s Office of Chief Counsel.

•

The Division of Corporation Finance CF Topics provide guidance on specific filing and disclosure
requirements.

•

The CAQ SEC Regulations Committee meets periodically with the SEC staff to discuss emerging
reporting issues relating to SEC rules and regulations. The CAQ SEC Regulations Committee meeting
highlights summarize the issues discussed at the meetings. Meeting highlights can be found on the
CAQ’s website.4 The highlights have not been considered and acted on by senior technical
committees of the AICPA, or by the FASB, and do not represent an official position of either
organization. In addition, the highlights are not authoritative positions or interpretations issued by
the SEC or its staff. Accordingly, the highlights do not constitute an official statement of the views of
the Commission or of the SEC staff. Nonetheless, SEC registrants should consider the views of the
SEC staff when preparing annual shareholders’ reports and financial and other related information
required under Items 13 and 14 of Schedule 14A.

2
3
4

The Corp Fin Manual is available at http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.
The Regulation S-K C&DIs are available at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
The CAQ SEC Regulations Committee highlights are available on the CAQ website at http://thecaq.org/resources/secregs/highlights.htm.


1-4

1 Overview

The rules and regulations for financial reporting are complex. Any materially inaccurate or incomplete
information in proxy statements can expose a company and its directors, officers and independent
auditors to liability under the federal securities laws.

1.4

Recent developments
A brief summary of final rules and other recent developments related to proxy statements is provided below.

1.4.1

Shareholder proposals

1.4.1.1

SEC proxy access rules
In 2010, the SEC issued final proxy access rules that would have required companies, under certain
circumstances, to include the following in proxy materials:
•

Nominees for director submitted by eligible shareholders or groups of shareholders (those holding
3% for three years) in accordance with new Exchange Act Rule 14a-11

•

Shareholder proposals that would amend a company’s governing documents regarding shareholder
director nominations in accordance with amended Exchange Act Rule 14a-8, which was initially
intended to permit shareholder proposals for proxy access incremental to Rule 14a-11

After the Business Roundtable and the US Chamber of Commerce petitioned the US Court of Appeals (Court)
for a review of Rule 14a-11, the SEC stayed the effectiveness of both rules. In August 2011, the Court
vacated Rule 14a-11 on the basis, among other things, that the SEC failed to adequately assess the
economic costs and benefits of the new rule. In September 2011, the SEC announced it would not challenge
the Court’s decision. The SEC made Rule 14a-8 effective on 20 September 2011 because it was not part
of the legal challenge. The requirements of Rule 14a-8 are incorporated throughout this publication.
In testimony before the House Financial Services Subcommittee on Capital Markets and Government
Sponsored Enterprises on 25 April 2012, Chairman Mary Schapiro said that the SEC will not be proposing
new proxy access rules because of a lack of staff resources. So for now, it appears that proxy access will
be determined on a company-by-company basis.
Note: During the 2012 proxy season, 23 companies5 received shareholder proposals to amend their
bylaws to establish proxy access procedures. The proposals differed on ownership requirements and
other procedural terms, with roughly six proposal variations emerging. Fifteen of the companies asked
the SEC staff whether they could exclude the shareholder proposals from their proxy materials. The
SEC staff reviewed the no-action requests on a case-by-case basis and allowed eight companies to omit
the proposals. Ultimately, 12 of the 23 shareholder proposals submitted went to a vote, averaging
29% support.
Investors, who have sought proxy access for decades, viewed the 2012 proxy access shareholder
proposals as a testing ground for various ways to give shareholders access to the proxy for nominating
directors. Although fewer proposals were submitted than some expected, the results of voting in 2012
have been closely followed and could determine how proposals are drafted for the 2013 proxy season.
While no consensus has emerged on how to best implement proxy access, shareholder proposals with
terms matching the SEC’s now-vacated Rule 14a-11 (i.e., requiring 3% ownership for three years) have
been the most successful, with two of these proposals securing majority support. The third was
withdrawn after the issuer agreed to sponsor the proposal in 2013.

5

Information is based on SEC filings as of 30 September 2012.


1-5

1 Overview

1.4.1.2

2012 trends in shareholder proposals
Shareholder proposals shape the corporate governance landscape and may reflect emerging trends. The
table below includes the various topics of shareholder proposals during the 2012 proxy season.6
Topic of shareholder proposal

% of total

Average support

Board-focused

36%

52%

Compensation

14%

26%

Environmental/social

34%

19%

Strategic/anti-takeover

16%

49%

•

•

Compensation-related shareholder proposals generally seek to increase links between pay and longterm performance, increase equity ownership policies for management and eliminate certain
practices that are viewed as problematic by shareholders. While these proposal topics do not tend to
receive majority support, proposals requesting that a company limit payouts for termination of
employment averaged over 40% support in 2012.

•

Environmental/social-related proposals request enhanced disclosure of company policies and
practices on a wide range of topics (e.g., political spending and lobbying) and in some cases may
request specific action (e.g., enhance equal employment opportunity (EEO) policies). While these
proposals usually do not receive majority support, strongly supported topics (i.e., averaging about
30% support) include requests for sustainability reporting, greenhouse gas emissions reduction and
enhanced diversity/EEO policies.

•

1.4.2

Board-focused shareholder proposals address accountability topics including board leadership,
composition and overall structure. Proposals in this category receiving the highest levels of investor
support include those seeking the annual election of all directors (versus staggered elections across
multiple years), implementation of majority voting in director elections (whereby a director must
receive a greater number of votes “for” than “against” versus plurality voting where directors may
be elected with a single “for” vote) and the appointment of an independent director as chairman of
the board. Average support for these proposal topics in 2012 was 81%, 63% and 37%, respectively.

Strategic/anti-takeover proposals seek to reduce a company’s takeover protections and encourage
a company to consider changes in strategy to enhance stockholder value. Majority supported
proposals in this category include those asking a company to reduce the supermajority voting
requirement (e.g., two-thirds, 80%) for modifying the charter or bylaws to a simple majority vote.

Smaller reporting companies now required to hold “say-on-pay” shareholder
votes on executive compensation
In January 2011, the SEC adopted a final rule7 requiring issuers to hold nonbinding shareholder votes on:
•

Executive compensation (“say-on-pay” vote), at least every three years8

•

Whether the say-on-pay vote should occur every one, two or three years (“frequency” vote), at least
every six years8

6

Information is based on SEC filings as of 30 September 2012.

7

SEC Release Nos. 33-9178 and 34-63768, Shareholder Approval of Executive Compensation and Golden Parachute Compensation.
Issuers that received financial assistance under the Troubled Asset Relief Program (TARP) are exempt from the say-on-pay and
frequency vote requirements until all TARP debt is repaid. TARP recipients already are required to hold annual shareholder votes
on executive compensation.

8


1-6

1 Overview

•

Certain “golden parachute” compensation arrangements when shareholders are asked to approve a
merger or similar transaction

The rule also requires issuers to include detailed disclosures about golden parachute compensation
arrangements in proxy statements when shareholders will vote on a merger or similar transaction.
Smaller reporting companies are required to comply with the say-on-pay and frequency votes for
shareholder votes after 21 January 2013.
All issuers must also hold shareholder votes on golden parachutes and make the related disclosures in
proxies for mergers or similar transactions.
The final rule, Shareholder Approval of Executive Compensation and Golden Parachute Compensation,
was required by Section 951 of the Dodd-Frank Act. The requirements of the final rule are incorporated
throughout this publication.
Note: During the 2012 proxy season, the second year of mandatory say-on-pay (SOP) votes, investors
continued to demonstrate support for most executive compensation packages. For Russell 3000
companies, the support for SOP proposals through 30 September 2012 averaged 91%, compared with
92% in 2011. The number of SOP advisory votes failing to receive majority support for these
companies increased to 53 in 2012 from 41 in 2011.9 Companies with SOP advisory votes that
received less than 70% support in 2011, and that have had meetings in 2012, saw support levels
improve by an average of about 20 percentage points. The higher support in 2012 was primarily due
to improved engagement with shareholders and/or changes in pay practices.

1.4.3

SEC issues final rule on independent compensation committees and
compensation advisers
On 20 June 2012, the SEC issued a final rule10 directing national securities exchanges to adopt minimum
listing standards related to boards’ compensation committees and their use of compensation
consultants, independent legal counsel and other advisers. Exchanges, such as the NYSE and NASDAQ
stock exchanges, proposed rules by the 25 September 2012 deadline. The SEC has until 27 July 2013 to
approve final rules adopted by the national securities exchanges.
As part of the final rule, the SEC also amended proxy rules to require new disclosures about whether the
use of compensation consultants raised any conflicts of interest. Companies have been required to
disclose in their proxy statements any role compensation consultants played in determining or
recommending the amount or form of executive and director compensation. These disclosure
requirements apply to compensation consultants engaged by management, as well as consultants
engaged by the compensation committee. Companies will now have to disclose in their proxy statements
whether the work of those consultants raised any conflicts of interest. And, if so, they will have to
describe the conflict and explain how the conflict is being addressed. While the rule does not define a
conflict of interest, the SEC notes that a company should, at a minimum, consider the six independence
factors required to be considered when selecting an adviser. The new proxy disclosure requirements go
into effect for shareholders’ meetings on or after 1 January 2013 at which directors are elected.

9

Information is based on SEC filings as of 30 September 2012. 2011 data is full year. Vote results are calculated based on votes
cast for and against the proposal (i.e., excluding abstentions and broker non-votes).

10

SEC Release Nos. 33-9330 and 34-67220, Listing Standards for Compensation Committees.


1-7

1 Overview

The final rule and rule amendments are required by Section 952 of the Dodd-Frank Act. The
requirements of the final rule are incorporated throughout this publication.

1.4.4

Scaled executive compensation disclosures allowed for emerging growth
companies
The Jumpstart Our Business Startups Act (JOBS Act), enacted 5 April 2012, gives private companies
greater access to capital and makes it easier for certain companies to go public.
Title I of the JOBS Act created a new category of issuer called an emerging growth company (EGC) to
encourage initial public offerings. The provisions in Title I of the JOBS Act related to EGCs were effective
immediately and did not require SEC rulemaking. Certain regulatory requirements are phased in for EGCs
during a five-year initial public offering (IPO) “on-ramp” period. The scaled disclosures during this period
generally allow for temporary, not permanent, relief.
Among the scaled disclosures, an EGC may provide executive compensation disclosures in a manner
consistent with a smaller reporting company and is not required to include a Compensation Discussion
and Analysis in its proxy materials. As a result, the tabular executive compensation disclosure
requirements are significantly reduced for EGCs.
EGCs also are not required to comply with the say-on-pay provisions of the Dodd-Frank Act, which, as
noted above, require companies to hold a shareholder advisory vote on executive compensation and
golden parachutes.
Information on the reduced executive compensation disclosures for EGCs is incorporated throughout
this publication.

1.4.5

Expanded compensation disclosures not yet proposed
The Dodd-Frank Act requires expanded executive compensation disclosures, including a clear description
in the annual proxy statement of the relationship between executive compensation and the company’s
financial performance. The executive compensation disclosures in registration statements, annual
reports and proxy statements will be required to include a “pay disparity ratio” comparing the CEO’s
annual total compensation to the median of all other employees.
Note: A number of companies have criticized the pending pay disparity disclosure. Multinational
companies in particular have expressed concern that the calculation of median total compensation
could be challenging (and the results inconsistent) due to global differences in what constitutes
“compensation” (e.g., the treatment of health benefits as part of pay in the US but not in most other
countries). Some also have raised questions about the usefulness of the information to investors.
The Dodd-Frank Act also requires issuers to implement “clawback” policies to recover incentive-based
compensation from current or former executives during a three-year “look-back” period, if the company
issues an accounting restatement due to material noncompliance with any financial reporting requirement
under the securities laws, regardless of whether the executive was involved in any misconduct. Companies
also will be required to disclose their policies on clawing back incentive-based compensation.
The SEC has not yet proposed rules to implement these requirements. The SEC’s timeline previously
indicated that rules regarding compensation disclosures and clawbacks would be completed by the end of
2012. However, the SEC recently removed expected timeframes for completing Dodd-Frank Act related
rulemaking from its website. We do not expect these new disclosures to be effective for the upcoming
2013 proxy season.


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1 Overview

1.4.6

SEC proxy concept release
In July 2010, the SEC issued a concept release soliciting public comment on the US proxy voting system
infrastructure. The SEC noted it has been nearly 30 years since it “last conducted a comprehensive
review of the proxy voting infrastructure. With significant changes in shareholders demographics,
technology, and other areas, the [SEC’s] review of the US proxy system will examine emerging issues
that did not exist or were not considered significant three decades ago.”
The SEC sought comment on matters including how to encourage retail investor participation in proxy
voting, whether shareholders should continue to be able to keep their identity confidential from issuers,
whether proxy distribution fees to broker-dealers should be based on market forces rather than stock
exchange rules, whether data tagging of proxy materials would be beneficial and whether potential
conflicts of interest of proxy advisory firms require improved disclosure.
The information gained from public comment will assist the SEC in future rulemaking to improve the US
proxy system. Comments were due in October 2010 and the following are some observations regarding
the public comments:
•

Institutional investors and public companies have a different view of the role of proxy advisers. Many
companies conclude that proxy adviser firms have a greater influence in voting than significant
shareholders when the proxy adviser firms have no ownership in a company. Some investors note
that proxy adviser firms are able to provide a useful service to assist in voting.

•

Commenters agree that there should be more transparency to allow voters to confirm that their
proxy votes are accurately transmitted and tabulated.

•

Commenters agree empty voting (i.e., a shareholder separating a share’s voting right from its
economic stake by hedging the economic interest in the shares, for example) resulting in the
shareholder’s voting rights substantially exceeding its economic interest in the issuer should not
be permitted.

Before any final rule would be implemented, the SEC would first propose rule(s) and seek public comments.


1-9

2

General rules on solicitation of proxies

2.1

Who must file a proxy statement
The securities laws do not require solicitation of proxies. However, regulations adopted under the
Exchange Act must be followed whenever proxies are solicited on matters involving any company whose
securities are registered under Section 12 of the Exchange Act. All companies that have securities listed
on a national securities exchange or have more than $10 million in assets and 2,0001 or more holders of
any class of equity securities (or 500 or more who are not accredited investors) for non-banks and nonbank holding companies must register their securities under Section 12.2 Most companies subject to the
Exchange Act meet these criteria.3

2.2

Furnishing proxy statements to shareholders

2.2.1

Internet availability of proxy materials
Rule 14a-16, Internet Availability of Proxy Materials, requires that proxy materials be posted on a
company’s website.4 An issuer has two delivery options, which it can elect on a shareholder-byshareholder basis:
•

A “notice only” option

•

A “full-set delivery” option, which requires the issuer to post its proxy materials on the internet, but
also allows the issuer to transmit the proxy materials by paper mail or electronic mail

A registrant may send proxy materials to shareholders via email if it follows SEC guidance, which
typically requires obtaining affirmative consent from individual shareholders. If it has received a
shareholder’s consent, a company may send proxy materials electronically under either the notice only
or full-set delivery option.
Other groups or people other than the registrant also may rely on either model, or a combination of the
two, when soliciting proxies on their own (e.g., proxy contest by shareholders).

1
2

3

4

For an issuer that is a bank or bank holding company, the threshold is 2,000 record holders, even if none are accredited investors.
Companies that have sold securities and are subject to periodic reporting under Section 15(d) of the Exchange Act, but do not
meet the criteria for registration under Section 12 of the Exchange Act, are not subject to the proxy rules.
Registrants that meet the definition of a smaller reporting company under the Exchange Act may refer to the scaled disclosure
items in Regulation S-K. A smaller reporting company may provide the financial information in Article 8 of Regulation S-X in place
of the financial statements required by Schedule 14A. See Section 9 of this publication for a discussion of the requirements of a
smaller reporting company.
Proxy materials issued in connection with a proposed business combination, as defined in Rule 165 under the Securities Act, as
well as transactions for cash consideration requiring disclosure under Item 15 of Schedule 14A, are not subject to mandatory
internet posting.


2-1

2 General rules on solicitation of proxies

2.2.1.1

Notice only option5
Registrants using the notice only model must send the “Notice of Internet Availability of Proxy Materials”
(the Notice) to shareholders at least 40 calendar days before the shareholders’ meeting. The Notice must
be sent separately from other types of shareholder communications so the Notice does not get lost among
several other types of communications. When the Notice is delivered, the registrant must provide
shareholders with a means to vote, including electronic voting over the internet, telephone voting or a
combination of these choices.
The Notice must provide the following in plain English:
•

A prominent legend in bold-face type that states “Important Notice Regarding the Availability of
Proxy Materials for the Shareholder Meeting To Be Held on [insert meeting date]”

•

Indication that the communication is not a form of voting and presents only an overview of the more
complete proxy materials, which are available by internet or mail

•

Specific language regarding the availability of proxy materials on the internet, the website address6
and instructions for requesting paper or email copies of the proxy materials at no charge

•

The date, time and location of the shareholders’ meeting

•

Clear and impartial description of each matter to be considered at the shareholders’ meeting and the
issuer’s recommendations, if any

•

A list of the materials available at the website

•

A toll-free number, email address and website at which the shareholder can request a copy of the
proxy materials

•

Instructions on how to access the form of proxy, including any control/identification numbers the
shareholder needs

•

Information on how to obtain directions to attend the meeting and vote in person

A proxy card may not accompany the Notice. Instead, the company may send a proxy card to a
shareholder no sooner than 10 calendar days after the initial Notice is sent, unless the proxy card is
accompanied or preceded by a copy of the proxy statement sent via the same medium (e.g., delivery by
paper mail, email or electronic access on a specified website).
Companies do not have to rely on the notice only model for all proxy related materials and may furnish
some proxy-related materials on a website and other material physically (or electronically if the
shareholder has agreed to such delivery). Shareholders must be allowed to make a permanent election to
receive paper or email copies of future proxy materials.
Under the notice only model, proxy materials must be posted on the website on or before the time the
shareholder receives the Notice. The materials must remain accessible on the website free of charge
through the time of the shareholders’ meeting.

5
6

SEC Release No. 34-61560, Amendments to Rules Requiring Internet Availability of Proxy Materials.
On 1 August 2008, the SEC staff published interpretive guidance on how to comply with the securities laws while developing
a website as a means for disseminating important information, including proxy materials, to investors. See SEC Release
No. 34-58288, Commission Guidance on the Use of Company Websites.


2-2


The website must be a site other than EDGAR, and registrants may not simply hyperlink to their EDGAR
filings. The website address identified on the Notice must be specific enough to lead shareholders directly
to the proxy materials.

2.2.1.2

Full-set delivery option
Registrants using the full-set delivery model must distribute proxy materials to the selected shareholders
and in addition must:
•

Provide the information required in the Notice in its proxy materials (or in a separate Notice that
would accompany the full set of materials)

•

Post its proxy materials on the internet

The full-set delivery method varies from the notice only option in the following ways:
•
•

The registrant is not required to provide instructions for requesting paper or email copies of the
proxy materials at no charge as the shareholder already would have been provided a full set of the
proxy materials along with the Notice.

•

The registrant is not required to provide another means for voting (e.g., electronic voting over the
Internet, telephone voting or a combination of the two) because a proxy card was included with the
proxy materials.

•

2.2.2

A proxy card may accompany the Notice.

The registrant is not required to comply with the 40-day Notice deadline.

Beneficial owners
The registrant must ask brokers, dealers, banks, clearing agencies and nominees that hold securities for
others (collectively referred to as record holders) whether there are beneficial owners of the securities.
The inquiries of record holders believed to hold securities for other beneficial owners must be made at
least 20 business days before the record date for the shareholders’ meeting.
The company can satisfy its obligation to provide beneficial owners with information required by the
proxy rules — normally the proxy statement, other proxy soliciting material or the annual shareholders’
report — in either of two ways:
•

By providing the record holder with the information to be forwarded to the beneficial owners

•

By obtaining the names of beneficial owners who have not objected to disclosure of their names,
addresses and securities positions and directly mailing the information

A company that elects the notice only option for providing proxy materials to beneficial owners must
provide the record holder with all the information required to be included in the Notice within sufficient
time for the record holder to prepare, print and send the Notice to the beneficial owners at least
40 calendar days before the date of the shareholders’ meeting.


2-3


2.2.3

“Household” deliveries of proxy materials
A single proxy statement or the Notice, as applicable, may be delivered to all security holders at a shared
address (i.e., household) if:
•

The security holders sharing an address consent (either by affirmative written consent or implied
consent)7 to delivery of a single document to the shared address

•

The company or intermediary delivers the proxy statement or the Notice to the shared address

•

The company or intermediary addresses the proxy statement or the Notice either to the security
holders as a group (e.g., “ABC Corporation Security Holders,” “Jane Doe and Household,” or “The
Smith Family”) or to each of the security holders sharing the address (e.g., “Jane Doe and Mary Doe”)8

•

The company includes a separate proxy card together with or subsequent to the delivery of the proxy
statement for each consenting security holder sharing an address (i.e., a proxy card cannot
accompany the Notice if a proxy statement is not sent at the same time)

•

The company includes an undertaking in the proxy statement or the Notice to promptly deliver, upon
request, separate copies of the proxy statement9

Registrants also may send the annual report to a household of shareholders if these conditions are met.

2.3

Filing proxy information with the SEC
The rules generally allow soliciting materials (e.g., shareholder communications) to be filed in definitive
form. These materials must be filed with the SEC on the same day they are published, sent or given to
shareholders. However, in certain circumstances (e.g., adoption of an option plan, merger, authorizing
additional shares), the preliminary proxy statement and the form of proxy (i.e., the proxy voting card) must
be submitted to the SEC for prior review. All preliminary proxies filed must be accompanied by a statement
of the date on which the definitive copies are intended to be published, sent or given to shareholders.
Proxy statements required to be submitted in preliminary form will be immediately available to the
public, except in certain circumstances when confidential treatment is obtained, such as in connection
with a merger, consolidation, acquisition or similar matter. Regulation M-A within Regulation S-K
significantly limits the instances in which a company may file confidential preliminary materials to
those in which the parties to a merger or other business combination transaction limit their public
communications about the transaction to those specified in Rule 135 of the Securities Act of 1933
(Securities Act).10 If, however, the parties elect to publicly disclose, either orally or in writing, information
relating to the transaction that goes beyond Rule 135, confidential treatment is not available.
Preliminary proxy materials and information statements with respect to a matter specified in Item 14 of
Schedule 14A for which confidential treatment has been requested cannot be filed electronically.

7
8

9

10

Companies or intermediaries cannot rely on any implied consent to electronically delivered proxy statements to a household.
Companies also may use alternative forms of the address with the written consent of each security holder at the shared address
(e.g., the company may address the proxy statement or the Notice only to one individual in the household).
The company must provide the security holders with specific instructions for requesting separate copies of the proxy statement
or the Notice.
Rule 135 generally permits prospective offerors (issuers or selling security holders) to issue notices that include no more than
the following information: (1) the name of the issuer; (2) the title, amount and basic terms of the securities to be offered;
(3) the amount of the offering, if any, to be made by selling security holders; (4) the anticipated time of the offering; (5) a brief
statement of the manner and purpose of the offering, without naming the underwriters; (6) whether the issuer is directing its
offering only to a particular class of purchasers and (7) any statement or legend required by the laws of any state or foreign
country or administrative authority. Other limited information also is permitted under Rule 135 for rights offerings, exchange
offers, offers to employees of the issuer or an affiliate or Rule 145(a) offerings (e.g., transfers of assets).


2-4


2.3.1

Preliminary materials
When required, five copies of the preliminary materials must be filed with the SEC at least 10 calendar
days before mailing or giving the “definitive” or “final” proxy materials to shareholders, or any shorter
period before that date that the SEC authorizes. Certain preliminary proxy solicitation materials are
subject to a filing fee.11
Preliminary filings with the SEC are not required if the solicitation relates to a shareholders’ meeting at
which the only matters to be acted upon are:
•

The election of directors

•

The election, approval or ratification of independent auditors

•

A proposal by a shareholder

•

Ratification or approval of a new employee benefit plan or plan amendments

•

Approval of executive compensation (i.e., say-on-pay vote or any other shareholder advisory vote on
executive compensation)12

•

Determination of whether the shareholder vote on executive compensation will occur every one, two
or three years (i.e., frequency vote)12

The exclusion from filing preliminary proxy material does not apply if, in its proxy material, the registrant
comments upon, or refers to, a “solicitation in opposition.”13 However, any security holder proposals that
are included in the proxy statement under Rule 14a-8 of the Exchange Act are not deemed to be
solicitations in opposition, and preliminary proxy materials are not required, even if the registrant
includes a statement opposing the security holder proposal.14 A company that files preliminary proxy
material only because it has commented on or referred to a “solicitation in opposition” should indicate
that fact in a letter when filing the preliminary proxy material.
In many cases, the SEC staff will not review the preliminary proxy statement. Thus, unless the SEC
notifies the registrant within 10 calendar days of receiving the preliminary proxy statement that it will
have comments, the definitive proxy statement may be mailed to shareholders.

11

12

13

14

At the time of filing the proxy solicitation material, the persons upon whose behalf the solicitation is made, other than investment
companies registered under the Investment Company Act of 1940, must pay the SEC a fee under Rule 0-11 of the Exchange Act
for preliminary proxy material involving acquisitions, mergers, spinoffs, consolidations or proposed sales or other dispositions of
substantially all of the company’s assets. There is no filing fee for all other proxy submissions and submissions under Rule 14a-6(g)
of the Exchange Act, including proxy submissions for the typical annual shareholders’ meeting.
As summarized in Section 1 of this publication, the SEC adopted a final rule on 25 January 2011 requiring issuers to hold
nonbinding shareholder say-on-pay and frequency votes. The final rule amended the proxy rules to add the say-on-pay and the
frequency votes to the list of items that are exempt from the preliminary proxy filing requirement. See SEC Release Nos. 33-9178
and 34-63768, Shareholder Approval of Executive Compensation and Golden Parachute Compensation.
For this purpose, a “solicitation in opposition” includes (1) any proxy solicitation by another party opposing a proposal supported
by the registrant and (2) any solicitation supporting a proposal that the registrant does not expressly support.
As summarized in Section 1 of this publication, amended Exchange Act Rule 14a-8 became effective on 20 September 2011.
Rule 14a-8 now requires companies, under certain circumstances, to include in proxy materials shareholder proposals that would
amend a company’s governing documents regarding shareholder director nominations. Along with other Rule 14a-8 shareholder
proposals, a shareholder proposal that would amend the company’s governing documents regarding shareholder director
nominations would not require a preliminary proxy.


2-5


2.3.2

Definitive materials
The definitive proxy statement, including all required proxy materials, must be filed electronically
using the SEC’s EDGAR system. The rules for electronic filings on the EDGAR system are included in
Regulation S-T and the EDGAR Filer Manual (Refer to Section 2 of our publication SEC annual reports
(Ernst & Young No. CC0360) for additional information about EDGAR filings).
In addition, eight copies of the definitive proxy statement, proxy card and all other soliciting material
must be filed with the SEC no later than the date these items are published, sent or given to
shareholders. Management should indicate on a marked copy any material changes from any previously
filed preliminary proxy materials and explain those changes in the transmittal letter. A minimum of three
copies of the definitive proxy statement, proxy card and all other soliciting material must be submitted to
each national securities exchange on which any of the company’s securities are listed, although the
exchange itself may require more copies.

2.3.3

Annual report to shareholders
Seven copies of the annual report to shareholders (the “glossy annual report”) must be submitted to the
SEC when it is transmitted to shareholders, or if later, when preliminary proxy materials (or definitive
proxy materials, if preliminary materials were not required) are filed with the SEC. General Instruction D(3)
to Form 10-K requires registrants to discuss in a transmittal letter to the Form 10-K whether the financial
statements in the annual report to shareholders reflect a change from the preceding year in any
accounting principles or practices.
For NYSE-listed companies, shareholder distribution of the company’s annual report is required at the
same time as the filing of its annual report with the SEC. Instead of physical delivery, a NYSE-listed
company may satisfy the requirement by making its Form 10-K (or Forms 20-F, 40-F or N-CSR) available
on or through its corporate website. Additional requirements apply for companies not subject to the
SEC’s proxy rules.
For NASDAQ-listed companies, shareholder distribution of the company’s annual report is required within
a reasonable period following the filing of the annual report with the SEC. NASDAQ requires listed
companies to distribute the annual report to shareholders by (1) mailing the report to shareholders,
(2) satisfying the internet posting requirements of Rule 14a-16 or (3) posting the report on or through the
company’s website. Simultaneously with the website posting, a company must issue a press release
stating that the annual report is available on the company’s website, the website address and that
shareholders may receive a hard copy of the report free of charge. A company must provide such hard
copies within a reasonable period of time following the request. NASDAQ rules have no provision related
to the timing for delivery of the annual report because the SEC’s proxy rules already require that such
information be provided before the annual meeting.

2.4

Information to be provided to shareholders
Management must provide an annual report to all shareholders when soliciting proxies for the annual
meeting (or a special meeting to elect directors). In addition to providing information required in the
proxy materials, the company must furnish the annual report to shareholders either before or at the
same time as the proxy materials. However, a company may solicit a proxy before the annual report is
available if an opposing proxy is being solicited. The annual report to shareholders is not considered part
of the solicitation materials to be filed with the SEC or subject to Regulations 14A or 14C, except to the
extent that it is incorporated by reference in the proxy statement. The annual report to shareholders,
however, is subject to the anti-fraud provisions of Rule 10b-5 under the Exchange Act.


2-6


Rule 14a-3 of the Exchange Act requires that companies15 include the following items in their annual
reports:16
•

Audited consolidated financial statements, including balance sheets as of the end of the two most
recent fiscal years and statements of income, comprehensive income (if applicable), shareholders’
equity and cash flows for each of the three most recent fiscal years, prepared in accordance with
Regulation S-X

•

A table of selected financial data for five years (Item 301 of Regulation S-K)17

•

Supplementary financial information, including selected quarterly financial data for the last two
years and certain oil and gas exploration and development information, if applicable (Item 302 of
Regulation S-K)

•

Management’s discussion and analysis of financial condition and results of operations
(Item 303 of Regulation S-K)

•

Changes in and disagreements with accountants on accounting and financial disclosure
(Item 304 of Regulation S-K)

•

Quantitative and qualitative disclosures about market risk (Item 305 of Regulation S-K)

•

A brief description of the general nature and scope of the business done by the registrant and its
subsidiaries for the latest fiscal year

•

Segment information — Paragraphs (b), (c)(1)(i) and (d) of Item 101 of Regulation S-K.
These disclosures generally are satisfied by the ASC 280 disclosures in the financial statement
footnotes. However, the SEC’s rules also require disclosure about (1) the principal markets or
methods of distribution of each segment’s principal products and services, (2) the risks attendant
to foreign operations and any segment’s dependence on foreign operations and (3) quantitative
disclosure of revenues from classes of “similar products or services.”

•

Director and executive officer information: name, principal occupation or employment and name of
employer and its principal business

•

Common stock market prices and dividends for the last two years, along with other market
information and related shareholder matters (Items 201 (a), (b) and (c) of Regulation S-K)18

•

If the report precedes or accompanies a proxy statement or information statement relating to an
annual meeting at which directors are to be elected, a “furnished”19 stock performance graph that
compares the company’s cumulative total shareholder return during the previous five years with a
performance indicator of the overall stock market (i.e., a “broad-based” index), and the company’s
peer group (Item 201(e) of Regulation S-K)

15

Refer to Section 9 for discussion on annual report requirements for smaller reporting companies.
The requirements in the annual report to shareholders differ from the related Form 10-K requirements in that the annual report
is not required to include financial statement schedules, exhibits or separate financial statements of certain subsidiaries, equity
investees or affiliates.
For Item 301 of Regulation S-K, an emerging growth company is not required to present selected financial data for any period
before the earliest audited period presented in its initial Securities Act or Exchange Act registration statement. That means the
selected financial data will “build” in subsequent annual reports until the full five-year selected data is provided.
The annual shareholders’ report is not required to include the disclosures under Item 201(d) about securities authorized for
issuance under equity compensation plans, which is required in Item 12 of Form 10-K each year and in Item 10 of Schedule 14A
if shareholders are voting on any compensation plan.
As “furnished” information, the stock performance graph will not be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act except to the extent the registrant specifically incorporates it by reference.

16

17

18

19


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•

A statement, which may be in the proxy statement instead of the annual report to shareholders, that
the annual report (Form 10-K), including the financial statements and the financial statement
schedules, will be provided free of charge upon written request

Neither the proxy statement nor the annual report to shareholders is required to include a management
certification like those required in annual reports (Form 10-K) and quarterly reports (Form 10-Q) under
Section 302 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). However, the certification
required in the annual report on Form 10-K covers any portions of the annual report to shareholders
incorporated by reference and any portions of the proxy statement that may be incorporated by
reference when the proxy is filed subsequently. Further, the SEC rules adopted to implement Section 302
of the Sarbanes-Oxley Act require issuers to design, maintain and evaluate disclosure controls and
procedures that ensure full and timely disclosure in periodic and current reports, as well as definitive
proxy materials and information statements.
None of the disclosures required by Item 307 (Disclosure controls and procedures) or Item 308 (Internal
control over financial reporting) of Regulation S-K are required in either the proxy statement or the
related annual report to shareholders. The SEC staff still encourages issuers to include management’s
and the auditor’s Section 404 reports on internal control over financial reporting, as specified in Item
308 of Regulation S-K, in the annual report to shareholders. If management’s report concludes that
internal control over financial reporting is ineffective, or if the auditor’s report on internal control over
financial reporting expresses an adverse opinion, the SEC staff believes that an issuer should consider
whether it is a material omission that renders the annual report to shareholders misleading to exclude
management’s and the auditor’s reports on internal control over financial reporting.
The typical “glossy” annual report is prepared to satisfy proxy rule disclosure requirements. However,
a glossy annual report is not required by the proxy rules, which allow the report to be “in any form
deemed suitable by management.” The SEC staff has indicated that the proxy rules can be satisfied by
providing the required information in an appendix to the annual meeting proxy statement, provided
that the attention of shareholders is called to this presentation. The SEC staff encourages the use of
supplemental graphs, charts and other illustrations that are consistent with the financial statements.
Our publication SEC annual reports (Ernst & Young No. CC0360) provides guidance for preparing annual
reports to shareholders.

2.5

Executive compensation votes and disclosures20

2.5.1

Shareholder say-on-pay vote
Rule 14a-21(a) of the Exchange Act requires issuers to provide a nonbinding shareholder vote on
executive compensation in a proxy statement at least every three years. The say-on-pay vote applies to
an annual meeting of shareholders at which directors will be elected and for which the SEC rules require
executive compensation disclosures under Item 402 of Regulation S-K.21 Shareholders vote on the
compensation of an issuer’s NEOs as disclosed in the following sections of the proxy statement, which
are discussed further in Section 5 of this publication:
•

Compensation Discussion and Analysis (CD&A)

•

The executive compensation tables

•

Other required narrative executive compensation disclosures

20

As discussed in Section 1, emerging growth companies are not required to comply with the say-on-pay provisions of the DoddFrank Act.

21

A separate vote on executive compensation also applies to a special meeting in lieu of an annual meeting.


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Smaller reporting companies are required to hold a shareholder vote on their NEOs’ compensation as
disclosed in Items 402(m) through 402(q) of Regulation S-K at annual meetings on or after 21 January
2013 (see further discussion in Section 9 of this publication).
New public companies, other than emerging growth companies, are required to hold the say-on-pay vote
at the first annual meeting after its initial public offering.

2.5.2

Shareholder frequency vote
Rule 14a-21(b) of the Exchange Act requires issuers to provide a nonbinding shareholder vote in a proxy
statement at least every six years on whether the say-on-pay vote should occur every one, two or three
years. Consistent with the say-on-pay vote:
•

•

Smaller reporting companies are required to comply with the frequency vote requirement for annual
meetings on or after 21 January 2013.

•

2.6

The frequency vote is required at an annual meeting of shareholders at which directors will be
elected and for which the SEC rules require executive compensation disclosures in accordance with
Item 402 of Regulation S-K.

Except for an emerging growth company, the frequency vote is required at a new public company’s
first annual meeting.

Shareholder proposals
Under Rule 14a-8 of the Exchange Act, shareholders may submit a proposal for inclusion in the proxy
statement if they have owned the lesser of at least 1% or $2,000 in market value of securities entitled to
vote on the proposal for at least one year before the proposal is submitted and will continue to own these
securities through the shareholders’ meeting date. A shareholder may not submit more than one
proposal per shareholders’ meeting. The proposal may include a supporting statement for inclusion in the
proxy materials; however, the proposal and supporting statement together may not exceed 500 words.
Note: A beneficial owner can prove eligibility to submit a proposal by submitting a written statement
“from the record holder of [the] securities (usually a broker or bank),” verifying that, at the time the
proposal was submitted, the shareholder held the required amount of securities continuously for at
least one year (SLB 14F). The SEC staff has stated that the proof of ownership letter may come from
participants in the Depository Trust Company, or their affiliates (SLB 14G).
Many shareholders’ proof of beneficial ownership letters do not meet the SEC requirements because they
do not verify the shareholders’ ownership through the entire one-year period preceding and including the
date the proposal is submitted. Many letters also fail to confirm continuous ownership of the securities.
This can occur when a broker or bank submits a letter that confirms the shareholder’s beneficial ownership
only as of a specific date but does not refer to continuous ownership for a one-year period (SLB 14F).
Note: A company may not exclude a proposal if the proof of ownership does not cover the appropriate
period unless it provides a notice of defect that identifies the specific date on which the proposal was
submitted (which may be different from the date of the letter) and explains that to cure the defect the
shareholder must obtain a new proof of ownership letter verifying continuous ownership of the
requisite amount of securities for the one-year period preceding and including the date on which the
proposal was submitted (SLB 14G).


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Generally, shareholders must notify management at least 120 calendar days before the date proxy
materials would be mailed (based on the prior-year proxy mailing) that they intend to present a proposal
for action at the annual meeting. This deadline must have been communicated to shareholders in the
proxy statement for the prior year’s annual meeting.
The proxy rules describe the circumstances when management may omit a shareholder proposal from
the proxy statement. Some of the reasons for doing so are:
•

It is not a proper subject for shareholder action under applicable state or federal law.

•

Implementation would involve a violation of state, federal or foreign law by the registrant.

•

It is contrary to the SEC’s proxy rules and regulations.
Note: It is not appropriate for management to exclude supporting statement language or an entire
proposal claiming it is violating proxy rules in the following circumstances: (1) management objects to
factual assertions because they are not supported; (2) management objects to factual assertions that,
while not materially false or misleading, may be disputed or countered; (3) management objects to
factual assertions because those assertions may be unfavorably interpreted or (4) management
objects to statements because they represent, but are not identified as, the opinion of the shareholder
proponent or referenced source. In these cases, management must demonstrate objectively that the
proposal or statement is materially false or misleading for it to be excludable (SLB 14B).

•

It relates to a personal claim or grievance not shared by other shareholders.

•

It relates to operations that account for less than 5% of the company’s total assets at the end of its
most recent fiscal year, and less than 5% of gross sales and net income for its most recent fiscal year,
and is not otherwise significant to the registrant’s business.

•

It deals with a matter beyond the registrant’s power to implement.
Note: Proposals that would require a director to maintain his or her independence at all times would
be considered excludable on the basis that a board of directors lacks the power to ensure that its
chairman or any other director would retain his or her independence at all times. In contrast, if the
proposal does not require a director to maintain independence at all times, or contains language
providing management the opportunity to cure a director’s loss of independence (i.e., consistent
with the SEC standards relating to audit committee independence as set forth in Rule 10A-3 and
Section 10A(m) of the Exchange Act), the proposal would not be considered excludable (SLB 14C).

•

It relates to matters dealing with the conduct of ordinary business operations.
Note: Proposals that relate to ordinary business matters, but that focus on sufficiently significant
social policy issues (e.g., proposals to approve equity compensation plans for only senior executive
officers and directors or to minimize or to eliminate operations that pose an environmental or public
health risk) would not be considered excludable because the proposals would transcend day-to-day
business matters (SLB 14A and SLB 14C).


2-10


It relates to director elections and the proposal would do or does any of the following things:22

•

•

Disqualify a nominee who is standing for election

•

Remove a director from office before his or her term expires

•

Questions the competence, business judgment or character of one or more nominees or directors

•

Seeks to include a specific individual in the company’s proxy materials for election to the board
of directors or

•

Affect the outcome of the upcoming election of directors

•

It is counter to a proposal to be submitted by management at the same meeting.

•

It has been rendered moot (i.e., the company already has substantially implemented the proposal).
Note: For example, shareholder proposals that would provide a frequency vote would be rendered
moot if the company has adopted a policy on the frequency vote consistent with the majority of votes
cast in the most recent frequency vote. If an issuer adopts a frequency vote that is consistent with the
majority of votes cast in the most recent shareholder frequency vote, the company also could exclude
shareholder proposals that would provide an advisory vote or seek future advisory votes on executive
compensation with the same scope as the say-on-pay vote.23

•

It substantially duplicates a proposal previously submitted by another shareholder that will be voted
on at the meeting.

•

It deals with substantially the same subject matter as a prior proposal voted on at one or more
annual or special shareholders’ meetings held within the last five years, provided it received less than
3% of the votes cast if it was voted on at only one meeting during this period, less than 6% of the
votes cast if it was voted on at the second of two meetings during this period and less than 10% of
the votes cast if it was voted on at the latest of three or more meetings during this period.

•

It relates to specific amounts of cash or stock dividends.

If management asserts that a proposal received from a shareholder may be properly omitted from the
proxy statement, it must notify the SEC in writing at least 80 calendar days before filing the definitive
proxy materials. This notification should consist of six copies of the following items:
•

The proposal

•

Any statement sent to management supporting it

•

The reasons for omitting it

•

An opinion from legal counsel supporting the omission if the proposal is excluded based upon
matters of law

At the same time, management also must notify the proponent of its intention to omit the proposal and
provide a copy of its reasons, including any supporting opinion of counsel.

22
23

See SEC Release No. 33-9136, Facilitating Shareholder Director Nominations, for Rule 14a-8.
See SEC Release Nos. 33-9178 and 34-63768, Shareholder Approval of Executive Compensation and Golden Parachute
Compensation, adopted 25 January 2011.


2-11


Management may include a statement opposing any shareholder proposal in the proxy statement. If such
a statement is to be made, management must provide a copy of its statement to the shareholder who
originally submitted the proposal no later than 30 calendar days before filing the definitive proxy materials.
The shareholder may notify the SEC if he or she believes management’s statement is false or misleading.
An increasing number of shareholder proposals and supporting statements include website addresses
that provide more information about the proposal. Websites may be included if the information on the
website only supplements the information contained in the proposal, and shareholders can understand
what the proposal requires without reviewing the website (otherwise, the proposal may be considered
vague and indefinite and could be excluded). If a referenced website is not operational at the time of
submission, it may be included if the proponent provides the company with the materials that will be
published on the website before the company files its definitive proxy materials. If the information on a
referenced website changes after submission of a proposal, and the company believes the revised
information renders the website reference excludable under Rule 14a-8, the company may be allowed to
exclude the website reference (SLB 14G).

2.7

Proxies not solicited
If management does not solicit proxies in connection with an annual or other meeting of shareholders,
the issuer is required under Regulation 14C of the Exchange Act to file with the SEC and to transmit to
shareholders information equivalent to that which would be required if a proxy solicitation were made.
The items of information specified by Schedule 14C are to be furnished in the form of an “Information
Statement.” If the information statement relates to an annual meeting of security holders at which
directors are to be elected, it must be accompanied or preceded by an annual report to security holders.

2.8

Form 8-K reporting
A company is required to file under Item 5.07 of Form 8-K the results of a shareholder vote within four
business days after the meeting at which the vote was held. If voting results are preliminary, a company
is required to file an amended Form 8-K to disclose the final voting results within four days after the final
results are known.
The Item 5.07 Form 8-K should include the following:
•

The date of the meeting and whether it was an annual or special meeting

•

If the meeting involved the election of directors
•
•

A brief description of each matter voted upon at the meeting

•

The number of votes cast for, against or withheld

•

The number of abstentions and broker non-votes

•
•

The name of each director elected at the meeting

A separate tabulation with respect to each nominee for office

A description of the terms of any settlement between the registrant and any other participant
terminating any solicitation, including the cost or anticipated cost to the registrant

Item 5.07 of Form 8-K also requires issuers to disclose, within 150 days after the nonbinding shareholder
vote on how frequently the say-on-pay vote should occur (but no later than 60 days prior to the deadline
for submission of shareholder proposals), how frequently the issuer will conduct its say-on-pay vote given
the results of a shareholder frequency vote. The disclosure should be included in an amendment to the

2-12


Form 8-K that initially announced the results of the shareholder frequency vote.24 A company can also
disclose the decision about the frequency of the say-on-pay advisory vote in an annual or quarterly
report rather than in Item 5.07 of Form 8-K.25
Note: The SEC staff noted that, in 2012 many companies failed to file the required amended 8-K
disclosing the timing of the next shareholder vote on executive compensation (“say-on-pay” vote)
under Exchange Act Rule 14a-21. Companies that fail to make the disclosure by the deadline are not
considered “timely” for purposes of Form S-3 eligibility. These companies must obtain a waiver from
the SEC staff before filing a new Form S-3 or issuing securities from an existing shelf registration
statement. The SEC staff generally has granted waivers when the company’s board has followed the
shareholders’ advice on frequency.

2.9

Timing
The timetable for soliciting votes for the annual meeting depends largely on the meeting date, which
usually is determined by the board of directors based on the bylaws of the registrant. The timeline
below shows the relative timing of the events for an annual meeting proxy statement of a calendar
year-end company.
November Shareholder proposals deadline (120 calendar days before the date proxy materials were
mailed to shareholders in the previous year)
December Notify the SEC of reasons for omitting a shareholder proposal (80 calendar days before filing
the definitive proxy)
February

Make beneficial owner inquiries (20 business days before the record date)
Provide shareholder with a copy of any statement opposing the shareholder’s proposal
(30 calendar days before filing definitive proxy)

March

Record date (To be selected by registrant)
File preliminary proxy materials and form of proxy with the SEC, if required (10 calendar days
prior to the date a final proxy may be mailed to shareholders)
File final (definitive) proxy materials with the SEC and appropriate exchanges (30 to 50 days
before the annual shareholders’ meeting is typical; however, the number of days is not
specified)
Send the Notice of Internet Availability of Proxy Materials to shareholders being provided
proxy materials under the “notice only” option (40 days before the annual shareholders’
meeting, if applicable)

April

Annual shareholders’ meeting (date to be selected by registrant)
File an Item 5.07 Form 8-K to disclose the results of a shareholder vote within four business
days after the meeting at which the vote was held

24

See SEC Release Nos. 33-9178 and 34-63768, Shareholder Approval of Executive Compensation and Golden Parachute Compensation.

25

See Exchange Act Form 8-K C&DI 121A.04 at http://www.sec.gov/divisions/corpfin/guidance/8-kinterp.htm.


2-13


SEC regulations require 10 calendar days between the date a preliminary proxy is filed with the SEC and
the date the final proxy may be mailed to shareholders. However, SEC regulations do not specify the
number of days in advance of an annual shareholders’ meeting that the final proxy statement must be
mailed to shareholders, with the exception that a registrant using the notice only option of delivering
proxy materials must make its proxy materials available on the internet at least 40 days before the
annual shareholders’ meeting. Registrants generally mail proxy statements 30 to 50 days before the
annual meeting so there is adequate time for beneficial owners to give instructions to the record holders
as to how to vote their proxy. However, most states have statutory requirements for mailing notices for
meetings, and proxy statements are often mailed with such notices. For example, state law may require
that written notice of the meeting be given no less than 10 or no more than 60 days before the meeting.


2-14

3

Information in the typical annual
meeting proxy statement
Schedule 14A of the Exchange Act regulations contains the specific disclosure requirements for proxy
statements. Many of the items do not apply to a proxy statement for the typical annual meeting. The
following is a list of the 24 items in Schedule 14A:
Item 1

Date, time and place information

Item 2

Revocability of proxy

Item 3

Dissenters’ right of appraisal

Item 4

Persons making the solicitation

Item 5

Interest of certain persons in matters to be acted upon

Item 6

Voting securities and principal holders thereof

Item 7

Directors and executive officers

Item 8

Compensation of directors and executive officers

Item 9

Independent public accountants

Item 10

Compensation plans

Item 11

Authorization or issuance of securities otherwise than for exchange

Item 12

Modification or exchange of securities

Item 13

Financial and other information

Item 14

Mergers, consolidations, acquisitions and similar matters

Item 15

Acquisition or disposition of property

Item 16

Restatement of accounts

Item 17

Action with respect to reports

Item 18

Matters not required to be submitted

Item 19

Amendment of charter, bylaws or other documents

Item 20

Other proposed action

Item 21

Voting procedures

Item 22

Information required in investment company proxy statement

Item 23

Delivery of documents to security holders sharing an address

Item 24

Shareholder approval of executive compensation

Note: When a company provides a say-on pay vote, frequency vote or golden parachute vote, Item 24
requires disclosure that a company is providing the votes and a brief explanation of the general effect
of the votes (e.g., whether the vote is nonbinding). Item 24 also requires disclosure, when applicable,
of the current frequency of the say-on-pay vote and when the next say-on-pay vote will occur.


3-1

3 Information in the typical annual meeting proxy statement

This section discusses matters commonly disclosed in annual meeting proxies, including the general
disclosure rules.

3.1

General information requirements
Regardless of shareholder action to be taken at a shareholders’ meeting, the proxy statement must
include information on:
•
•

Whether the shareholder returning a proxy has a right to revoke it and, if so, the limitations or
procedures to follow (Item 2)

•

Who is soliciting the proxy, whether proxies will be solicited other than by mail or through the
internet under Rule 14a-16 (as discussed in Section 2 of this publication), and who will pay the cost
of solicitation (e.g., if proxy solicitors will be paid, disclosure of the arrangement and the estimated
cost must be made) (Item 4)

•

The number of shares of voting securities outstanding and the record date for shareholders entitled
to vote (Item 6)

•

3.2

When and where the shareholders’ meeting will take place, unless such information is otherwise
disclosed in material furnished to shareholders with or preceding the proxy statement (Item 1)

The number and percentage of equity shares beneficially owned by each director and nominee
(including directors’ qualifying shares), the named executive officers (see Section 5 of this
publication), all directors and executive officers as a group and each person who beneficially owns
more than 5% of any class of voting securities (Item 6)

Meeting to elect directors
Proxies solicited to elect directors must provide information about executive officers, continuing
directors and nominees for director. These disclosures are intended to allow shareholders to judge the
professional competence, accountability and effectiveness of directors and officers and the qualifications
of nominees.
The proxy rules require disclosures about executive officers, directors and nominees that frequently
overlap; however, the disclosures have to be made only once in the proxy statement.
Proxies solicited to elect directors also must describe any applicable cumulative voting rights (i.e., a
shareholder may be entitled to a number of votes equal to shares owned multiplied by the number of
directors to be elected and the right to allocate the vote among nominees as the shareholder chooses).
In addition, proxy statements must set forth the vote required for approval or election, the manner in
which votes will be counted (including the treatment and effect of abstentions) and broker non-votes.

3.3

Incorporation by reference into Form 10-K
General Instruction G(3) of Form 10-K provides that information called for by Part III of Form 10-K (Items
10 through 14) may be incorporated by reference from the registrant’s definitive proxy or information
statement if the proxy or information statement is filed with the SEC no later than 120 days after the end
of the fiscal year covered by the Form 10-K. However, if the information called for by these items cannot
be incorporated by reference, it must either be included in Form 10-K when filed or included by
amendment on Form 10-K/A no later than 120 days after the fiscal year-end.


3-2


Regulation S-K contains the rules for disclosure of information required in Part III of Form 10-K, including:
Item 201(d)

Securities authorized for issuance under equity compensation plans (required under
Item 10 of Schedule 14A)

Item 401

Directors, executive officers, promoters and control persons (required under Item 7 of
Schedule 14A)

Item 402

Executive compensation (required under Item 8 of Schedule 14A)

Item 403

Security ownership of certain beneficial owners and management (required under Item 6
of Schedule 14A)

Item 404

Transactions with related persons, promoters and certain control persons (required under
Item 7 of Schedule 14A)1

Item 405

Compliance with Section 16(a) of the Exchange Act (required under Item 7 of Schedule 14A)

Item 406

Code of ethics

Item 407

Corporate governance (certain disclosures required under Items 7 and 8 of Schedule 14A)

In addition, Item 14 in Part III of Form 10-K requires principal accounting fee disclosure identical to that
required by Item 9(e) of Schedule 14A, which is discussed in Section 6 of this publication.
There are several exceptions to the general rule that Part III Item 10 information will be identical to, and
generally incorporated by reference from, the annual meeting proxy statement. These exceptions are
discussed further below.

3.3.1

Executive officers
General Instruction G(3) of Form 10-K provides that the information required by Item 10 of Form 10-K
(Item 401 of Regulation S-K) for executive officers may be included in Part I of Form 10-K under a
caption entitled “Executive Officers of the Registrant.” If this is done, this information need not be
included in the proxy or information statement.

3.3.2

Audit committee financial experts
The disclosures about audit committee financial experts (Item 407(d)(5) of Regulation S-K) must be
provided in response to Item 10 of Form 10-K, but an instruction to Item 407(d)(5) specifically states
that the disclosures may be omitted from the proxy or information statement. However, a company may
elect to provide the disclosures about its audit committee financial experts in its proxy statement and
incorporate those disclosures by reference into the Form 10-K, provided the proxy statement is filed no
later than 120 days after the company’s fiscal year-end. Otherwise the disclosures about audit
committee financial experts must be included in the Form 10-K.
Item 407(d)(5) requires a public company to disclose whether its board of directors has determined that
the company has at least one audit committee financial expert (as defined) on its audit committee. If so,
the company also must disclose the name of its audit committee financial expert and whether that person
is independent. If the audit committee does not have such an expert, the company is required to explain

1

Item 404(c) of Regulation S-K, Promoters and certain control persons, requires certain disclosures from registrants that are filing a
registration statement on Form S-1 under the Securities Act, or on Form 10 under the Exchange Act, and that had a promoter at any
time during the past five fiscal years. Therefore, this item is not applicable to annual reports on Form 10-K or to proxy statements.


3-3


why not. If the company has more than one audit committee financial expert, it may, but is not required
to, disclose the names of any additional audit committee financial experts. If the company elects to
disclose the names of such experts, it also must indicate whether they are independent.

3.3.3

Code of ethics
The disclosures about the issuer’s code of ethics (Item 406 of Regulation S-K) must be provided in
response to Item 10 of Form 10-K, but the proxy or information statement is not required to provide
those disclosures. However, a company may elect to provide the disclosures about its code of ethics in its
proxy statement and incorporate those disclosures by reference into the Form 10-K, provided the proxy
statement is filed no later than 120 days after the company’s fiscal year-end. Otherwise the disclosures
about the code of ethics must be included in the Form 10-K.
Item 406 of Regulation S-K requires a public company to disclose whether it has adopted a code of ethics
(as defined) that covers its principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. If so, the issuer must make its code of ethics
publicly available by one of the following means: (1) filing the code of ethics as an exhibit to its Form 10K; (2) posting the code of ethics on its website, provided the Form 10-K disclosed that intention and the
website address or (3) providing disclosure in its Form 10-K that a copy of the code is available without
charge upon written request. A company also must file Form 8-K to report significant amendments to its
code of ethics, or any waivers, affecting the specified officers. If the issuer has not adopted a code of
ethics, it is required to disclose why it has not done so.
Separately, the listing standards of the NYSE and NASDAQ require listed companies to have a code of
conduct and make it publicly available.
Illustration 3-1:

Code of ethics

The Company has adopted a Code of Ethics that applies to all of its directors, officers (including its
chief executive officer, chief financial officer, chief accounting officer, controller and any person
performing similar functions) and employees. The Company has made the Code of Ethics available on
its website at http://www.companyethicsexample.com.

3.3.4

Changes in shareholder nominating procedures
The proxy rules require disclosure in proxy statements about an issuer’s process for nominating
directors. Item 407(c)(3) requires a public company to disclose any material changes to the procedures
disclosed in the most recent proxy statement for security holders to recommend a director candidate. A
company is required to report any material change in its periodic Exchange Act report for the period that
the material change occurs (i.e., the company’s quarterly report on Form 10-Q or, for changes that occur
during the fourth fiscal quarter, the company’s annual report on Form 10-K). A material change requiring
disclosure would include the adoption of procedures by which security holders may recommend a nominee
when the company disclosed in its last proxy statement that it did not have any such procedures.
The disclosures about material changes, during the fourth fiscal quarter, to the procedures for security
holders to recommend a director candidate (Item 407(c)(3) of Regulation S-K) must be provided in
response to Item 10 of Form 10-K, but an instruction to Item 407(c)(3) specifically states that the
disclosures only need to be provided in the company’s quarterly or annual report and therefore may be
omitted from the proxy or information statement. If the company elects to provide the disclosures about
any such changes in its proxy statement, it also may incorporate them by reference into the Form 10-K if
the proxy statement is filed no later than 120 days after the company’s fiscal year-end. Otherwise the
disclosures about such changes must be included in the Form 10-K.

3-4


3.3.5

Authorized equity compensation
In addition to the exceptions discussed above, the information required by Item 201(d) of Regulation S-K
in response to Item 12 of Form 10-K is not required to be included in a proxy or information statement in
all cases. The proxy or information statement is not required to provide this disclosure unless the
registrant is submitting a compensation plan for shareholder action (see Section 7 of this publication).
Nevertheless, even if a registrant does not submit a compensation plan for shareholder action, a
registrant that provides the information required under Item 201(d) in its proxy statement may
incorporate the disclosure by reference into Item 12 of Form 10-K if the proxy statement is filed no later
than 120 days after the company’s fiscal year-end. Otherwise, the Form 10-K must include the disclosure
upon filing or by amendment within 120 days of the fiscal year-end. The Form 10-K instructions indicate
that the disclosures required under Item 201(d) of Regulation S-K must be provided in response to both
Item 5 and Item 12 of Form 10-K. However, the SEC staff has indicated that the disclosures required
under Item 201(d) should be included only in response to Item 12 of Part III of Form 10-K. These
disclosures are discussed in Section 7 of this publication.


3-5

4

Item 7 — Directors and executive officers
Item 7 of Schedule 14A largely requires the information about directors and executive officers as
specified in Regulation S-K Items 401, 404, 405 and 407. This information frequently is incorporated by
reference into Items 10 and 13 in Part III of Form 10-K.
Item 7 also requires certain disclosures about the compensation committee, which are discussed below.
Item 8 of Schedule 14A requires additional disclosures related to the compensation committee, which
are discussed in Section 5 of this publication.
The following summarizes the requirements of Item 7 of Schedule 14A and which of those disclosures
also are required in Form 10-K (refer to Section 10 of our publication SEC annual reports (Ernst & Young
No. CC0360) for additional information):
Disclosure requirement of Item 7 of Schedule 14A

Required in Form 10-K?

Regulation S-K Item

Identification of directors and executive officers

Yes (Part III — Item 10;
Part I — Item 3)

401 (a) — (f); 103
(Instruction 4)

Independence of directors

Yes (Part III — Item 13)

407 (a)

Board meetings and committees; annual meeting
attendance

No

407 (b)

Nominating committee disclosures

No*

407 (c)(1) & (2)

Audit committee charter

No

407 (d)(1)

Non-independence of audit committee members

No

407 (d)(2)

Audit committee report

No

407 (d)(3)

Audit committee disclosures by listed issuers


407 (d)(4)

Audit committee financial expert**


407 (d)(5)

Compensation committee disclosures

No

407 (e)(1), (2) & (3)

Security holder communications with directors

No

407 (f)

Board leadership structure and role in risk oversight

No

407(h)

Transactions with related persons


404 (a)***

Review and approval of related person transactions


404 (b)

Promoters and control persons


401 (g)

Insider trading and reporting


405

Audit committee disclosures

•
•
•
•
•

*

Registrants are required under S-K Item 407(c)(3) to report any material change to the procedures for security holders to recommend
a director candidate in their periodic Exchange Act report for the period that the material change occurs (e.g., for changes that
occurred during the fourth fiscal quarter, the disclosure would be required in the registrant’s annual report on Form 10-K).

** Disclosure requirements related to Item 407(d)(5) are discussed further in Section 3.3.2.
*** A registrant that qualifies as a smaller reporting company must follow the requirements of Item 404(d) of Regulation S-K.
See Section 9 of this publication for further information.


4-1

4 Item 7 — Directors and executive officers

4.1

Items 401(a)-(f) of Regulation S-K require disclosure of named executive officers,1 directors2 and
director nominees in the proxy, including:3
•

Their names and ages

•

All positions and offices held with the registrant (including the period that they have been a director
or officer)

•

A description of their business experience for the last five years (including their principal occupation
and the name and principal business of their employers during this period) and the specific
experience, qualifications, attributes or skills that led to the conclusion that the individual should
serve as a director, in light of the company’s business and structure4
Note: If the individual has been employed by the company or a subsidiary of the company for less than
five years, a brief explanation should be provided about the nature of the individual’s responsibilities in
his or her prior position and information relating to the individual’s level of professional competence
(e.g., size of operation supervised).
If material, this disclosure should cover more than the past five years, including information about the
person’s particular areas of expertise or other relevant qualifications. Regulation S-K C&DI 116.055
specifies that the disclosure of each director or nominee’s experience must be provided on an
individual basis even if a group of directors or nominees share similar characteristics.

•

Any family relationships among these individuals (i.e., any relationship by blood, marriage or
adoption, but not more remote than first cousin)

•

A brief description of arrangements or understandings they have with any other person(s)
(naming such person(s)) under which they were, or are to be, selected as an executive officer,
director or nominee

•

The names of any other SEC registered company for which these individuals served as director
during the past five years, even if the individual no longer serves on that board

1

2

3

4

5

A non-reporting issuer (e.g., a issuer registering securities in an initial public offering) that employs persons who are not executive
officers but who make, or are expected to make, significant contributions to the registrant’s business, must identify such persons
and disclose their background to the same extent as in the case of executive officers.
Instruction 3 to Regulation S-K Item 401(a), Identification of directors, provides that if the information called for by paragraph
(a) is being presented in a proxy or information statement, no information need be given about any director whose term of office
will not continue after the meeting. Regulation S-K C&DI 116.07 notes that Item 401(e), Business experience disclosures, are
not required for any director for whom the company is not required to provide the Item 401(a) disclosures. Regulation S-K
C&DI 116.10 notes that a company also may omit these disclosures from its Form 10-K if it incorporates director information
by reference from its proxy statement. If a company includes disclosure of director information in its Form 10-K (rather than
incorporating by reference from its proxy statement), disclosures about a departing director may not be omitted. See Regulation
S-K C&DIs 116.07 and 116.10 at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
The required information for executive officers may be omitted from the proxy statement if it is included in the registrant’s
annual report on Form 10-K.
A director’s business experience should be disclosed regardless of whether the director was nominated by the company’s board
or appointed by holders of a class of preferred stock. See Regulation S-K C&DI 116.09 at
http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
Regulation S-K C&DI 116.05 is available at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.


4-2


•

Any involvement during the past 10 years6 in certain types of judicial and administrative
proceedings, to the extent material to an evaluation of the ability or integrity of the executive officer,
director or nominee (including bankruptcy, criminal, injunctive and securities-related proceedings as
well as disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or
other self-regulatory organization)7

In addition, Instruction 4 to Item 103 of Regulation S-K requires the registrant to describe any material
proceeding in which a director or executive officer is a party or has a material interest adverse to the
registrant.
The company must not identify any nominee or person chosen to become a director or executive officer
unless that person has consented to be named. In addition, in a proxy statement, certain of the disclosures
are not required for any director whose term of office will not continue after the shareholders’ meeting.

4.2

Item 407(a) of Regulation S-K requires registrants to disclose the name of each nominee for director (in
connection with a proxy or information statement relating to the election of directors) and each director
that is independent under specified independence standards, which may vary depending on whether the
registrant is a listed issuer as discussed below. The scope of the disclosures about independence of
directors encompasses any person who served as a director of the registrant during any part of the
respective fiscal year, even if the person no longer serves as a director at the time of filing the proxy or
information statement.
If the registrant is a listed issuer with securities that are listed on a national securities exchange or in an
inter-dealer quotation system that requires a majority of the board of directors to be independent, the
registrant must use that definition of independence for purposes of the disclosures under Item 407(a)
of Regulation S-K. If the registrant is not a listed issuer, these disclosures must be based on the
definition of independence in the listing standards of a national securities exchange or inter-dealer
quotation system that requires a majority of the board of directors to be independent and the definition
must be identified and used for all directors and director nominees. Additionally, if the registrant has
relied on certain exemptions from such independence requirements allowed by its national securities
exchange or inter-dealer quotation system (or, for non-listed issuers, the independence standards
selected), the registrant must disclose the exemption relied upon and explain the basis for its conclusion
that the exemption is applicable.
If the independence standards applicable to the registrant contain independence requirements for
committees of the board of directors, the registrant must identify each director who is a member of the
compensation, nominating or audit committee who is not independent under such committee independence
standards. If the registrant does not have a separately designated compensation, nominating or audit
committee or committee performing similar functions, the registrant must provide this disclosure for all
directors who are not independent applying such committee independence standards.
When determining whether each director and nominee for director is independent, registrants also are
required to fully describe, by specific category or type, any transactions, relationships or arrangements
not otherwise disclosed that were considered by the board of directors.

6
7

Instruction 1 to Item 401(f) of Regulation S-K provides guidance in computing the 10-year period.
The SEC’s final rule, Proxy Disclosure Enhancements, expanded the list of legal proceedings under Item 401(f) to include: (1) any
judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity,
(2) any violations of federal or state securities, commodities, banking or insurance laws and regulations, or any settlement of those
(or related) actions. The disclosure requirement does not apply to any settlement of a civil proceeding among private litigants.


4-3


4.3

Board meetings and committees; annual meeting attendance
Under Item 407(b) of Regulation S-K, registrants must state the total number of meetings held by the
board of directors and each committee during the last fiscal year. The disclosure must identify any
director who during the last fiscal year attended fewer than 75% of the aggregate of (1) the number of
meetings the board of directors held during the period in which he or she was a director and (2) the
number of meetings of all committees of the board held during the period in which he or she served as a
member of the respective committee. Registrants also are required to describe, either in the proxy
statement or on their websites, their policy, if any, with regard to board member attendance at annual
meetings and state the number of board members who attended the prior year’s annual meeting.
Registrants must state whether they have standing audit, nominating and compensation committees (or
committees performing similar functions), and, if so, must identify the members of each and the number
of meetings held during the last fiscal year. They also must briefly describe the functions performed by
each committee. The registrant may integrate these disclosures with the specific disclosures required
about each of the committees in Schedule 14A. As discussed below, Item 7 of Schedule 14A requires
specific additional disclosures about the audit, nominating and compensation committees and, as
discussed in Section 5 of this publication, Item 8 of Schedule 14A requires additional disclosures related
to the compensation committee.

4.4

Item 407(c) of Regulation S-K requires disclosures about an issuer’s process for nominating directors.
Item 407 of Regulation S-K defines the term “nominating committee” to include not only a standing
nominating committee, but also other board committees performing similar functions, as well as groups
of directors fulfilling the role of a nominating committee including the entire board of directors. If a
company does not have a standing nominating committee or committee performing similar functions,
the company is required to disclose the basis for the board of directors’ view that it is appropriate not
to have such a committee, and the identity of each director who participates in the consideration of
director nominees.
With respect to the process of nominating directors, Item 407(c)(2) of Regulation S-K requires the
following disclosures:
•

Whether the nominating committee has a charter, and, if so, whether the current charter is available
on the company’s website (providing the website address), or otherwise, as an appendix to its proxy
statement following any material amendment or at least once every three fiscal years (indicating the
prior fiscal year provided, if applicable)

•

If the nominating committee has a policy about the consideration of any director candidates
recommended by security holders, a description of the material elements of that policy (including a
statement whether the committee will consider director candidates recommended by security
holders); or, otherwise, the fact that it does not have such a policy and the basis for the board of
directors’ view that it is appropriate not to have such a policy

•

If the nominating committee will consider candidates recommended by security holders, a
description of the procedures to be followed by security holders in submitting such recommendations

•

Any specific, minimum qualifications that the nominating committee believes must be met by their
nominees for director and any specific qualities or skills that the nominating committee believes are
necessary for one or more of the company’s directors to possess


4-4


•

The nominating committee’s process for identifying and evaluating potential nominees for director,
including any differences in the evaluation process if the potential nominee is recommended by a
security holder

•

Whether, and if so how, the nominating committee considers diversity in identifying nominees
(if applicable, a company should disclose how it has implemented its policy with respect to the
consideration of diversity in identifying director nominees and how it assesses the effectiveness
of that policy)

•

For each nominee approved by the nominating committee and included on the company’s proxy card
(other than nominees who are executive officers or directors standing for re-election), which one or
more of the following categories or persons or entities recommended the nominee: security holder,
non-management director, chief executive officer, other executive officer, third-party search firm or
other specified source8

•

If the company pays any third party a fee to identify or evaluate, or assist in identifying or evaluating,
potential nominees for director, the function performed by each such third party

•

The identity of any recommended nominee for director and the recommending security holder(s),
provided both give their written consent, and whether the nominating committee chose to nominate
any such potential nominee recommended in a timely manner (as defined) by a security holder, or
group of security holders, that has held a beneficial ownership interest in the company’s voting
common stock of 5% or more for at least one year9

In its comment letters, the SEC staff often requests that a registrant disclose whether its nominating
committee or board considers diversity in identifying director nominees and, if so, how. Also, with
respect to each director, the SEC staff may request that the registrant specifically discuss what aspects
of the individual’s experience led the board to conclude that the person should serve as a director for
the registrant, as well as any other relevant qualifications, attributes or skills that were considered by
the board.

4.5

Section 3(a)(58) of the Exchange Act defines the term “audit committee” as “a committee (or equivalent
body) established by and amongst the board of directors of an issuer for the purpose of overseeing the
accounting and financial reporting processes of the issuer and audits of the financial statements of the
issuer.” If the company does not have a standing audit or similar committee, the entire board of directors
of the company is considered the audit committee. Exchange Act Rule 10A-3 includes the SEC’s
minimum audit committee requirements for listed companies.

4.5.1

Item 407(d)(1) of Regulation S-K requires the proxy statement to state whether the audit committee has
a written charter, and, if so, whether the current charter is available on the company’s website (providing
the website address) or, otherwise, as an appendix to the proxy statement following any material
amendment or at least once every three fiscal years (indicating the prior fiscal year provided, if
applicable). If provided as an appendix to the proxy statement, the Audit Committee Charter has the

8

9

For example, if the CEO asks a third party to evaluate a candidate and that third party then recommends the candidate to the
nominating committee, the proxy statement should disclose both the CEO and the third party as the source of the nominee’s
recommendation.
Item 407 of Regulation S-K neither requires nor prohibits disclosure of the reasons for the nominating committee’s conclusion
not to nominate the candidate recommended by the security holder(s).


4-5


same legal status as the annual report to shareholders and is not deemed to constitute soliciting material
or a “filed” document. The disclosure is required only in proxy or information statements relating to an
annual meeting of security holders for the election of directors and will not be deemed to be incorporated
by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the
registrant decides to specifically incorporate it by reference.
The NYSE and NASDAQ corporate governance provisions require listed companies to adopt formal
written audit committee charters that specify the committee’s responsibilities, including those related to
independence and accountability of the independent auditors.

4.5.2

Minimum independence requirements for audit committee members
Rule 10A-3 of the Exchange Act establishes minimum audit committee requirements for listed companies
including, among other things, the independence of audit committee members.
Consistent with Section 301 of the Sarbanes-Oxley Act, Rule 10A-3 establishes two basic independence
criteria for audit committee members involving the member’s compensation by the issuer and affiliation
with the issuer. The SEC has included limited, specific exceptions to the independence criteria, which are
discussed separately below under “Exemptions.”
Compensation: Each audit committee member must be precluded from receiving any remuneration from
the issuer (including any consulting, advisory or other fees from the issuer or any subsidiary of the
issuer), other than (1) in the member’s capacity as a director and (2) fixed amounts under a retirement
plan (including deferred compensation) for prior service with the issuer, provided such compensation is
not in any way contingent on continued service. Thus, a current officer or employee of the issuer or any
of its subsidiaries would not be allowed to serve as an audit committee member, but a retired officer or
employee would not necessarily be precluded. The compensation prohibition is absolute (i.e., Rule 10A-3
does not allow de minimis exceptions), but it applies only to current relationships and payments
(i.e., Rule 10A-3 requires no “look back” period prior to a director’s appointment to the audit committee).
Payments made either directly or indirectly would impair the independence of an audit committee
member. Accordingly, Rule 10A-3 defines indirect payments as those to spouses, minor children or
stepchildren or children or stepchildren sharing a home with the audit committee member. In addition,
Rule 10A-3 prohibits payments to an entity (1) in which an audit committee member is a partner or
member (or officer such as a managing director occupying a comparable position to a partner or
member), an executive officer, or occupies any similar position (e.g., a “principal” in certain organizations)
and (2) which provides accounting, consulting, legal, investment banking or financial advisory services10
to the issuer or any of its subsidiaries. In these circumstances, the SEC prohibited payments because the
member’s compensation from such entities could be directly affected by the fees for services provided to
the issuer, even if the member was not directly involved in providing the services to the issuer. However,
for such entities, if an audit committee member is, or occupies a position similar to, a limited partner or
non-managing member and has no active role in providing services to the entity, the audit committee
member’s independence would not be impaired under the SEC’s definition. Moreover, ordinary course
commercial relationships between an issuer and an entity with which a director has a relationship would
not impair the SEC’s definition of audit committee member independence.
Affiliation: Other than in the member’s capacity as a director of a non-investment company issuer, each
audit committee member cannot be an “affiliated person” of the issuer or any subsidiary. For purposes
of Rule 10A-3, “affiliated person” is defined as “a person that directly, or indirectly through one or

10

The prohibition does not extend to non-advisory financial services such as lending, check clearing, stock brokerage services,
custodial services, cash management services or customer account maintenance.


4-6


more intermediaries, controls, or is controlled by, or is under common control with” the issuer or any
subsidiary. Under Rule 10A-3, “control” is defined as “the possession, direct or indirect, of the power to
direct or cause the direction of the management or policies” of the issuer or any subsidiary, “whether
through the ownership of voting securities, by contract or otherwise.”
Under a safe harbor within Rule 10A-3, a person who is neither an executive officer nor a 10% beneficial
owner of any class of voting equity securities is deemed not to be in control, and thus would not be an
affiliated person. For executive officers or 10% shareholders who fall outside the rule’s safe harbor, a
legal analysis of the facts and circumstances is required in order to conclude whether or not they are an
affiliated person. However, while it might be concluded that an executive officer is not an affiliated
person, it is unlikely that an executive officer of the issuer could meet the compensation criterion of
independence discussed above. Thus, as a practical matter, evaluation of the affiliation criterion will be
limited to audit committee members who are 10% beneficial owners or who have relationships with any
such persons.
For purposes of Rule 10A-3, an audit committee member would not be independent of the issuer if the
audit committee member also serves an affiliate of the issuer or any of its subsidiaries in any of the
following capacities: executive officer, director and employee, general partner or managing member.
Conversely, an audit committee member could be determined to be independent of the issuer even if the
audit committee member serves an affiliate of the issuer or any of its subsidiaries in other capacities,
such as outside director, limited partner or non-executive employee. However, in any event, an audit
committee member would not be independent of the issuer if the audit committee member acts as the
representative or agent of an affiliate of the issuer or any of its subsidiaries.
Exemptions: Section 301 of the Sarbanes-Oxley Act provides the SEC with the authority to exempt from
the audit committee independence requirements, certain relationships “as the Commission determines
appropriate in light of the circumstances.” Rule 10A-3 provides specific exemptions from the
independence requirements in the following circumstances:
•

Exemption for an issuer listing securities pursuant to an initial registration statement such that the
audit committee must be comprised of: one fully independent member at the effective date of the
registration statement, a majority of independent members within 90 days thereafter, and a fully
independent committee within one year of the effective date of the IPO registration statement

•

Exemption from the “affiliated person” requirement of an audit committee member that sits on the
board of both the listed issuer and an affiliate (e.g., on the board of a subsidiary or a joint venture in
which the issuer participates) of the listed issuer, provided the individual otherwise meets the
remaining independence requirements with respect to both the listed issuer and the affiliate of the
listed issuer

•

For foreign private issuers only (in light of their unique circumstances):
•

Exemption of an employee elected to the audit committee pursuant to the issuer’s governing law
or documents, an employee collective bargaining or similar arrangement, or other home country
legal or listing requirements, provided the employee is not an executive officer of the foreign
private issuer

•

Exemption from the “affiliated person” criterion (but not the compensation criterion) for a
member of the audit committee who is an affiliate of the issuer or a representative of such an
affiliate; has only observer status, and is not a voting member or the chair of the audit
committee; and is not an executive officer of the foreign private issuer


4-7


•

Exemption from the “affiliated person” criterion (but not the compensation criterion) for a
member of the audit committee who is a representative of a foreign governmental entity that is
an affiliate of the foreign private issuer, provided the member also is not an executive officer of
the foreign private issuer

Rule 10A-3 also provides that if an audit committee member ceases to be independent for reasons
outside the member’s reasonable control (e.g., the issuer acquires a company that receives services from
a law firm in which the audit committee member is a partner), with notice to the applicable national
securities exchange, the member may remain an audit committee member of the listed issuer until the
earlier of the issuer’s next annual shareholders’ meeting or one year from the occurrence of the event
that caused the member to no longer be independent. This period may allow the issuer sufficient time to
implement a cure rather than removing the audit committee member.11
Rule 10A-3 also provides a general exemption for a foreign private issuer that does not have a separate
audit committee of the board of directors, but that does have a board of auditors (or similar body) or
statutory auditors (collectively the “audit board”) separate from the board of directors.12 If certain
conditions are met, Rule 10A-3 of the Exchange Act exempts a foreign private issuer from the audit
committee requirements. To qualify for the general exemption, the foreign private issuer must meet all
of the following conditions:
•

The foreign private issuer has an audit board pursuant to home country legal or listing provisions
expressly requiring or permitting such a board or similar body

•

The audit board is required under home country legal or listing provisions to be either separate from
the board of directors, or composed of one or more members of the board of directors and one or
more members that are not members of the board of directors

•

The audit board is not elected by management of the issuer, and no executive officer of the issuer is
a member of the audit board

•

Home country legal or listing provisions provide standards for the independence of the audit board
from the issuer or the management of the issuer

•

The audit board, in accordance with home country legal or listing requirements or the issuer’s
governing documents, is responsible, to the extent permitted by law, for the appointment, retention
and oversight of the work of any registered public accounting firm (including, to the extent permitted
by law, the resolution of disagreements between management and the auditor regarding financial
reporting) engaged for the purpose of preparing or issuing an audit report or performing other audit,
review or attest services for the issuer

•

The requirements in Rule 10A-3 with respect to complaint procedures, outside advisers and funding,
to the extent permitted by law, apply to the audit board

Under any of the specific exemptions discussed above, the issuer is required to disclose its reliance on
such exemption and provide an assessment whether (and how) such reliance would materially adversely
affect the ability of the audit committee (or the audit board) to act independently and to satisfy its
related responsibilities.

11

12

The NYSE and NASDAQ rules regarding the cure period provided when an audit committee member ceases to be independent are
consistent with those in Rule 10A-3. However, NASDAQ allows a listed issuer at least 180 days to regain compliance when a
previously independent director or audit committee member loses his or her independence.
The adopting releases of the SEC rule (SEC Release Nos. 33-8220, 34-47654, Standards Related to Listed Companies Audit
Committees) cited Japan, Italy and Brazil as jurisdictions that require an audit board.


4-8


Consistent with Section 301 of the Sarbanes-Oxley Act, Rule 10A-3 provides the SEC authority to exempt a
particular relationship with respect to audit committee members as it “determines appropriate in light of
the circumstances.” In the adopting release, the SEC stated that this exemptive authority will allow it to
respond to evolving standards of corporate governance and changes in US and foreign laws. However, the
adopting release indicated that, besides the specific exemptions included in Rule 10A-3, the SEC did not
intend to entertain requests for exemptions or waivers for particular relationships on a case-by-case basis.

4.5.3

If the registrant’s board of directors determines, in accordance with applicable listing standards and the
exemptions described in the preceding section, to appoint a director to the audit committee who is not
independent, Item 407(d)(2) of Regulation S-K requires the registrant to disclose the nature of the
relationship that makes that individual not independent and the reasons for the board’s determination.
Any such disclosure has the same legal status as the annual report to shareholders and is not deemed
to constitute soliciting material or a “filed” document. The disclosure is required only in proxy or
information statements relating to an annual meeting of security holders for the election of directors
and will not be deemed to be incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant decides to specifically incorporate it by reference.

4.5.4

Under Item 407(d)(3) of Regulation S-K, the audit committee must include a report in the proxy that
states whether the audit committee has:
•

Reviewed and discussed the audited financial statements with management

•

Discussed with the independent auditors matters required to be discussed under Statement on
Auditing Standards No. 61, Communications with Audit Committees (SAS 61), as amended and as
adopted by the Public Company Accounting Oversight Board in Rule 3200T13

•

Received from the independent auditors written disclosures regarding the auditors’ independence
required by PCAOB Ethics and Independence Rule 3526, Communication with Audit Committees
Concerning Independence, and has discussed with the independent auditors, the independent
auditors’ independence

Based on the above, the audit committee must state whether it has recommended to the board of
directors that the audited financial statements be included in the company’s annual report on Form 10-K
for filing with the SEC.
The name of each member of the company’s audit committee (or, in the absence of an audit committee,
the board committee performing equivalent functions or the entire board of directors) must appear
below the Audit Committee Report.
The Audit Committee Report has the same legal status as the annual report to shareholders and is not
deemed to constitute soliciting material or a “filed” document. The disclosure is required only in proxy or
information statements relating to an annual meeting of security holders for the election of directors and
will not be deemed to be incorporated by reference into any filing under the Securities Act or the
Exchange Act unless the registrant decides to specifically incorporate it by reference.

13

PCAOB Rule 3200T adopted, on an interim basis, AU Section 380, Communications with Audit Committees (AU 380), as of
16 April 2003. In December 2006, SAS 114, Auditor’s Communication with Those Charged with Governance, superseded SAS 61
but only with respect to non-issuers. PCAOB Rule 3200T still retains the SAS 61 communications with respect to SEC issuers.
On 15 August 2012, the PCAOB adopted Auditing Standard No. 16, Communications with Audit Committees (AS 16), related to
communications with audit committees. AS 16 is subject to SEC approval. The SEC comment period on AS 16 closed on 9 October
2012. Upon approval, AS 16 will apply to audits for fiscal years beginning on or after 15 December 2012 and will supersede the
PCAOB’s interim rule.


4-9


The SAS 61 communications referred to above include matters such as significant adjustments,
management judgments and accounting estimates, significant new accounting policies and disagreements
with management. SAS 61 was amended in the year 2000, by Statement on Auditing Standards No. 90,
Audit Committee Communications, to require discussion of the independent auditor’s judgments about the
quality, not just the acceptability, of the company’s accounting principles. SAS 61 also was amended by
Statement on Auditing Standards No. 89, Audit Adjustments, to require the auditor to inform the audit
committee about any uncorrected misstatements pertaining to the current period whose effects
management believes are immaterial to the financial statements taken as a whole. The SEC’s rules on
auditor independence also require the auditor to communicate the following matters to the audit
committee prior to the filing of an audit report: (1) all critical accounting policies and practices used,
(2) material alternative treatments within GAAP that have been discussed with management including the
ramification of the alternative treatment as well as the auditor’s preference and (3) other material written
communications between the auditor and management (e.g., letter of representations).

4.5.4.1

PCAOB Auditing Standard No. 16
On 15 August 2012, the PCAOB adopted Auditing Standard No. 16, Communications with Audit
Committees (AS 16), related to communications with audit committees and transitional amendments to
AU 380. AS 16 is subject to SEC approval. The SEC comment period on AS 16 closed on 9 October 2012.
Upon approval, AS 16 will apply to audits for fiscal years beginning on or after 15 December 2012. AS 16
modifies and expands existing communications requirements. Some key changes in communication
requirements include:
•

The auditor must provide the engagement agreement to the audit committee annually and the audit
committee must acknowledge and agree to the terms.

•

In addition to current inquiries regarding fraud risks, the auditor must inquire of the audit committee
members whether they are aware of matters relevant to the audit, including violations or possible
violations of laws and regulations.

•

The auditor must provide more detail about the audit strategy, including the timing and significant
risks identified by the audit and any changes to the planned audit strategy or significant risks
identified and the reasons for such changes.

•

The auditor must provide more detail about significant and critical accounting policies and practices,
critical accounting estimates, significant unusual transactions and the auditor’s evaluation of the
entity’s financial reporting.

•

The auditor must communicate matters that are difficult or contentious when they consult outside
the engagement team on such matters.

•

The auditor must communicate events or conditions that indicate a substantial doubt about the
entity’s ability to continue as a going concern for a reasonable period of time.

•

The auditor must communicate the implications of corrected misstatements that may not have been
detected except through the audit. Additionally, the auditor must discuss the basis for determining
that uncorrected misstatements were immaterial, including the qualitative factors considered and
any effect the uncorrected misstatements may have on future financial statements.


4-10


4.5.5

Item 407(d)(4) of Regulation S-K requires a listed issuer to provide additional disclosures relating to its
audit committee in proxy or information statements for shareholders’ meetings at which action is to be
taken with respect to the election of directors. However, disclosure is not required if either:
•

The listed issuer is relying on the exemption in Rule 10A-3(c)(2) (i.e., the issuer has only listed nonequity securities or non-convertible, non-participating preferred securities and is a direct or indirect
subsidiary of a parent company with listed common equity securities)

•

The listed issuer is relying on any of the exceptions under Rule 10A-3(c)(4) through (c)(7)
(e.g., asset-backed issuers, unit investment trusts, foreign governments, passive trusts or other
unincorporated associations and foreign private issuers with qualifying audit boards)

A listed issuer must:
•

State whether it has a standing audit committee of the board of directors or a committee performing
similar functions

•

Identify each audit committee member

•

If the entire board of directors acts as the audit committee, state that fact

A listed issuer also must disclose its reliance on specific exemptions from the SEC minimum listing
standards for audit committees, if applicable, and provide an assessment whether (and how) such
reliance would materially adversely affect the ability of the audit committee to act independently and to
satisfy its related responsibilities (Item 407(d)(4)(ii)(B) of Regulation S-K and Exchange Act Rule 10A-3(d)).

4.6

Item 407(e) of Regulation S-K requires disclosures about a registrant’s compensation committee. If a
company does not have a standing compensation committee or committee performing similar functions,
the company is required to disclose the basis for the view of the board of directors that it is appropriate
not to have such a committee and the identity of each director who participates in the consideration of
executive and director compensation.
With respect to the compensation committee, Item 407(e) of Regulation S-K requires the following
disclosures:
•

Whether the compensation committee has a charter, and, if so, whether the current charter is
available on the company’s website (providing the website address) or, otherwise, as an appendix to
its proxy statement following any material amendment or at least once every three years (indicating
the prior fiscal year provided, if applicable)

•

A narrative description of the company’s processes and procedures for considering and determining
executive and director compensation, including:
•

The scope and authority of the compensation committee (or persons performing similar functions)

•

The extent to which the compensation committee (or persons performing similar functions)
may delegate any such authority to other persons (specifying what authority may be delegated
and to whom)

•

Any role of executive officers or compensation consultants in determining or recommending the
amount or form of executive or director compensation


4-11


4.6.1

Listing standards for compensation committees
The SEC issued a final rule on 20 June 2012 required by the Dodd-Frank Act that requires the national
securities exchanges to adopt minimum listing standards related to compensation committees. The
listing standards require that a member of a listed company’s compensation committee also be a
member of the board of directors and be “independent.” The SEC did not prescribe the independence
requirements as it did for audit committee members. Instead, the rule requires that each exchange
create standards that consider both of the following factors:
•

The source of compensation of a member of the board of directors, including any consulting,
advisory or other compensatory fee paid by the company

•

Whether a member of the board of directors is affiliated with the company or a subsidiary of the
company or its affiliate

The rule also requires exchanges to have listing standards stating that the compensation committee has
the authority to retain or obtain the advice of advisers. The rule does not require an adviser to be
independent, but requires the compensation committee consider the following independence factors in
selecting an adviser:
•

The provision of other services to the company by the adviser’s employer

•

The amount of fees the adviser’s employer receives from the company as a percentage of the
employer’s total revenue

•

The policy and procedures of the adviser’s employer that are designed to prevent conflicts of interest

•

Any business or personal relationship of the adviser with a member of the compensation committee

•

Any stock of the company owned by the advisers and their immediate family members

•

Any business or personal relationships between the company’s executive officers and the
compensation adviser or the advisers’ employer

The listing standards must require the compensation committee to be responsible for the adviser’s
appointment, compensation and oversight, and the listed company must be required to provide funding
for those advisers. The scope of these requirements is limited to compensation advisers retained by the
compensation committee and specifically excludes in-house counsel.
Under the final rule, the listing requirements do not apply to certain companies, including smaller
reporting companies and foreign private issuers that don’t have an independent compensation committee.
The exchanges also have the authority to exempt from the listing standards certain relationships and
categories of issuers (e.g., emerging growth companies as defined by the JOBS Act).
Exchanges, such as the NYSE and NASDAQ stock exchanges, proposed rules by the 25 September 2012
deadline. The SEC has until 27 July 2013 to approve final rules adopted by the national securities
exchanges.


4-12


4.6.2

Disclosures about consultants and conflicts of interest
If compensation consultants play a role in determining or recommending the amount or form of executive
or director compensation, a registrant also is required to identify the compensation consultant, state
whether the consultant is engaged directly by the compensation committee or any other person, describe
the nature and scope of the consultant’s assignment and the material elements of the instructions or
directions given to the consultants about the performance of their duties under the engagement.
A company also must disclose the fees paid to compensation consultants and their affiliates who play a role
in determining or recommending the amount or form of executive and director compensation, if those
consultants also provide other services to the company. If required, the company must disclose the fees
paid to the compensation consultant for executive and director compensation services and the aggregate
fees paid for all other services. There is no limitation on the types of services that are included in all other
services. If the consultant also sells products to the company, revenues generated from such sales should
be included in the aggregate fees paid for all other services provided by the compensation consultant or
its affiliates. The company is not required to disclose the nature of the other services provided.
The fee disclosures required by Item 407(e)(3)(iii) provide for the following:
•

If (1) the board, compensation committee or other persons performing the equivalent functions
(collectively, the board) has engaged its own consultant to provide advice or recommendations on
the amount or form of executive and director compensation and (2) the board's consultant or its
affiliates provided other non-executive compensation consulting services to the company for which
the fees exceeded $120,000 during the company’s fiscal year, fee disclosures are required. The
company also must disclose whether the decision to engage the compensation consultant or its
affiliates for non-executive compensation consulting services was made or recommended by
management and whether the board approved those non-executive compensation consulting
services. If the board engaged its own compensation consultant, disclosure of fees paid to any
compensation consultants that work with management is not required.

•

If the board has not engaged its own compensation consultant, fee disclosures are required if
(1) there is a consultant providing executive compensation consulting services and (2) the consultant
or its affiliates also provided non-executive compensation consulting services to the company for
which the fees exceeded $120,000 during the company’s fiscal year. No disclosure is required with
respect to compensation consultants who work with management if the board has its own
compensation consultant.

Under the final rule14 issued on 20 June 2012, companies now have to disclose in their proxy statements
whether the work of the consultants identified in response to Item 407(e)(3)(iii) raised any conflicts of
interest. If so, companies have to describe the conflict and explain how the conflict is being addressed.
While the rule does not define a conflict of interest, the SEC notes that a company should, at a minimum,
consider the six independence factors required to be considered when selecting an adviser. The new
proxy disclosure requirements go into effect for shareholders’ meetings on or after 1 January 2013 at
which directors are elected.

14

See SEC Release Nos. 33-9330; 34-67220, Listing Standards for Compensation Committees.


4-13


4.7

Item 407(f) of Regulation S-K requires a company to disclose whether its board of directors provides a
process for security holders to send communications to the board. If not, the proxy statement must
disclose the basis for the board of directors’ view that it is appropriate not to have such a process.
If the company has such a process, the company must provide the following additional disclosures, which
the proxy statement may either include or refer to the company’s website address at which the
information appears:
•

The manner in which security holders can send communications to the board of directors and,
if applicable, to individual directors

•

If all security holder communications are not sent directly to board members, the company’s process
for determining which communications will be relayed to board members15

While the term “communications” is not defined in Item 407(f) of Regulation S-K, the SEC intends the
term to be broadly construed. However, the scope of the required disclosure specifically excludes the
following: (1) communications from an officer or director of the company, (2) communications from
employees or agents of the company, unless the communications are made based on such employee’s or
agent’s capacity as a shareholder and (3) security holder proposals under Rule 14a-8 of the Exchange
Act (see Section 2 of this publication) for consideration at shareholders’ meetings and communications
about such proposals.

4.8

Item 407(h) of Regulation S-K and corresponding Item 7 of Schedule 14A require disclosure of a board’s
leadership structure and why a company believes it is the best structure for the company at the time of
the filing.
A company must disclose whether, and why, it has chosen to combine or separate the principal executive
officer and board chair positions. If the role of principal executive officer and board chair are combined, a
company is required to disclose whether, and why, the company has a lead independent director, as well
as the specific role the lead independent director plays in the leadership of the company.
In addition, Item 407(h) requires a company to include disclosure about the board’s involvement in the
oversight of the risk management process. These disclosures should provide information about how the
company perceives the role of its board and the relationship between the board and senior management
in managing the material risks facing the company. For example, a company may disclose whether the
board administers its risk oversight function through the whole board or through a separate risk
committee or the audit committee. A company also may disclose whether the individuals who supervise
the day-to-day risk management responsibilities report directly to the board as a whole or to a board
committee or how the board or committee otherwise receives information from such individuals.
In its comment letters, the SEC staff frequently observes that registrants do not comply with the
Item 407(h) disclosure requirements. For example, if a registrant discloses that it has an independent
chairman of the board and a separate principal executive officer, the SEC staff requests a disclosure of
why that leadership structure is the most appropriate for the registrant.

15

The process for collecting and organizing security holder communications, and similar or related activities, is not required to be
disclosed if the issuer’s process has been approved by a majority of the independent directors.


4-14


4.9

Item 404(a) of Regulation S-K requires registrants to describe transactions (both actual and proposed),
since the beginning of the registrant’s last fiscal year, in which the registrant is a participant, which
exceed $120,000, and in which any related person had or will have a direct or indirect material
interest.16 “Related persons” are those in the following categories at any time during the most recent
fiscal year: executive officers,17 directors,18 nominees for director, security holders known to own or
beneficially own more than 5% of any class of voting securities and members of their immediate families
(e.g., spouse, parents, step-parents, children, step-children, siblings, mothers- and fathers-in-law, sonsand daughters-in-law, brothers- and sisters-in-law, persons (other than tenants or employees) sharing the
household of a related person). “Transactions” include any financial transaction, arrangement or
relationship (including indebtedness or a guarantee of indebtedness) or any series of similar transactions,
arrangements or relationships.19
Required disclosures of such related person transactions include:
•

The related person’s name and relationship to the registrant

•

The nature of their interest in the transaction with the registrant, including their position with, or
ownership in, the entity that is a party to, or has an interest in, the transaction

•

The approximate dollar value of the transaction

•

The value of the related person’s interest in the transaction, determined without regard to the
amount of any profit or loss

The registrant also is required to disclose any other information regarding the related person transaction
that is material to investors in light of the transaction’s particular circumstances.
These disclosures are not necessary when the payment involved in the transaction is determined by
competitive bids or the transaction involves rendering services as a common contract carrier or public
utility, at rates fixed by law or governmental authority, or involves services as a bank depositary, transfer
agent, registrar or trustee. Generally, the details of other related person transactions (e.g., consulting or
lease agreements, purchases or sales of assets) that exceed $120,000 should be reviewed with legal
counsel to determine the required disclosure.

16

17

18

19

Instruction 6 to Item 404(a) of Regulation S-K provides limited exceptions whereby certain transactions are not deemed to create an
indirect material interest (e.g., when the interest arises only from the related person’s position as a director of another corporation
that is a party to the transaction; when the aggregate direct and indirect equity interests of all related persons is less than 10% in a
corporation or a limited partnership, in which no related person is a general partner, that is a party to the transaction).
Disclosure of compensation to an executive officer solely resulting from such officer’s employment relationship with the issuer
need not be provided under Item 404(a) if the compensation is reported under Item 402 of Regulation S-K. See Section 5 of this
publication for those executive compensation disclosure requirements. Also, if the executive officer is not an “immediate family
member” of a director or executive officer and his or her employment compensation would have been reported pursuant to
Item 402 of Regulation S-K if he or she were a named executive officer, then disclosure under Item 404(a) is not required if the
compensation has been approved by the compensation committee of the board of directors.
Disclosure of compensation to a director need not be provided under Item 404(a) if the compensation is reported under Item 402(k)
or 402(m) of Regulation S-K. See Section 5 of this publication for those director compensation disclosure requirements.
If the related person transaction involves a lease or other transaction requiring periodic payments or installments, the
computation of the dollar value involved in the transaction should include the aggregate amount of all periodic payments or
installments due on or after the beginning of the registrant’s last fiscal year, including any payments due during or at the
conclusion of the transaction.


4-15


For related person transactions that involve indebtedness,20 the registrant also must disclose the largest
aggregate principal amount outstanding during the year, the amount outstanding as of the latest
practical date, the interest rate and the amount of principal and interest paid during the year. For
purposes of the $120,000 disclosure threshold, a registrant should include the largest aggregate
amount of principal outstanding at any time since the beginning of the last fiscal year, as well as all
amounts of interest payable during the last fiscal year. These disclosures may be omitted if the amount
due from the related person was for purchases of goods and services subject to usual trade terms,
ordinary business travel and expense payments, or other transactions in the ordinary course of business.
Indebtedness of 5% beneficial owners and their immediate family members also need not be disclosed.
Note: Section 13 of the Exchange Act prohibits substantially all loans to any director or executive
officer by an issuer.

4.9.1

Review and approval of related person transactions
Item 404(b) of Regulation S-K requires registrants to describe their policies and procedures for the review,
approval or ratification of any related person transaction required to be disclosed under Item 404(a) of
Regulation S-K (as discussed above). Examples of items to be considered for disclosure include:
•

The types of transactions covered by the registrant’s policies and procedures

•

The standards the registrant applies under the policies and procedures

•

The persons on the board of directors or otherwise who are responsible for applying the policies and
procedures

•

A statement of whether the policies and procedures are written, and if not, how the policies and
procedures are evidenced

Registrants also are required to identify any related person transaction required to be reported under
Item 404(a) of Regulation S-K since the beginning of the registrant’s last fiscal year (other than those
that occurred prior to the time an individual became a “related person,” provided the transaction did not
continue after such time) if such policies and procedures did not require review, approval or ratification
or if the policies and procedures were not followed.

4.10

Promoters and control persons
Item 401(g) of Regulation S-K requires registrants that have not been subject to the reporting
requirements of Sections 13(a) or 15(d) of the Exchange Act for the 12 months immediately prior to the
filing of an annual report or proxy statement and that had a promoter21 at any time during the last five
years, to describe with respect to any promoter, the information required by Item 401(f) of Regulation S-K

20

21

If the lender is a bank, savings and loan association or broker-dealer extending credit, and the loans are not disclosed as non-accrual,
past due, restructured or potential problems, disclosure under Item 404(a) may consist of a statement (if true) that the loans:
• Were made in the ordinary course of business
• Were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for
comparable loans with persons not related to the lender
• Did not involve more than the normal risk of collectibility or present other unfavorable factors
Rule 12b-2 of the Exchange Act defines a promoter as (1) any person who, acting alone or in conjunction with one or more other
people, directly or indirectly takes initiative in founding and organizing the business of an issuer, or (2) any person who, in
connection with the founding and organizing the business of an issuer, directly or indirectly receives in consideration of services
or property, or both services and property, 10% or more of any class of securities of the issuer or 10% or more of the proceeds
from the sale of any class of such securities. (However, a person who receives such securities or proceeds either solely as
underwriting commissions or solely in consideration of property shall not be deemed a promoter if such person does not
otherwise take part in founding and organizing the enterprise.)


4-16


regarding the involvement of any promoter in certain legal proceedings that occurred during the past
10 years to the extent material to a voting or investment decision. Such registrants also must provide
this same information with respect to any control person. Item 401(f) of Regulation S-K requires the
disclosure of certain types of bankruptcy, criminal, injunctive or securities-related proceedings as well as
disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other selfregulatory organization.

4.11

Section 16 of the Exchange Act governs the reporting of stock transactions by “insiders” (e.g., officers,
directors and principal shareholders) and the recovery of “short-swing profits.” Item 7 of Schedule 14A
requires the disclosures set forth under Item 405 of Regulation S-K. Item 405 of Regulation S-K requires
disclosure of delinquent reports filed by insiders during the most recent fiscal year or prior fiscal years.
However, any instance of a delinquent report is only required to be disclosed once and is not required to
be reported in subsequent disclosures.
Registrants must disclose for each insider (1) the number of late reports, (2) the number of transactions
not reported on a timely basis and (3) any known failure to file a required Form. A known failure to file
would include, but not be limited to, a failure to file a Form 3, which is required of all insiders, and a
failure to file a Form 5, in the absence of a written representation by the insider that no such filing is
required.22 Registrants also must check the cover of Form 10-K if disclosure of delinquent filers pursuant
to Item 405 is not included in Form 10-K and will not be included, to the best of registrant’s knowledge,
in the definitive proxy or information statement.
The Section 16 rules can be read to imply that a registrant’s obligation only is to disclose information of
which it becomes aware upon its review of those insider reports, as well as Form 4. However, we
understand that the SEC staff expects registrants to disclose all known Section 16 reporting violations of
which it otherwise has knowledge. For example, knowledge of events requiring disclosure may be
obtained as a result of preparing disclosures pursuant to Item 403 of Regulation S-K in response to Item
6 of Schedule 14A and Item 12 of Form 10-K.
Registrants will not be liable for incorrect disclosure of Section 16 reporting violations if the information
disclosed is consistent with the information reported on Forms 3, 4, and 5 or amendments sent to the
registrant by the insider pursuant to Section 16. A registrant does not have an obligation to research or
make inquiry regarding delinquent filings. As noted above, the registrant may rely on a written statement
by the insider that a Form 5 filing was not required.
The Section 16 definition of “officer” is modeled after the definition of “executive officer” currently used
for other proxy statement disclosures and focuses on the functional responsibilities of the officer rather
than the officer’s title (see Section 5 of this publication for the definition of executive officer). For
purposes of determining whether a person is the beneficial owner of greater than 10% of a class of equity
security, the focus is on “voting power” or “investment power” regardless of whether there is a
monetary interest in the security. However, only transactions in those securities in which the insider has
a monetary interest are reported under Section 16. The rules also specify that ownership of derivative
securities (e.g., options) will be treated as functionally equivalent to ownership of the underlying securities.

22

If the registrant receives written representation from the insider that no Form 5 is required and the representation is maintained
for two years and available to the SEC upon request, the registrant need not report the insider as having failed to file a Form 5 for
that fiscal year.


4-17


To encourage appropriate reporting by insiders and avoid potentially embarrassing disclosures,
registrants may wish to coordinate with their insiders to develop and implement an effective system to
monitor compliance with Section 16 reporting. Basic insider reporting forms and requirements include
the following:
•

Form 3 is to be filed with the SEC within 10 days after a person becomes a director or officer or a
greater than 10% beneficial owner of a class of equity securities.

•

Form 4 must be filed within two business days following reportable changes. The SEC has created
exceptions for two narrowly defined types of transactions for which filing within the two-business
day deadline is not feasible. In these cases, if the insider does not control and cannot reasonably
be expected to know immediately the precise transaction date, the execution date is deemed to
be the later of the date the insider is actually notified of the transaction or the third business day
after execution.

•

Form 5 is to be filed no later than 45 days after the end of the issuer’s fiscal year. This form is used
to report transactions not required to be reported on an interim basis (e.g., gifts) and transactions or
holdings that were required to be reported previously, but were not (i.e., failures to file Forms 3 or 4).
A Form 5 is not required to be filed for a year if there were no transactions or holdings required to be
reported on that Form.

In addition to filing with the SEC, all three forms must be filed with the principal exchange on which the
class of equity security is listed and a duplicate copy must be sent to the issuer of the security. Generally,
questions about the scope of disclosure obligations with respect to Section 16 reporting violations should
be discussed with legal counsel.
The SEC final rule, Mandated Electronic Filing and Website Posting for Forms 3, 4 and 5, mandates
the electronic filing via EDGAR of all reports of “insiders” under Section 16(a) of the Exchange Act
(i.e., Forms 3, 4 and 5). The SEC also requires each issuer with a corporate website to post all insider
reports with respect to its equity securities by the end of the business day after the report’s filing.


4-18

5

Item 8 — Compensation of directors and
executive officers
The required proxy disclosures about the compensation of directors and executive officers are governed
by Item 402 of Regulation S-K. All elements of the Item 402 disclosures, except Item 402(t), are required
in proxy or information statements for a shareholders’ meeting at which directors will be elected or other
action will be taken on compensation matters involving directors, executive officers, or nominees
(e.g., adoption or amendment of bonus or profit sharing plans, pension or retirement plans, stock
compensation plans). These same elements of the Item 402 disclosures are always required under Item
11 of Part III of Form 10-K.
The following summarizes the requirements of Item 8 of Schedule 14A:
Disclosure Requirement of Item 8 of Schedule 14A


Regulation S-K Item

Compensation discussion and analysis


402 (b)

Summary compensation table


402 (c)

Grants of plan-based awards table


402 (d)

Narrative disclosures to the SCT and grants of plan-based
awards table


402 (e)

Outstanding equity awards at fiscal year-end table


402 (f)

Option exercises and stock vested table


402 (g)

Pension benefits table


402 (h)

Nonqualified deferred compensation table


402 (i)

Potential post-employment or change in control payments


402 (j)

Director compensation table


402 (k)

Smaller reporting company disclosures


402 (1) – (r)*

Disclosure of registrant’s compensation policies and
practices for risk management


402(s)

Golden parachute compensation

Yes (Part III – Item 11)

402(t)**

Board compensation committee report on executive
compensation

Yes (Part III — Item 11)***

407 (e)(5)

Disclosure of compensation committee interlocks and
insider participation


407 (e)(4)

* Information about smaller reporting companies is included in Section 9 of this publication.
** Item 402(t), Golden Parachute Compensation,1 is required only for a proxy or consent solicitation material for shareholders to
approve an acquisition, merger, consolidation or the proposed sale or other disposition of all or substantially all of a company’s
assets. Although Item 402(t) is not required in annual meeting proxy statements, companies may include disclosure under Item
402(t) voluntarily if they believe it would help shareholders understand their compensation programs. See Section 8 for further
discussion of 402(t).
*** Instruction 1 to Item 407(e)(5) of Regulation S-K provides that the compensation committee report is not deemed to constitute
“soliciting material” or a “filed” document and will not be deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except if the registrant decides to specifically incorporate it by reference.

1

SEC Release Nos. 33-9178 and 34-63768, Shareholder Approval of Executive Compensation and Golden Parachute Compensation.


5-1

5 Item 8 — Compensation of directors and executive officers

5.1

Overview
CD&A is required to provide a general overview of the material principles underlying the registrant’s
executive compensation policies and decisions, and the most important factors for analysis of those
policies and decisions.
Registrants also must present a Summary Compensation Table (SCT), which includes three years of
compensation data. The SCT is supplemented by a table about grants of plan-based awards and related
narrative disclosures providing a more detailed description of any material factors necessary to understand
the tabular disclosures. Additional disclosures are required about exercises and holdings of previously
awarded equity, post-employment compensation (including benefits from defined benefit plans and nonqualified defined contribution plans and other deferred compensation) and director compensation.
The following section explains these requirements. It is based on SEC proxy rule requirements,
interpretive guidance issued by the SEC and its staff and our experience helping clients comply with the
proxy rules.
This SEC staff interpretative guidance includes the SEC staff’s report, Staff Observations in the Review of
Executive Compensation Disclosure,2 issued in October 2007 (October 2007 Observations Report), which
provides valuable insight about the SEC staff’s expectations for executive compensation disclosures. The
report encourages public companies to review their executive compensation disclosures, and draft future
disclosures, in light of the principles and themes of the comments issued by the SEC staff. The SEC staff
continues to issue comments similar to those addressed in the October 2007 Observations Report.
The SEC staff’s comments sought more direct, specific, clear and understandable disclosure. The report
cites two principal themes:
•

CD&A should focus on clearly explaining how and why a company arrives at specific executive
compensation decisions and policies. CD&A should help the reader understand the basis and the
context for granting different types and amounts of executive compensation.

•

Executive compensation disclosures should be presented in plain English and should be organized in
a way that helps the reader understand a company’s disclosure. The SEC staff encourages
companies to make their disclosure more useful and meaningful by providing an executive summary
or creating tables or charts tailored to their particular executive compensation program.
Note: During the 2012 proxy season, many companies used the proxy statement as a strategic tool to
strengthen board communications with shareholders, effectively enhancing the transparency of their
corporate governance practices and policies. Most companies now include an executive summary at
the beginning of the CD&A section of the proxy statement. These summaries range from a brief
overview of prior-year performance to a comprehensive snapshot of the entire pay program, and
many companies highlight compensation changes and/or engagement that occurred with shareholders
about the results of the prior year SOP vote.

2

The Division of Corporation Finance staff report is available on the SEC’s website at http://www.sec.gov/divisions/corpfin/
guidance/execcompdisclosure.htm.


5-2


5.2

Definition of executive officer
Rule 3b-7 of the Exchange Act defines a registrant’s executive officer as “its president, any vice president
of the registrant in charge of a principal business unit, division or function (such as sales, administration or
finance), any other officer who performs a policy making function or any other person who performs
similar policy making functions for the registrant. Executive officers of subsidiaries may be deemed
executive officers of the registrant if they perform such policy making functions for the registrant.”

5.3

Definition of named executive officers
Information generally is required only about the NEOs, which include: (1) the registrant’s principal
executive officer (PEO) and principal financial officer (PFO) or any individual(s) acting in those capacities
at any time during the year,3 regardless of compensation level; (2) the registrant’s three highest paid
executive officers, other than the PEO and PFO, who were serving as executive officers at the end of the
last completed fiscal year and (3) up to two additional executive officers who would have met the
requirements in (2), but for the fact that the individual was not serving as an executive officer of the
registrant at the end of the last completed fiscal year.
Determination of the registrant’s NEOs is based on total compensation for the most recent fiscal year as
determined for purposes of disclosure in the SCT, with the exception of the change in pension value and
non-qualified deferred compensation earnings amounts reported in column (h) of the SCT (see below).
However, no disclosure is required for any executive, other than the PEO and PFO, whose total
compensation does not exceed $100,000.
In determining the NEOs to include in the SCT, an individual’s status during the fiscal year governs. If an
executive officer at year-end is determined to be an NEO for the first time, disclosure should be provided
of the NEO’s compensation for the full year including any compensation during the current year when the
individual was not an executive officer. However, that NEO’s total compensation is not required to be
reported for any periods presented in which the NEO was not an executive officer. The SCT generally
must include information for the current reporting year and the two preceding years, or such shorter
period that the company was publicly traded.
For any NEOs that terminated employment with the registrant during the year, the individual’s
information should be disclosed for all years for which the individual was an NEO, including the portion of
the current year before termination. No disclosure is required for “former NEOs” in years following the
year during which they were terminated.

5.4

Definition of compensation
Disclosure is required for all plan and non-plan compensation awarded to, earned by or paid to the NEOs
for all services rendered in all capacities to the registrant and its subsidiaries. Amounts reported as
compensation in one fiscal year should not be reported as compensation for a subsequent fiscal year
(e.g., bonuses earned in one fiscal year and paid in the following fiscal year). The nature of the
compensation generally has no bearing on the application of the disclosure requirements. However,
registrants may omit information about group life, health, hospitalization, medical reimbursement and
disability plans that do not discriminate in scope, terms, or operation in favor of executive officers or
directors of the registrant, and that are generally available to all salaried employees.4

3

Because the SEC requires disclosure for any person who acted as PEO or PFO during the year, more than one PEO and PFO may be
reported in the proxy statement. See Regulation S-K C&DI 117.06 at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.

4



5-3


5.5

Executive compensation disclosures
Executive compensation disclosures should begin with the narrative disclosure, CD&A, which should
address in one place the registrant-specific factors affecting both the separate elements of executive
compensation and executive compensation as a whole.
In addition, two tables are required that present information on compensation paid to or awarded to the
NEOs:5 (1) Summary Compensation and (2) Grants of Plan-Based Awards. Four additional tables also are
required for NEO compensation: (1) Outstanding Equity Awards at Fiscal Year-End, (2) Option Exercises
and Stock Vested, (3) Pension Benefits and (4) Nonqualified Deferred Compensation. The SCT includes a
three-year comparison of compensation; however, the remaining tables only present information with
respect to the latest fiscal year. The SEC staff has asked registrants in comment letters to relocate any
tables placed before CD&A so that they follow CD&A.
Generally, the rules do not permit registrants to deviate from the formatted tabular presentations
required for the six tables noted above, except to omit any column or table otherwise not applicable. If
registrants believe additional disclosure is needed to prevent the required tabular information from being
misleading, such information should be presented in a narrative footnote to the appropriate table.
The SEC staff has said that charts, tables and graphs tailored to a registrant’s specific circumstances may
be helpful in addition to the required tables. However, the SEC staff requests changes when additional
tables are found to be confusing, include calculations inconsistent with the requirements of Item 402 of
Regulation S-K or overshadow or detract from the required tables. The SEC also asks some registrants to
change the titles of supplemental tables that too closely resembled the titles of required tables and to
explain any differences between compensation amounts presented in the supplemental and required
tables. In some instances, the SEC staff may ask registrants to specifically state that their supplemental
tables were not a substitute for the required tabular disclosure.

5.5.1

CD&A (Item 402(b) of Regulation S-K) must provide, in plain English and without boilerplate or repetitive
disclosures, context for the registrant’s other compensation disclosures and explain the objectives and
material elements of the compensation for NEOs by answering the following questions:
•

What are the objectives of the registrant’s compensation programs?

•

What is the compensation program designed to reward?

•

What is each element of compensation?

•

Why does the registrant choose to pay each element?

•

How does the registrant determine the amount (and, if applicable, the formula) for each element?

•

How does each element, and the registrant’s decisions about that element, fit into the registrant’s
overall compensation objectives and affect decisions about other elements?

•

Whether, and if so how, the registrant has considered the results of the previous shareholder say-onpay votes in determining compensation policies?

5

The SEC’s final rule, Proxy Disclosure Enhancements (see SEC Release No. 33-9089), requires disclosure in the SCT and Director
Compensation Table (DCT) of the aggregate grant date fair value of stock and option awards.


5-4


While the CD&A disclosure requirements are principles based, their scope is intended to be comprehensive,
incorporating material elements of both in-service and post-termination compensation. The CD&A
narrative should focus on the most important factors relevant to an understanding and analysis of the
registrant’s compensation policies and decisions. While CD&A should address compensation for the most
recently completed fiscal year, an instruction to Item 402(b) of Regulation S-K directs that CD&A also
should cover actions taken on executive compensation after the registrant’s last fiscal year-end.
Subsequent executive compensation changes that might require discussion include: (1) the adoption or
implementation of new or modified programs and policies or (2) specific decisions that were made after
year-end that could affect a fair understanding of each NEO’s compensation for the last fiscal year.6
Item 402(b)(2) of Regulation S-K provides a lengthy illustrative list of matters that might be appropriate
for inclusion in CD&A, including:
•

Policies for allocating between compensation paid currently and on a longer-term basis

•

Policies for allocating between cash and non-cash compensation, and among different forms of noncash compensation

•

How the determination is made about when awards are granted, including awards of equity-based
compensation such as options

•

The specific aspects of corporate performance that are taken into account in setting compensation
policies and making compensation decisions

•

How specific forms of compensation are structured and implemented to reflect aspects of the
registrant’s performance and the executive’s individual performance, including whether discretion
can be or has been exercised (e.g., to award compensation without attainment of the relevant
performance goals, to increase the size of an award), instances of such discretion and how such
discretion applied to one or more specified NEOs or to some or all of the compensation subject to the
relevant performance goal(s)

•

Policies and decisions about the adjustment or recovery of awards or payments if the relevant
performance measures on which they are based are restated or otherwise adjusted in a manner that
would reduce the size of an award or payment

•

How compensation or amounts realizable from prior compensation are considered in setting other
elements of compensation

•

The effect of accounting and tax treatments of a particular form of compensation

•

The registrant’s equity or other security ownership requirements or guidelines for executives
(specifying applicable amounts and forms of ownership), and any registrant policies about the ability
of executives to hedge the economic risk of such ownership

6

Regulation S-K C&DI 118.07 reinforces that CD&A is required to address only executive compensation for the company’s most
recent fiscal year and need not discuss compensation (or related performance targets) to be paid in the current or future years.
Although Instruction 2 to Item 402(b) provides that the CD&A also should cover actions about executive compensation that were
taken after the registrant’s last fiscal year’s end, such disclosure requirement is limited to those actions or steps that could
“affect a fair understanding of the named executive officer’s compensation for the last fiscal year.” Regulation S-K C&DI 118.07
is available at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.


5-5


•

Whether the registrant engaged in any benchmarking7 of total compensation or any material
element of compensation, and, if so, what benchmark was used and, if applicable, its components
(including component companies)8

If the compensation policies and decisions for individual named executives vary materially, CD&A should
provide sufficient information for investors to understand the material differences, including a discussion
of the policies and decisions applicable to an individual executive officer, if necessary.
Registrants should remember that CD&A is treated as “filed” information subject to the civil liability
provisions of Section 18 of the Exchange Act for making false or misleading statements in reports filed
with the SEC. If CD&A and any of the other disclosure about executive officer and director compensation
are included or incorporated by reference into a periodic report filed under the Exchange Act, such as a
Form 10-K, the disclosure is covered by the certifications that the principal executive officer and
principal financial officer are required to make in such periodic reports.9
CD&A is a focus area of the SEC staff and often a subject of comment. The SEC staff has asked
companies to enhance their analyses of compensation policies and discussions, including providing more
insight into how they arrived at the particular levels and forms of compensation that they chose to award
to their named executive officers.
In a speech,10 John White, the former Director of the SEC’s Division of Corporation Finance, elaborated,
“Far too often, meaningful analysis is missing — this is the biggest shortcoming of the first-year
disclosures. Stated simply — Where’s the analysis? A good starting point, and a representative example,
is disclosure of compensation philosophies and decision-making processes. We saw a great deal of detail
this year, but what was missing was a discussion of how and why those philosophies and processes
resulted in the numbers the company presented in its tabular disclosure. There also was a great deal of
detail on individual compensation components, but little discussion of how the amounts paid or awarded
under each compensation element — and how the total compensation delivered from all these elements
(what some refer to as wealth accumulation) — affected the decisions that companies made regarding
amounts paid or awarded under other compensation elements. That’s missing analysis.”

5.5.1.1

Performance targets
Item 402(b) of Regulation S-K provides a principles-based framework for disclosing the use of individual or
corporate performance targets when they are material elements of a company’s compensation policies
and decisions. These targets are often the focus of SEC staff reviews. The SEC staff has said that
companies frequently allude to using corporate or individual performance targets, but do not explain
exactly what the targets were and how they were considered when making compensation decisions.

7

8

9

10

Benchmarking generally entails using compensation data about other companies as a reference point on which, either wholly or in
part, to base, justify or provide a framework for a compensation decision. It would not include a situation in which a company reviews
or considers a broad-based third-party survey for a more general purpose, such as to obtain a general understanding of current
compensation practices. See Regulation S-K C&DI 118.05 at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
Benchmarking disclosures are a source of frequent SEC staff comment. The SEC staff asks registrants to provide a more
detailed explanation of how they used comparative information and how that comparison affected compensation decisions. In
addition, when a registrant disclosed it had benchmarked its compensation to that of its peers, but did not identify the peer group
used, the SEC staff asks the registrant to identify which companies it had benchmarked against, as well as the compensation
components used in that comparison.
Exchange Act Rules 13a-14 and 15d-14, promulgated under Section 302 of the Sarbanes-Oxley Act of 2002, require each report
filed on Form 10-Q, Form 10-K, Form 20-F or Form 40-F to include certifications, in the exact form specified, signed (separately)
by the registrant’s principal executive officer and principal financial officer, or persons performing similar functions.
The 9 October 2007 speech of John White, Where’s the Analysis?, is available at
http://www.sec.gov/news/speech/2007/spch100907jww.htm.


5-6


Instruction 4 to Item 402(b) of Regulation S-K clarifies that “registrants are not required to disclose
target levels with respect to specific quantitative or qualitative performance-related factors considered
by the compensation committee or the board of directors, or any other factors or criteria involving
confidential trade secrets or confidential commercial or financial information, the disclosure of which
would result in competitive harm for the registrant.” However, when relying on this instruction, the
registrant must discuss how difficult or likely it will be for the executive or registrant to achieve the
undisclosed target levels or other factors.
In its comment letters, the SEC staff asks registrants that did not disclose their performance targets to
either (1) disclose the targets or (2) demonstrate to the SEC staff how disclosure of such targets could
cause competitive harm. If a registrant discusses the difficultly of achieving undisclosed targets, the SEC
staff often seeks more specific disclosure to enhance investor understanding.
Regulation S-K C&DI 118.0411 addresses how a company should determine whether it may omit
disclosure of performance target levels under Instruction 4 to Item 402(b). The SEC staff stated that a
company should begin its analysis of whether it is required to disclose performance targets by
determining the materiality of the performance target in the context of the company’s executive
compensation policies or decisions. If performance targets are not material in this context, the SEC staff
stated that a company is not required to disclose the performance targets. When performance targets
are a material element of a company’s executive compensation policies or decisions, the SEC staff stated
that a company may omit targets involving confidential trade secrets or confidential commercial or
financial information only if their disclosure would result in competitive harm. A company should use the
same standard for evaluating whether target levels (and other factors or criteria) may be omitted as it
would use when making a confidential treatment request under Securities Act Rule 406 or Exchange Act
Rule 24b-2. However, no confidential treatment request is required to be submitted for the omission of a
performance target level or other factors or criteria.
To reach a conclusion that disclosure would result in competitive harm, the SEC staff stated that a
company must undertake a competitive harm analysis taking into account its specific facts and
circumstances and the nature of the performance targets. In the context of the company’s industry and
competitive environment, the company must analyze whether a competitor or contractual counterparty
could extract information from the disclosure of performance targets about the company’s business or
business strategy that the competitor or counterparty could use to the company’s detriment.
The SEC staff has stated that it is often more difficult for companies to persuade the SEC staff that
disclosure of performance targets will result in competitive harm after the company has disclosed the
amounts. This is especially true for targets that are tied to company-wide financial results that are
publicly reported (e.g., targets tied to company-wide earnings per share). The SEC staff commented that
it has not seen persuasive analyses explaining how competitors could compile sufficiently specific
information about a company’s future operations and strategy from the disclosure of these types of
targets to cause the company harm. The SEC staff has stated that absent highly unusual circumstances,
companies should plan to disclose these kinds of performance targets if material to their compensation
policies and decisions.
The SEC staff also has stated that when a company concludes that it may omit a performance target
because disclosure would cause it competitive harm, it must disclose with “meaningful specificity” how
difficult or likely it would be for the company or executive to achieve the undisclosed target. A statement
that the target is intended to be “challenging” is insufficient absent more detailed information. Rather, a
company should provide support for the level of difficulty it asserts (e.g., a discussion of the correlation
between historical and future achievement of the relevant performance metric).

11



5-7


The SEC staff also has reminded registrants to disclose how to calculate non-GAAP financial performance
targets (e.g., shareholder return) and to consider whether a discussion of prior year performance targets
would be helpful to investor understanding.12 Additionally, Instruction 2 to Item 402(b) of Regulation S-K
states, “Moreover, in some situations it may be necessary to discuss prior years in order to give context
to the disclosure provided.”

5.5.1.2

Enhanced disclosure of option grants
Additional disclosures are required about company programs, plans or practices for the granting of
options to executives, including in particular the timing of option grants in coordination with the release
of material non-public information and the selection of exercise prices that differ from the underlying
stock’s closing price on the grant date.
CD&A also requires enhanced narrative disclosure about option grants to executives. Companies must
analyze and discuss, as appropriate, material information such as the reasons a company selects
particular grant dates for awards or the methods a company uses to select the terms of awards, such as
the exercise prices of stock options. With regard to the timing of stock options in particular, the SEC
expects CD&A to address the following:
•

Does the company have any program, plan or practice13 to time option grants to its executives in
coordination with the release of material non-public information?14

•

How does any program, plan or practice for time option grants to executives compare to the company’s
program, plan or practice, if any, with regard to option grants to employees more generally?

•

What was the role of the compensation committee in approving and administering such a program,
plan or practice? How did the board of directors or compensation committee take such information
into account when determining whether, and in what amount, to make those grants? Did the
compensation committee delegate any aspect of the actual administration of a program, plan, or
practice to any other persons?

•

What was the role of executive officers in the company’s program, plan or practice of option timing?

•

Does the company set the grant date of its stock option grants to new executives in coordination with
the release of material non-public information?

•

Does the company plan to time, or has it timed, its release of material non-public information for the
purpose of affecting the value of executive compensation?

12

13

14

Other than in the context of “target level” disclosures pursuant to Item 402(b) of Regulation S-K, non-GAAP financial measures
included in proxy statements are subject to the requirements of Regulation G and Item 10(e) of Regulation S-K. The SEC staff will
not object if a registrant includes the required GAAP reconciliation and other disclosures by including a prominent crossreference to either an annex to the proxy statement or to the relevant pages of the Form 10-K that includes such disclosures.
See Regulation S-K C&DI 118.08 at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
When a registrant has a program, plan or practice of timing option grants, CD&A also should disclose that the board of directors or
compensation committee may grant options at times when the board or committee is in possession of material non-public information.
Disclosure also is required if a registrant has not previously disclosed a program, plan or practice of timing option grants, but has
since adopted such a program, plan or practice.


5-8


5.5.2

Risk and compensation policies and practices
Item 402(s)15 of Regulation S-K requires a company to disclose its broader compensation policies and
actual compensation practices for all employees, including non-executive officers, if risks arising from
those compensation policies or practices are “reasonably likely to have a material adverse effect on
the company.”
These disclosures are provided outside the company’s CD&A because their scope goes beyond the
named executive officers to consider the company’s broader compensation policies and practices for
all employees. If risk considerations are a material aspect of the company’s compensation policies or
decisions for its named executive officers, the company is required to discuss those considerations as
part of its CD&A.
Situations requiring disclosure under Item 402(s) of Regulation S-K vary depending on the particular
company and its compensation programs. However, the SEC’s Proxy Disclosure Enhancements rule
release16 identifies situations that could potentially trigger further discussion because they might create
material risks to a company that otherwise would not be apparent in a discussion focused solely on
executive compensation policies. These situations include compensation policies and practices:
•

At a business unit of a company that represents a significant portion of the company’s risk profile

•

At a business unit with compensation structured significantly differently than other business units
within the company

•

At business units that are significantly more profitable than others within the company

•

At business units for which compensation expense is a significant percentage of the unit’s revenues

•

That vary significantly from the overall risk and reward structure of the company

Item 402(s) provides the following examples of the issues that a company might need to address. The
level of detail required depends on a company’s particular facts and circumstances.
•

The general design philosophy of a company’s compensation policies for employees whose behavior
would be most affected by the incentives established by the policies

•

A company’s risk assessment or incentive considerations, if any, in structuring its compensation
policies or in awarding and paying compensation

•

How a company’s compensation policies relate to the recognition of risks resulting from the actions
of employees in both the short term and long term

•

A company’s policies about adjustments to its compensation programs to address changes in its risk
profile

•

Material adjustments a company has made to its compensation policies or practices as a result of
changes in its risk profile

•

The extent to which a company monitors its compensation policies to determine whether its risk
management objectives are being met with respect to incentivizing its employees

The SEC staff frequently asks companies with no 402(s) disclosures to explain their basis for concluding
that disclosure was not necessary and describe the process undertaken to reach that conclusion.

15

Smaller reporting companies are exempt from the disclosure requirements of Item 402(s) of Regulation S-K.

16

SEC Release No. 33-9089, Proxy Disclosure Enhancements.


5-9


5.5.3

Summary compensation table
The SCT (Item 402(c) of Regulation S-K) is intended to provide a comprehensive overview of the
registrant’s executive pay practices.

5.5.4

Summary compensation table for 20X2, 20X1 and 20X0
Name
and
principal
position
(a)

Year
(b)

PEO

20X2
20X1
20X0

B

20X2
20X1
20X0

C

Total
($)
(j)

20X2
20X1
20X0

A

All other
compensation
($)
(i)

20X2
20X1
20X0

PFO

Non-equity
Stock Option incentive plan
Salary Bonus awards awards compensation
($)
($)
($)
($)
($)
(c)
(d)
(e)
(f)
(g)

Change in pension
value and
nonqualified
deferred
compensation
earnings ($)
(h)

20X2
20X1
20X0

The SCT requires disclosure of the following types of compensation for each NEO for a three-year period:
Salary and bonus — Columns (c) and (d), the salary and bonus columns respectively, must reflect the total
salary and bonus amounts earned by each NEO during the respective year. If the salary or bonus amounts
for the most recent fiscal year cannot be calculated as of the most recent practicable date, a footnote
must disclose that the amount of salary or bonus is not calculable and provide the date that the amount
of salary or bonus is expected to be determined. Such amount, when finally determined, must be timely
disclosed in a filing under Item 5.02(f) of Form 8-K. Any amounts deferred, whether pursuant to a plan
established under Section 401(k) of the Internal Revenue Code, or otherwise, should be included in the
appropriate column for the fiscal year in which earned.17
As discussed below, the amount deferred also generally would be reflected in the Nonqualified Deferred
Compensation table. Any amount of salary or bonus forgone at the election of the NEO in exchange for
stock, equity-based or other forms of non-cash compensation should be included in the respective Salary
or Bonus column [Instruction 2 to Item 402(c)(2)(iii) and (iv) of Regulation S-K]. A footnote to the
respective column(s) must disclose the receipt of non-cash compensation in lieu of salary or bonus and
refer to the Grants of Plan-Based Awards table (discussed below) in which the stock, option or non-equity
incentive plan award elected by the NEO would be reported.

17

Instruction 4 to Item 402(c) of Regulation S-K directs that any amounts deferred still must be reported in the respective column
in the SCT. This applies to all deferrals, not just deferrals made at the election of the NEO or the deferral of salary and bonus.


5-10


Stock awards and option awards — Column (e), the stock awards column, must disclose the dollar value of
stock-related awards (other than “option awards” that are disclosed in a separate column, as discussed
below) that derive their value from the registrant’s equity securities or that permit settlement by issuance
of the registrant’s equity securities. “Stock” is defined as instruments such as common stock, restricted
stock, restricted stock units, phantom stock, phantom stock units, common stock equivalent units or any
other similar instruments that do not have option-like features [Item 402(a)(6)(i) of Regulation S-K].
The option awards column must disclose the dollar value of option-related awards. The term “option” is
defined as instruments such as stock options, stock appreciation rights (SARs) and similar instruments
that have option-like features [Item 402(a)(6)(i) of Regulation S-K].
The dollar amount reported for stock awards and option awards for the SCT should be the aggregate
grant date fair value of awards granted during the year computed for financial statement reporting
purposes in accordance with ASC 718.18 When a service inception date as defined in ASC 718 precedes
the grant date, it may be appropriate to report the value measured as of the service inception date if
reporting the award in this manner better reflects the compensation committee’s decision to establish
the award arrangement.19
For stock and option awards containing a performance-based vesting condition, the value reported in the
SCT should reflect the value of the award at the grant date based on the probable outcome of the
performance conditions. A company must report the grant-date fair value for stock and stock option
awards subject to performance conditions based on the probable outcome of the performance conditions
as of the grant date, even if the actual outcome is known when disclosed.20 This amount should be
consistent with the estimate of aggregate compensation cost to be recognized over the service period
determined as of the grant date under ASC 718, excluding the effect of estimated forfeitures. The value
of the award at the grant date, assuming that the highest level of performance conditions will be
achieved should be included in a footnote to the table (assuming an amount less than the maximum was
included in the table).
If the exercise price of stock and option awards has been adjusted during the last completed fiscal year
through an amendment, cancellation, replacement or has otherwise been materially modified, the
incremental fair value of the modified award, computed as of the repricing or modification date in
accordance with ASC 718, should be reported in column (f) of the SCT.
The all other compensation column in the SCT also is required to report the payment of any dividends or
earnings on stock awards and option awards but only if such dividends or earnings were not considered in
the grant date fair value computation for those awards under ASC 718. For example, the fair value of a
share of stock includes the present value of dividends expected to be paid in the future. Therefore, if
nonvested stock granted to an officer entitles the officer to dividends paid during the vesting period, and
the fair value of the award is based on the quoted market price of the stock (which considers the expected
dividends), then no disclosure would be required in the SCT when those dividends are actually paid.
Non-equity incentive plan compensation — Column (g) of the SCT must report the dollar value of all other
amounts earned by the NEO during the fiscal year pursuant to non-equity incentive plans of the registrant.
This column reports awards only if the incentive plan’s relevant performance measure is not based on the
price of the registrant’s equity securities or the award may not be settled by issuance of the registrant’s

18

Instruction 1 to Item 402(c)(2)(v) and (vi) of Regulation S-K requires a footnote to the stock and option award columns disclosing all
assumptions made in the valuation, which may be accomplished by referring to a discussion of those assumptions in the notes to the
registrant’s financial statements or in management’s discussion and analysis of financial condition and results of operations (MD&A).

19


20



5-11


equity securities and which therefore are not within the scope of ASC 718. Performance-based
compensation under an incentive plan that is not indexed to or settled in the registrant’s stock will be
disclosed in this column in the SCT in the year when the plan’s specified performance criteria are satisfied
and the compensation is earned (whether or not payment is actually made in that year).21
As discussed further below, the grant of such an award would be initially disclosed in the supplemental
Grants of Plan-Based Awards table in the year of grant, which might be one or more years before disclosure
is made in this column of the SCT (in contrast to stock and option awards which are always reported in the
SCT in the year of grant). Once non-equity incentive plan compensation has been earned and disclosed in
column (g) of the SCT, no further disclosure is required when payment is actually made to the NEO.
Earnings on outstanding awards under non-equity incentive plans also must be included in the Non-Equity
Incentive Plan Compensation column of the SCT and identified and quantified in a footnote to the table.
Footnote disclosure also is required about whether such earnings were paid during the fiscal year,
payable during the year but deferred, or payable by their terms at a later date.
Change in pension value and nonqualified deferred compensation earnings — Column (h) of the SCT must
disclose the sum of: (1) the aggregate increase in actuarial present value of each NEO’s accumulated
benefit under all defined benefit and actuarial plans (including supplemental plans) during the year and
(2) any earnings on nonqualified deferred compensation. Footnote identification and quantification of the
separate amounts attributable to (1) and (2) above are required.
•

Change in pension value — The amount that must be disclosed in this column is the aggregate annual
increase in the actuarial present value of each NEO’s accumulated benefit under all such plans,
computed using the same assumptions and pension plan measurement date used for financial
reporting purposes under generally accepted accounting principles in the registrant’s audited
financial statements. If the aggregate amount attributable to all defined benefit and actuarial plans
for any NEO is a negative number, that amount should be disclosed by footnote but should not be
reflected in the amount reported in column (h).

•

Nonqualified deferred compensation earnings — For compensation that has been deferred on a basis
that is not tax-qualified (including under non-qualified deferred contribution plans), column (h) of the
SCT must disclose any earnings on such deferred compensation if those earnings are above-market
or preferential.22 Footnote or narrative disclosure may be provided explaining the registrant’s
criteria for determining any portion considered to be above-market or preferential. If the ultimate
interest rates vary depending on future conditions, such as a minimum period of continued service,
registrants must calculate the amount of above-market or preferential earnings assuming
satisfaction of all conditions to the NEO receiving the highest rate.

This column is included in the sum of total compensation reflected in the total column, column (j) of the
SCT, but it is ignored for determining the NEOs.
All other compensation — All other compensation to an NEO during the fiscal year that has not been
reported in another column of the SCT must be disclosed in the all other compensation column (column
(i)). The only exception, as discussed below, is if perquisites and other personal benefits for the NEO
aggregated less than $10,000 during the year, in which case disclosure of such amount may be omitted.

21

22

Disclosure is required in the year earned even if the award remains subject to forfeiture conditions. The SEC encourages registrants to
use the related narrative section to discuss material award features that are not reflected in the tabular disclosures, including, for
example, forfeiture provisions related to amounts reported in the SCT.
The above-market or preferential portion is, for interest, the extent to which such interest exceeds 120% of the applicable federal
long-term rate and, for dividends, the extent to which such dividends exceed the dividend rate on the company’s common stock
[Instruction 2 to Item 402(c)(2)(viii) of Regulation S-K].


5-12


Each item of compensation included in the all other compensation column for the last fiscal year that
exceeds $10,000 for each NEO must be separately identified and quantified in a footnote to the table.
Conversely, any individual item of compensation that is less than $10,000 for each NEO will be included
in the all other compensation column but does not require separate identification and quantification in a
footnote to the table.
Items to be disclosed under all other compensation for each NEO include:
•

Perquisites and other personal benefits — All perquisites and other personal benefits must be
included in the total of all other compensation unless the aggregate amount of such benefits for the
fiscal year for the respective NEO is less than $10,000. If the total value of all perquisites and other
personal benefits is $10,000 or more for an NEO, each perquisite or other personal benefit,
regardless of its amount, must be identified by type for the respective NEO. Further, a footnote to
the SCT is required to identify and quantify each individual perquisite or other personal benefit for
the last fiscal year that exceeds the greater of $25,000 or 10% of the total amount of perquisites
and other personal benefits for the respective NEO. In each such case, the footnote must identify the
particular nature of the benefit received.
Item 402(c) of Regulation S-K does not identify specific benefits that represent perquisites and other
personal benefits based on bright line tests. Instead, the SEC has set forth interpretive guidance that
should be considered, among other factors, in determining whether an item is a perquisite or other
personal benefit. In particular, “An item is not a perquisite or personal benefit if it is integrally and
directly related to the performance of the executive’s duties,”23 but “otherwise, an item is a
perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect,
without regard to whether it may be provided for some business reason or for the convenience of the
company, unless it is generally available on a non-discriminatory basis to all employees.”24
Perquisites and other personal benefits should be valued on the basis of the aggregate incremental
cost to the registrant and its subsidiaries, not the amount attributed to such benefits for federal
income tax purposes. Footnote disclosure must be made of the methodology used for computing the
aggregate incremental cost for the perquisites [Instruction 4 to Item 402(c)(2)(ix) of Regulation S-K].

•

Gross-ups — All gross-ups or other amounts reimbursed during the fiscal year for the payment of
taxes. Notably, reimbursements of taxes with respect to perquisites or other personal benefits are
required to be included under all other compensation, subject to separate identification and
quantification as tax reimbursements, even if the associated perquisites and other personal benefits
are not required to be separately identified and quantified because in aggregate they fell below the
$10,000 de minimis threshold discussed above.

23

The concept of “integrally and directly related” to job performance is “narrow.” The fact that the registrant may have determined
that an expense is an “ordinary” or “necessary” business expense for tax or other purposes should not affect the disclosure
determination. However, if an item is integrally and directly related to the performance of an executive’s duties, there is no
requirement to disclose any incremental cost over a less expensive alternative (e.g., it is not necessary to disclose the cost
differential between renting a mid-sized car over a compact car used for business travel).
The SEC described several examples of items requiring disclosure as perquisites or personal benefits including: club memberships not
used exclusively for business entertainment purposes; personal financial or tax advice; personal travel using vehicles owned or leased
by the registrant; personal travel otherwise financed by the registrant; housing and other living expenses (including relocation
assistance and payments for the executive to stay at his or her personal residence); security provided at a personal residence or
during personal travel; commuting expenses (whether or not for the registrant’s convenience or benefit); and discounts on the
registrant’s products or services not generally available to employees on a non-discriminatory basis.

24


5-13


•

Securities purchased at a discount — The grant date fair value computed in accordance with ASC 718
for any security of the registrant or its subsidiaries purchased from the registrant or its subsidiaries
(whether through deferral of salary or bonus, or otherwise) at a discount from the market price of
such security at the date of purchase, unless that discount is generally available either to all security
holders or to all salaried employees of the registrant.

•

Termination or change in control — The amount paid to (or for which payment has become due to)
any NEO pursuant to a plan or arrangement in connection with any termination or change in control
of the registrant.25 Termination-related compensation includes, without limitation, any compensation
for retirement, resignation, severance or constructive termination of employment. (Amounts
potentially payable under post-employment benefits, but for which payment has not become due, are
covered by separate disclosure requirements described in the section titled Post-employment
compensation below.)

•

Company contributions to defined contribution plans — All registrant contributions or other allocations
to vested and unvested defined contribution plans, including 401(k) plans, during the fiscal year.

•

Insurance premiums — The dollar value of any insurance premiums paid by, or on behalf of, the
registrant during the fiscal year with respect to life insurance26 for the benefit of the NEO.

•

Earnings on stock or option awards — The dollar value of any dividends or other earnings paid on
stock or option awards when such earnings were not considered in the grant date fair value
computation of those awards under ASC 718.

Total — Column j, the total compensation column in the SCT, representing the sum total of columns (c)
through (i).

5.5.5

A supplemental table, Grants of Plan-Based Awards (Item 402(d) of Regulation S-K), must include
information about each grant made to an NEO in the last completed fiscal year under any plan,27
including awards that subsequently have been transferred.

25

26

27

For any compensation as a result of a business combination (other than pursuant to a plan or arrangement in connection with any
termination of employment or change-in-control), such as a retention bonus, acceleration of option or stock vesting periods, or
performance-based compensation intended to serve as an incentive for NEOs to acquire other companies or enter into a merger
agreement, disclosure is required in the appropriate SCT column and in the other tables or narrative disclosure that require the
particular element of compensation to be disclosed. However, if a company assumes another entity’s outstanding options in a
business combination without modifying them (other than to reflect the merger exchange ratio), the acquirer would not include any
aquiree options granted in total compensation for the purposes of determining its NEOs nor report the acquiree company options in
its SCT and Grants of Plan-Based Awards Table in the year of the acquisition. Because the acquiree options become the acquirer’s
options, the acquirer should report them in its Outstanding Equity Awards at Fiscal Year-End Table and Options Exercised and Stock
Vested Table, as applicable, for the acquisition year and subsequent years, with footnote disclosure describing the assumption of
the acquiree options. Regulation S-K C&DI 119.27 is available at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
Registrants are allowed to omit information about group life, health, hospitalization or medical reimbursement plans that do not
discriminate in scope, terms or operation in favor of executive officers or directors of the registrant and that are generally
available to all salaried employees [Item 402(a)(6)(ii) of Regulation S-K].
“Plan” is defined in Item 402(a)(6)(ii) of Regulation S-K as including “any plan, contract, authorization, or arrangement, whether
or not set forth in any formal document, pursuant to which cash, securities, similar instruments, or any other property may be
received. A plan may be limited to one person.”


5-14


5.5.5.1

Grants of plan-based awards for 20X2
Estimated future payouts
under non-equity incentive
plan awards

Estimated future payouts
under equity incentive
plan awards

All other
stock
awards:
number of
shares of
Grant Threshold Target Maximum Threshold Target Maximum stock or
($)
($)
($)
(#)
(#)
(#)
units (#)
Name date
(a)
(b)
(c)28
(d)
(e)
(f)
(g)
(h)
(i)

All other
option
awards:
number of
securities
underlying
options
(#)
(j)

Exercise
or base
price of
option
awards
($/sh)
(k)

Grant
date fair
value of
stock
and
option
awards
(l)

PEO
PFO
A
B
C

Disclosure in this table complements the SCT by disclosing the number of shares of stock or units
comprising or underlying the award, the terms of the grants made during the year, including estimated
future payouts for both equity incentive plans and non-equity incentive plans,29 and the grant date fair
value of stock and option awards. The table requires separate disclosures for each grant (e.g., a grantby-grant basis), including the identity of the respective plan under which each such grant was made if
grants are made under more than one plan. A tandem grant of two instruments, only one of which is
granted under an incentive plan, such as an option granted in tandem with a performance share, only
needs to be reported in column (i) or (j), as applicable. For example, an option granted in tandem with a
performance share only would be reported as an option grant in column (j), with the tandem feature
noted either by a footnote or in the accompanying textual narrative.
If the grant date30 disclosed in column (b) is different from the date on which the compensation
committee (or a committee of the board of directors performing a similar function or the full board of
directors) takes action or is deemed to take action to grant such awards, a separate, adjoining column
must be added by the registrant between columns (b) and (c) showing such date.
This table requires disclosure about the estimated future payout or range under three scenarios: (1)
threshold (minimum amount payable for a certain level of performance under the plan), (2) target
(amount payable if the specified performance target(s) under the plan are achieved) and (3) maximum
(the maximum payout possible under the plan). If an award provides only for a single estimated payout,
that amount should be reported as the target.
If the exercise or base price reported in column (k) is less than the closing market price of the underlying
security on the grant date, a separate adjoining column must be added after column (k) showing the
closing market price on the grant date. In determining whether the exercise or base price is less than the
closing market price on the grant date, if a market exists for the security, the registrant must use the price
at which the registrant’s security was last sold in the principal US market for such security, or the principal

28

29

30

If non-equity incentive plan awards are denominated in units or other rights, a separate adjoining column between columns (b)
and (c) must be added to quantify the units or other rights awarded.
“Incentive plan” is defined in Item 402(a)(6)(iii) of Regulation S-K as “any plan providing compensation intended to serve as incentive
for performance to occur over a specified period, whether such performance is measured by reference to financial performance of
the registrant or an affiliate, the registrant’s stock price or any other performance measure.” “Equity incentive plan” is defined as
“an incentive plan or portion of an incentive plan under which awards are granted that fall within the scope of [ASC 718)];” and
“non-equity incentive plan” is defined as “an incentive plan or portion of an incentive plan that is not an equity incentive plan.”
Disclosure in the table should be of the grant date as determined for financial statement reporting purposes under ASC 718.


5-15


foreign market for a foreign company security. If no market exists, any other formula prescribed for the
security may be used to determine the closing market price. Whenever the exercise or base price reported
in column (k) is not the closing market price, a footnote or the accompanying textual narrative must
describe the methodology defined in the appropriate plan for determining the exercise or base price.31
Column (l) of the table requires disclosure of the grant date fair value of each stock award and option
award, on a grant-by-grant basis, determined under ASC 718. This column would include the grant date
fair value of, among others, stock awards that are classified as liabilities under ASC 718 and awards with
performance-based vesting conditions.32 Also, previously awarded options or freestanding SAR awards
that the registrant repriced or otherwise materially modified33 during the most recent fiscal year must be
reported in column (l) based on the incremental fair value computed as of the date of such repricing or
modification in accordance with ASC 718.
Registrants also must disclose in a footnote to the appropriate column the dollar amount of
consideration, if any, paid by an NEO for any award depicted in the table.

5.5.6

Narrative disclosures to the SCT and grants of plan-based awards table
Item 402(e) of Regulation S-K requires a narrative disclosure to provide context to the tabular
disclosures in the SCT and the Grants of Plan-Based Awards table, including a description of any
additional material factors necessary to provide an understanding of the information disclosed in the
tables.34 The material factors will vary depending on registrant-specific facts and circumstances, but may
include descriptions of the material terms in the NEO’s employment agreement or arrangement (whether
written or unwritten), despite the separate requirement to file such employment agreement(s) or
arrangement(s) under Item 601 of Regulation S-K, Exhibits.
Registrants are not required to disclose any factor, criteria or performance-related or other condition to
payout or vesting of a particular award that involves confidential trade secrets or confidential
commercial or financial information, disclosure of which would result in competitive harm to the
company.35 However, in that case, the registrant must discuss how difficult or likely it will be for the
executive or registrant to achieve the undisclosed target levels or other factors.

31

32

33

34

35

For example, a plan may determine the exercise or base price based on the average of the high and low market price on the grant
date, rather than the closing market price.
Instruction 8 to Item 402(d) states that for equity awards subject to performance conditions, the amount reported in column (l) of
the Grants of plan-based awards table should be consistent with the estimate of the aggregate compensation cost to be
recognized over the service period determined as of the grant date under ASC 718, excluding the effect of estimated forfeitures.
Instruction 7 to Item 402(d) of Regulation S-K directs that options or SAR awards that are repriced through a pre-existing
formula or mechanism in the plan or award that results in the periodic adjustment of the option or SAR exercise or base price, an
antidilution provision in the plan or award, or a recapitalization or similar transaction equally affecting all holders of the class of
securities underlying the options or SARs, need not be disclosed in this table.
If a registrant does not believe that the full grant date fair value of stock or option awards disclosed in the SCT reflects the
compensation earned, awarded or paid during the fiscal year, the registrant may provide appropriate explanatory disclosure in
this accompanying narrative section.
As stated in Instruction 4 to Item 402(b) of Regulation S-K, the standard to use when determining whether disclosure would
cause competitive harm for the registrant is the same standard that would apply when a registrant requests confidential
treatment of confidential trade secrets or confidential commercial or financial information pursuant to Securities Act Rule 406
and Exchange Act Rule 24b-2. A registrant is not required to seek confidential treatment under the procedures in these two rules
if the registrant determines that the disclosure would cause competitive harm in reliance on this instruction provided it makes
alternative disclosure about the likelihood of achieving the undisclosed performance target.


5-16


If at any time during the last fiscal year, any outstanding option or other equity-based award was repriced
or otherwise materially modified (such as by extension of exercise periods, change of vesting or forfeiture
conditions, change or elimination of applicable performance criteria, or change of the bases on which
returns are determined), this narrative should discuss each repricing or any other material modification.36
The narrative disclosure also must describe, if material and necessary to provide an understanding of the
disclosure in the Grants of Plan-Based Awards table or the SCT:
•
•

The vesting schedule

•

A description of any performance-based conditions37

•

Any other material conditions applicable to the award, including whether dividends or other amounts
will be paid, the applicable rate and whether that rate is preferential

•

5.5.7

Award terms, such as a general description of the formula or criteria to be applied in determining the
amounts payable

An explanation of the amount of salary and bonus in proportion to total compensation

Because grants of equity awards represent potential amounts that the NEOs might or might not realize,
the Outstanding Equity Awards at Fiscal Year-End table (Item 402(f) of Regulation S-K) provides detailed
information about all outstanding equity awards.

5.5.7.1

Outstanding equity awards at [fiscal year-end] 31 December 20X2
Option awards

Equity
incentive
plan awards:
Number of
Number of
number of
securities
securities
securities
underlying
underlying
underlying
unexercised unexercised unexercised Option
Option
options (#)
options (#)
unearned exercise expiration
Name exercisable unexercisable options (#) price ($)
date
(a)
(b)
(c)
(d)
(e)
(f)

Stock awards

Number
of
shares
or units
of stock
that
have not
vested
(#)
(g)

Market
value of
shares
or units
of stock
that
have
not
vested
($)
(h)

Equity
incentive
plan
awards:
number of
unearned
shares,
units or
other
rights that
have not
vested (#)
(i)

Equity
incentive
plan
awards:
market or
payout
value of
unearned
shares,
units or
other
rights that
have not
vested ($)
(j)

PEO
PFO
A
B
C

36

However, an instruction to Item 402(e)(1) of Regulation S-K provides that any repricing that occurs through a pre-existing formula or
mechanism in the plan or award that results in the periodic adjustment of the option or SAR exercise or base price, an antidilution
provision in the plan or award, or a recapitalization or similar transaction equally affecting all holders of the class of securities
underlying the options or SARs, need not be disclosed.

37

Performance-based conditions include both performance conditions and market conditions as those terms are defined in ASC 718.


5-17


This table requires separate disclosure of the outstanding number of securities and related market value
(i.e., not the fair value measured under ASC 718) measured as of the end of the most recent fiscal year
for outstanding option and unvested stock awards as follows:

5.5.7.2

Outstanding option awards (columns (b) through (f))
•

•

On an award-by-award basis,38 registrants must disclose in column (d) the total number of shares
underlying unexercised options awarded under any equity incentive plan that have not been earned.
Awards disclosed in this column would be those that may or may not be realized depending on the
outcome of the measure(s) (e.g., stock price, performance benchmarks) to which the awards relate

•

5.5.7.3

On an award-by-award basis,38 registrants must disclose the number of securities underlying
unexercised options, including awards that have been transferred by the NEO to another party other
than for value,39 with separate identification for those instruments that are currently exercisable
(column (b)) and unexercisable (column (c)), other than those awarded under an equity incentive plan
that are reported in column (d)

On an award-by-award basis,38 for each instrument disclosed in columns (b), (c) and (d), the
registrant must disclose the exercise or base price of that instrument (column (e)) and the expiration
date (column (f)), as applicable

Outstanding stock awards (columns (g) through (j))
•

Registrants must disclose in column (g) the total number of shares of stock that have not vested and
that were not awarded under an equity incentive plan and, in column (h), the corresponding
aggregate market value (see description of calculation below)

•

Registrants must disclose in column (i) the total number of shares of stock, units, or other rights
awarded under any equity incentive plan (including the number of shares underlying any such unit or
right, if applicable) that have not yet vested and that have not been earned, and, in column (j), the
corresponding aggregate market or payout value (see description of calculation below)

Instruction 5 to Item 402(f)(2) of Regulation S-K provides that options or stock awarded under an equity
incentive plan are reported in columns (d) or (i) and (j),40 respectively, until the relevant performance
condition has been satisfied. Once the relevant performance condition has been satisfied, even if the
option or stock award is subject to forfeiture conditions, option awards would then be reported in column
(b) or (c), as appropriate, until they are exercised or expire, and stock awards would be reported in
columns (g) and (h) until they vest. The vesting dates of options, shares of stock and equity incentive
plan awards held at fiscal year-end are required to be disclosed by footnote to the applicable column
(i.e., column (c), (d), (g), or (i)).

38

39

40

Multiple awards may be aggregated when the expiration date and the exercise or base price of the instruments are identical
(e.g., a single grant of options with tranches that vest on various dates but otherwise have identical terms). However, a single
award consisting of a combination of options, SARs or similar option-like instruments must be reported as separate awards with
respect to each tranche with a different exercise or base price or expiration date.
An instruction to Item 402(f)(2) of Regulation S-K requires registrants to identify by footnote any award that has been transferred
other than for value and to disclose the nature of the transfer.
If the award provides only for a single estimated payout, that amount should be reported. Otherwise, Instruction 3 to Item 402(f)(2)
of Regulation S-K states the number of shares or units reported in column (d) or (i), and the payout value reported in column (j),
should be based on achieving threshold performance goals, except if the previous fiscal year’s performance exceeded the minimum
threshold, in which case the disclosure should be based on the next higher performance measure (target or maximum) that exceeds
the previous fiscal year’s performance under the terms of the equity incentive plan. In any case, if the target amount is not
determinable, the registrant must disclose a representative amount based on the previous fiscal year’s performance.


5-18


Instruction 3 to Item 402(f)(2) of Regulation S-K directs that the market value of stock reported in
column (h) and equity incentive plan awards of stock reported in column (j) should be computed by
multiplying the closing market price of the registrant’s stock at the end of the last completed fiscal year
by the number of outstanding shares or units of stock or the amount of outstanding equity plan awards,
respectively.

5.5.8

The Option Exercises and Stock Vested table (Item 402(g) of Regulation S-K) must report exercises of
stock options, SARs, and similar instruments, as well as the vesting of stock, restricted stock, and similar
instruments for the last completed fiscal year on an aggregate basis.

5.5.8.1

Option exercises and stock vested for 20X2
Option awards

Name
(a)

Number of shares
acquired on exercise
(#)
(b)

Value realized on
exercise ($)
(c)

Stock awards
Number of shares
Value realized on vesting
acquired on vesting (#)
($)
(d)
(e)

PEO
PFO
A
B
C

For all exercises of stock options, SARs and similar instruments during the last fiscal year, the table
requires registrants to disclose the number of shares acquired upon exercise (column (b)) and the
aggregate dollar value realized upon the exercise or the transfer of an award for value (column (c)).41
For all vestings of stock, including restricted stock, restricted stock units and similar instruments
during the last fiscal year, the table requires registrants to disclose the number of shares acquired upon
vesting (column (d)) and the aggregate dollar value realized upon the vesting or the transfer for value
(column (e)).42

5.5.9

The Pension Benefits table (Item 402(h) of Regulation S-K) requires disclosure of the actuarial present
value of each NEO’s accumulated benefit under each pension plan. A separate line of tabular disclosure is
required for each plan in which an NEO participates that provides for payments or other benefits at,
following, or in connection with retirement.43 The number of years of credited service and actuarial
present value of accumulated benefits must be computed using the same assumptions and measurement
date as used for financial reporting purposes for the last completed fiscal year under generally accepted

41

42

43

An instruction to Item 402(g)(2) of Regulation S-K provides that, for purposes of column (c), the value realized should be
computed by determining the difference between the market price of the underlying securities at exercise and the exercise or
base price of the options. For any amount realized upon exercise for which receipt has been deferred, registrants should provide
a footnote quantifying the amount deferred and disclosing the terms of the deferral.
An instruction to Item 402(g)(2) of Regulation S-K provides that, for purposes of column (e), the value realized should be
computed by multiplying the number of shares of stock or units vested by the market value of the underlying securities on the
vesting date. For any amount realized upon vesting for which receipt has been deferred, registrants should provide a footnote
quantifying the amount deferred and disclosing the terms of the deferral.
The required disclosures apply to each plan that provides for specified retirement payments or benefits, or payments or benefits
that will be provided primarily following retirement, including tax-qualified defined benefit plans and supplemental executive
retirement plans (SERPs), but excluding tax-qualified defined contribution plans and nonqualified defined contribution plans (for
which disclosure is required in a separate table as discussed below).


5-19


accounting principles (except that retirement age should be assumed to be the normal retirement age as
defined in the plan, or if not so defined, the earliest time at which a participant may retire under the plan
without any benefit reduction due to age).44

5.5.9.1

Pension benefits at 31 December 20X2
Name
(a)

Plan name
(b)

Number of years
credited service (#)
(c)

Present value of
accumulated benefit ($)
(d)

Payments during last
fiscal year ($)
(e)

PEO
PFO
A
B
C

If an NEO’s number of years of credited service with respect to any plan is different from the NEO’s
actual years of service with the registrant, footnote disclosure must quantify the difference and any
resulting benefit augmentation.
A narrative description of any material factors necessary to understand each plan included in the tabular
disclosure also is required. While recognizing that such material factors will vary depending on the facts,
Item 402(h)(3) of Regulation S-K provides the following examples of factors that might require disclosure:
•

The material terms and conditions of payments and benefits available under the plan, including the
plan’s “normal retirement” benefit formula and eligibility standards, and any effect of the form of
benefit elected on the amount of annual benefits. For this purpose, “normal retirement” means
retirement at the normal retirement age as defined in the plan, or if not so defined, the earliest time
at which a participant may retire under the plan without any benefit reduction due to age.

•

If any NEO is currently eligible for “early retirement” under any plan, the identity of the NEO and the
plan and a description of the plan’s early retirement benefit formula and eligibility standards. For this
purpose, “early retirement” means retirement before “normal retirement” as defined in the plan, or
otherwise if benefits currently would be available to the executive under the plan.

•

The specific elements of compensation (e.g., salary, bonus) included in computing the retirement
benefit, identifying each such element.

•

If NEOs participate in multiple plans, the different purposes for each plan.

•

The registrant’s policies with regard to such matters as granting extra years of credited service.

44

Instructions to Item 402(h)(2) of Regulation S-K require that the registrant disclose, in the accompanying narrative to the table,
the valuation method and all material assumptions applied in quantifying the actuarial present value of the accumulated benefit
(including possibly interest rate, form of benefit, years of service, levels of compensation used to determine the benefit, and
mortality tables). A benefit specified in the plan document or the executive’s contract itself is not deemed to be an assumption.
Registrants may satisfy all or part of this disclosure by reference to a discussion of those assumptions in specific footnotes to its
financial statements or in its MD&A.


5-20


5.5.10

Item 402(i) of Regulation S-K requires disclosure, in the following tabular form, with respect to all
defined contribution or other plans that provide for the deferral of compensation to any NEO on a basis
that is not tax-qualified.45

5.5.10.1

Nonqualified deferred compensation table for 20X2

Name
(a)

Executive
contributions in
last FY ($)
(b)

Registrant
contributions in last
FY ($)
(c)

Aggregate
earnings in last FY
($)
(d)

Aggregate
withdrawals/
distributions ($)
(e)

Aggregate
balance at last
FYE ($)
(f)

PEO
PFO
A
B
C

Column (b) should include contributions made or deferrals elected by the NEO, while column (c) should
include any contributions made directly by the registrant to the account of the respective NEO, whether
under formal or informal plans. Column (d) requires disclosure of all earnings accrued during the
registrant’s most recent fiscal year on all non tax-qualified deferred compensation arrangements. By
contrast, column (h) in the SCT, Change in Pension Value and Nonqualified Deferred Compensation
Earnings, is required to disclose only preferential or above-market earnings accrued during each fiscal
year on non tax-qualified deferred compensation.
An instruction to Item 402(i)(2) of Regulation S-K requires footnote disclosure quantifying (1) the
extent to which amounts reported in the contributions and earnings columns (columns (b), (c) and (d)
above) are reported as compensation in the most recent fiscal year in the SCT and (2) the portion of the
aggregate balance at last fiscal year-end (column (f) above) that has been reported as compensation to
the NEO in the registrant’s SCT on a cumulative basis. The latter disclosure is intended to complement the
Instruction to the SCT that requires any amounts deferred to be included in the appropriate column for
the fiscal year in which earned [Instruction 4 to Item 402(c) of Regulation S-K].
A narrative description of any material factors necessary to understand each plan covered by the
above tabular disclosure also is required. While recognizing that such material factors will vary depending
on the facts, Item 402(i)(3) of Regulation S-K provides the following examples of factors that might
require disclosure:
•

The types of compensation permitted to be deferred and any limitations (by percentage of
compensation or otherwise) on the extent to which compensation may be deferred

•

The measures and provisions for calculating interest or other plan earnings (e.g., whether such
measure(s) are selected either by the NEO or the registrant; the frequency and manner in which
selections may be changed), including quantification of the interest rates and other earnings
measures applicable during the registrant’s most recent fiscal year

•

Material terms with respect to payouts, withdrawals and other distributions from such plans and
arrangements

45

Nonqualified defined contribution and other nonqualified deferred compensation plans are “plans providing for deferral of
compensation that do not satisfy the minimum coverage, nondiscrimination and other rules that ‘qualify’ broad-based plans for
favorable tax treatment under the Internal Revenue Code.”


5-21


5.5.11

Other potential post-employment payments
Item 402(j) of Regulation S-K requires certain disclosures about each contract, agreement, plan, or
arrangement, whether written or unwritten, that provides for payment(s) to an NEO at, following, or
in connection with any termination (including without limitation resignation, severance, retirement,
or constructive termination), or a change-in-control of the registrant or a change in the NEO’s
responsibilities.46 A description and explanation are required about each of the following items:
•

The specific circumstances that would trigger payment(s) or the provision of other benefits, including
perquisites and health care benefits

•

The amount of the estimated payments and benefits that would be provided in each covered
circumstance (including any tax gross-ups), whether they would or could be paid in a lump sum or
annually (including the duration), and by whom they would be provided

•

How the respective payment and benefit levels would be determined under the various
circumstances that trigger payments or provision of benefits

•

Any material conditions or obligations applicable to the receipt of payments or benefits, including
non-compete, non-solicitation, non-disparagement or confidentiality agreements, including the
duration of such agreements and provisions about waiver of breach of such agreements

•

Any other material factors about each such contract, agreement, plan or arrangement

An instruction to Item 402(j) of Regulation S-K makes clear that the registrant must quantify any such
payments or benefits assuming that the triggering event had taken place on the last business day of the
registrant’s last completed fiscal year using the closing price per share of the registrant’s securities as of
that date. In the event that uncertainties exist as to the amounts payable in given circumstances, the
registrant must make a reasonable estimate (or a reasonably estimated range) of the payment or benefit
and disclose any material assumptions underlying such estimates or ranges, which might include
forward-looking information. Consistent with the requirements of the SCT, perquisites and other
personal benefits may be excluded from the disclosure only if the amount of such compensation is
expected to be less than $10,000 in the aggregate with respect to an individual NEO. Otherwise, all
potential perquisites and other personal benefits must be disclosed for the respective NEO in a manner
similar to the disclosure in the SCT.
When a triggering event actually has occurred for an NEO and that individual was not serving as an NEO
of the registrant at the end of the last completed fiscal year, the registrant should provide the required
disclosures of post-employment payments with respect to that NEO only for that triggering event.

5.6

Director compensation
Under Item 402(k) of Regulation S-K, director compensation is required to be provided in tabular format
similar to the SCT. However, director compensation only is required for the most recent fiscal year, as
opposed to the last three years for NEOs in the SCT. The tabular disclosure of director compensation is
required to be accompanied by narrative disclosure of any factors necessary to understand the tabular
disclosure. For any columns in the Director Compensation table (DCT) that are analogous to the SCT,
registrants should follow the instructions for the SCT in preparing the DCT.

46

Instruction 5 to Item 402(j) states, “the registrant need not provide information with respect to contracts, agreements, plans or
arrangements to the extent they do not discriminate in scope, terms or operation, in favor of executive officers of the registrant
and that are available generally to all salaried employees.”


5-22


5.6.1

Director compensation table for 20X2

Fees earned
or paid in
Name
cash ($)
(a)
(b)

Stock
awards
($)
(c)

Option
awards ($)
(d)

Non-equity
incentive plan
compensation
($)
(e)

Change in
pension value
and nonqualified
deferred
All other
compensation
compensation
earnings
($)
(f)
(g)

Total ($)
(h)

A
B
C
D
E
F

All directors who served as directors during the most recent fiscal year are required to be listed in the
DCT, not just the five most highly compensated directors. However, any NEO who also serves as a
director does not need to be listed in the DCT as long as all of the NEO’s compensation is fully reflected in
the SCT (including any separate compensation as a director, with director compensation identified and
quantified by appropriate footnotes to the SCT). Two or more directors are allowed to be grouped in a
single row in the DCT only if all elements of their compensation are identical and their identities are clear
from the disclosure.
Fees earned or paid in cash — In column (b), registrants are required to disclose all fees earned or paid in
cash for services as a director, including annual retainer fees, committee or committee chair fees and
meeting fees. Consistent with the requirements of the SCT, any amount of director’s fees payable in cash
that is forgone at the election of the director in exchange for stock, equity-based or other forms of noncash compensation should be included in column (b). A footnote to column (b) must disclose the receipt of
non-cash compensation in lieu of cash and the grant date fair value of any such stock or equity-based
compensation computed in accordance with ASC 718.
Stock and option awards — Registrants are required to disclose all stock awards47 in column (c) and all
option awards (with or without tandem SARs),48 including awards that subsequently have been transferred,
in column (d), based on the aggregate grant date fair value of the award determined under ASC 718.
The Instruction to Items 402(k)(2)(iii) and (iv) of Regulation S-K requires footnote disclosure, for each
director, of: (1) for the most recent fiscal year only, the grant date fair value of each stock and option
award on a grant-by-grant basis computed in accordance with ASC 718 and the incremental fair value
related to the repricing or material modification of previously awarded options or freestanding SAR awards,
(2) any forfeitures of previous stock awards or option awards and (3) the aggregate shares under stock
awards, and the aggregate shares underlying option awards, which were outstanding at fiscal year-end.
Non-equity incentive plan compensation — In column (e), registrants are required to disclose the dollar
value of all compensation earned for services performed during the fiscal year under non-equity
incentive plans and all earnings on any outstanding awards.

47

48

Stock is defined in Item 402(a)(6) of Regulation S-K as “instruments such as common stock, restricted stock, restricted stock
units, phantom stock, phantom stock units, common stock equivalent units or any similar instruments that do not have optionlike features.”
Options are defined in Item 402(a)(6) of Regulation S-K as “instruments such as stock options, stock appreciation rights and
similar instruments with option-like features.”


5-23


Change in pension value and nonqualified deferred compensation earnings — In column (f), registrants are
required to disclose the sum of the following two items:
•

The aggregate increase in the actuarial present value of the director’s accumulated benefit under all
defined benefit and actuarial pension plans (including supplemental plans) based on measurement
dates used for financial statement reporting purposes

•

Above-market or preferential earnings on compensation that is deferred on a basis that is not taxqualified, including such earnings on nonqualified defined contribution plans

All other compensation — similar to the SCT, the all other compensation column (column (g)) is intended
to capture any other elements of director compensation not disclosed in any other column of the table.
Such compensation might include:
•

Perquisites and other personal benefits49

•

Gross-ups or other amounts reimbursed for the payment of taxes

•

Compensation cost for registrant securities purchased at a discount

•

The amount paid or accrued pursuant to a plan or arrangement for the resignation, retirement or
any other termination of the director or a change-in-control of the registrant

•

Registrant contributions or other allocations to vested and unvested defined contribution plans

•

Consulting fees earned from, or paid or payable by the registrant or its subsidiaries (including
corporate joint ventures)

•

The annual cost of payments and promises of payments pursuant to director legacy programs and
similar charitable award programs50

•

The dollar value of any insurance premiums paid by, or on behalf of, the registrant with respect to
life insurance for the benefit of the director

•

The dollar value of any dividends or other earnings paid on stock or option awards, when those
amounts were not factored into the grant date fair value required to be reported for the stock or
option award as a footnote to the DCT

Total — The total compensation column (column (h)) in the DCT represents the sum total of columns (b)
through (g).

5.6.2

Narrative disclosures to the DCT
Similar to the SCT, Item 402(k)(3) of Regulation S-K requires registrants to provide a narrative description
of any material factors necessary to understand the information disclosed in the DCT, including, for
example, a description of standard director compensation arrangements and whether any director has

49

50

Perquisites and other personal benefits may be excluded as long as the aggregate annual value for the respective director is less
than $10,000. If the aggregate value of all perquisites and other personal benefits exceeds $10,000 for the respective director,
the nature of each such benefit must be disclosed in a footnote, regardless of the amount. Also, each perquisite or other personal
benefit that exceeds $25,000 or 10% of the total amount of perquisites and other personal benefits for the director must be
quantified and disclosed in a footnote. Similar to the SCT, perquisites and other personal benefits must be valued on the basis of
the aggregate incremental cost to the registrant with footnote disclosure of the registrant’s methodology for computing such
aggregate incremental cost.
Registrants should provide footnote disclosure of the total dollar amount payable under the program and other material terms of
each program for which tabular disclosure is provided.


5-24


a different compensation arrangement, identifying the director and describing the terms of that
arrangement. The SEC encourages registrants to consider whether narrative disclosures similar to those
described under the caption Enhanced disclosure of option grants earlier in this section about option
timing and dating practices might be necessary when directors receive stock option grants.

5.7

Other disclosures
In addition to the required tables and narrative disclosures, the following disclosures must be included in
the typical annual meeting proxy statement.

5.7.1

Board compensation committee report on executive compensation
Registrants must “furnish” a Compensation Committee Report (CCR) [Item 407(e)(5) of Regulation S-K].
The compensation committee (or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) must state whether: (1) it has reviewed
and discussed CD&A disclosure with management and (2) based on this review and discussion,
recommended to the board of directors that CD&A be included in the company’s annual report on
Form 10-K, proxy, or information statement.
These requirements of the CCR are similar to those of the audit committee report with respect to the
audited financial statements in that the report is only required once during the fiscal year and the name
of each member of the compensation committee (or the group performing equivalent functions) must
appear below the disclosure. However, unlike the audit committee report that is required only in the
annual proxy or information statement, the CCR also is required in the company’s annual report on
Form 10-K, either by inclusion or incorporation by reference, so that it is presented along with CD&A.
As furnished information, the CCR is not deemed to be incorporated by reference into any filing under
the Securities Act or Exchange Act except if the registrant specifically incorporates it by reference.

5.7.2

Disclosure of compensation committee interlocks and insider participation
Item 404 of Regulation S-K requires registrants to identify members of the compensation committee
who are or were formerly officers or employees of the registrant or any of its subsidiaries, or had any
relationship requiring disclosure (e.g., a director who is a partner in a law firm retained by the registrant).
In addition, Item 407(e)(4) of Regulation S-K requires disclosure of compensation committee
“interlocks.” The following illustrates “interlocks” that Company A would be required to disclose:
•

An executive officer of Company A is a member of the Compensation Committee of Company B, and
an executive officer of Company B is a member of the Compensation Committee of Company A.

•

An executive officer of Company A is a director of Company B, and an executive officer of Company
B is a member of the Compensation Committee of Company A.

•

An executive officer of Company A is a member of the Compensation Committee of Company B, and
an executive officer of Company B is a director of Company A.

The SEC has stated that these disclosures must be included under the caption of this section, and not
dispersed throughout the proxy statement.51 The caption “Compensation Committee Interlocks and
Insider Participation” may be omitted by the registrant if the registrant has no relationships that trigger
a disclosure obligation.

51

SEC Release No. 33-7009, Executive Compensation Disclosure; Securityholder List and Mailing Requests.


5-25


If the registrant has no compensation committee (or other board committee performing equivalent
functions), the registrant must identify each director who is an officer and employee of the registrant or
any of its subsidiaries, or a former officer of the registrant or any of its subsidiaries, who, during the last
completed fiscal year, participated in deliberations of the registrant’s board of directors concerning
executive officer compensation. An example of this situation often occurs in the year following an initial
public offering. An example of disclosure for this situation follows.
Illustration 5-01:

Compensation committee interlocks and insider participation

Prior to the Company’s initial public offering on 1 July 20X2, executive compensation decisions were
made by the Board of Directors of the Company, of which Messrs. Jones and Smith constituted the
majority of the members. Consequently, they participated in all determinations of compensation
payable to themselves during the past year. Beginning 1 July 20X2, the Compensation Committee
made all determinations regarding executive compensation and will continue to do so. Accordingly,
with respect to the fiscal year ended 30 June 20X2, executive compensation was determined without
reference to policies established by the Compensation Committee.


5-26

6

Item 9 — Disclosures about independent
public accountants
In the typical annual shareholders’ meeting at which directors are to be elected, a registrant must name
the principal auditing firm selected or recommended to shareholders for election, approval or ratification
for the current year. Registrants must name the principal auditing firm for the most recently completed
fiscal year if it is not the same as the one selected or recommended for the current year. Further, the
registrant must state whether representatives of its principal auditing firm are expected to attend the
annual meeting and whether they will have the opportunity to make a statement or respond to questions.
If no firm has been selected or recommended, that fact and the reasons for it must be disclosed.
If there has been a change in principal auditors (or a change in auditors of a significant subsidiary on
whom the principal auditors express reliance in their report) during the registrant’s two most recent
fiscal years or the subsequent interim period, disclosures pursuant to Item 304(a) of Regulation S-K (as
discussed below) must be included in a proxy statement relating to the annual election of directors or the
election, approval or ratification of the principal auditor, even though this information may have been
reported previously on Form 8-K.

6.1

Former auditors
Item 304(a) of Regulation S-K requires the following disclosures about the issuer’s former auditors:
•

Whether, and on what date, the former auditor resigned, declined to stand for re-election or
was dismissed

•

Whether the former auditor’s report on the financial statements for either of the previous two years
contained an adverse or disclaimer of opinion or was qualified as to uncertainty (e.g., a going
concern uncertainty), audit scope or accounting principles, along with a description of the nature
of such opinion

•

Whether the decision to change auditors was recommended or approved by the audit or similar
committee of the board of directors or by the board of directors if no such committee exists

•

Whether during the two most recent fiscal years and any subsequent interim period preceding such
resignation, declination or dismissal there were any resolved or unresolved disagreements with the
former auditor

•

Whether during the two most recent fiscal years and any subsequent interim period up to the date
of such resignation, declination or dismissal there were any reportable events (e.g., auditor
communication about a lack of sufficient internal controls, inability of the auditor to rely on
management’s representations, need for the auditor to expand significantly the scope of its work)

•

Whether the auditor has advised the registrant that information has come to its attention that it has
concluded materially affects the fairness or reliability of a previously issued audit report or related
financial statements or financial statements issued or expected to be issued for subsequent periods,
and the issue has not been resolved to the auditor’s satisfaction


6-1

6 Item 9 — Disclosures about independent public accountants

Item 304 of Regulation S-K states that “disagreements” should be interpreted broadly to include any
difference of opinion concerning any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which would have caused the former auditor to make
reference to the disagreement in the former auditor’s report. Reportable disagreements include those
resolved to the former auditor’s satisfaction as well as those not resolved. It is not necessary for there
to have been an argument to have had a disagreement, merely a difference of opinion at the “decisionmaking level” (i.e., between personnel of the registrant responsible for the presentation of its financial
statements and personnel of the accounting firm responsible for rendering its report).
Disagreements do not include initial differences of opinion based on incomplete facts or preliminary
information that were subsequently resolved to the former auditor’s satisfaction. In determining whether
any disagreement or reportable event has occurred, an oral communication by the engagement partner
or another person responsible for rendering the accounting firm’s opinion is sufficient to advise the
registrant that there is a reportable event or disagreement at the “decision-making level” within the
accounting firm.
For disagreements or reportable events, management should describe the disagreement or reportable
event, state whether the audit committee or board of directors discussed the matter with the former
auditor and indicate whether the registrant has authorized the former auditor to respond fully to the
inquiries of the newly engaged auditor.
If the information under Item 304(a) of Regulation S-K is being provided in a proxy or information
statement, and the former or newly engaged auditor believes the disclosures made by the registrant are
inaccurate, either auditor may state its version (in 200 or fewer words) if they so choose. The auditor
must submit its statement to the registrant within 10 business days of receipt of the disclosure for
inclusion in the proxy or information statement. In addition, if the views of the newly engaged auditor
have not been filed as an exhibit to Form 8-K, the registrant must file a Form 8-K concurrently with the
proxy statement or information statement.
The SEC staff issued Regulation S-K and Form 8-K C&DIs about a change in a registrant’s certifying
accountant in January 2011.1 The C&DIs note that when a registrant dismisses its independent
accountant because the auditor was deregistered by the PCAOB, registrants should disclose that fact.
In these circumstances, audit reports issued by the deregistered accounting firm should no longer be
included in a registrant’s filings made on or after the date the firm’s registration was revoked, even if the
accountant’s report was issued before the date of revocation. Financial statements previously audited by
a firm whose registration has been revoked generally would need to be re-audited by a PCAOB-registered
firm before inclusion in future filings. The re-audit requirement applies to all periods presented in the
financial statements.
Other C&DIs include the following:
•

An explanatory paragraph in the audit report describing uncertainty about the company’s ability to
continue as a going concern is a report modification as to uncertainty, as discussed in Item 304 of
Regulation S-K, and should be disclosed.

•

The auditor advising the registrant that there is a material weakness in internal control over financial
reporting is a reportable event, as discussed in Item 304 of Regulation S-K, and should be disclosed
even if the material weakness was remediated and did not result in an adverse opinion on the
effectiveness of internal control over financial reporting.

1

The C&DIs are available on the SEC website at: http://www.sec.gov./divisions/corpfin/cfguidance.shtml.


6-2


•

•

The “subsequent interim period” for purposes of disclosing disagreements and reportable events
includes the period since the most recent audited year-end through the termination date.

•

6.2

The auditor advising the registrant that one or more significant deficiencies in internal control over
financial reporting existed without advising there is a material weakness would not be a reportable
event under Item 304 of Regulation S-K. However, the factors that led to a significant deficiency
could result in the conclusion that there are other reportable events that require disclosure.

A registrant should report if a new principal auditor is a different legal entity from the former
principal accountant and is separately registered with the PCAOB even if the new and former
principal accountants are related in some manner (e.g., members of a single global network).

Newly engaged auditors
Item 304(a) of Regulation S-K requires registrants to name the newly engaged auditors and the date of
engagement. Consultations by the registrant with the newly engaged auditors (whether a written report
or oral advice was provided) during the two most recent fiscal years or subsequent interim period before
engagement also must be described if those consultations involved (1) any disagreement or reportable
event described above, (2) the application of accounting principles to a specified transaction (completed
or proposed) by the registrant or (3) the type of opinion that might be rendered on the registrant’s
financial statements.2 Specifically, the registrant must state the issue, describe the views of the newly
engaged auditor, indicate whether the registrant consulted with the former auditor on the issue and, if
so, disclose the former auditor’s view and request that the newly engaged auditor review the disclosure
before filing with the SEC.

6.3

Auditor fees
Item 9 of Schedule 14A requires disclosure of aggregate auditor fees for each of the two most recent
fiscal years using the following categories: (1) audit fees, (2) audit-related fees, (3) tax fees and (4) all
other fees. In addition, Item 9 requires companies to describe, in qualitative terms, the types of services
provided in the audit-related, tax and all other fees categories. Item 9 also requires disclosures about the
audit committee’s pre-approval policies and procedures. If the audit committee has approved de minimis
services after the fact, the company must disclose the percentage of total fees of each category of nonaudit services to which the de minimis exception was applied. See Section 6.3.9 for a discussion of the
de minimis exception.
The Item 9 disclosures also are required in SEC annual reports. Therefore, these disclosures also apply to
companies that are not subject to the proxy rules (e.g., companies reporting solely under Section 15(d)
of the Exchange Act because of public debt, foreign private issuers that file Form 20-F). For companies
subject to the proxy rules, the Form 10-K may incorporate the disclosures by reference from a timely
filed proxy statement. However, these disclosures are not required in annual reports to shareholders that
accompany proxy materials. Example disclosures are included in this section.

2

The SEC adopted these rules to require disclosure of potential “opinion shopping” situations. The scope of the required
disclosures does not include all communications with the successor auditor, just those involving the disclosed disagreements and
reportable events or that were within the scope of AU Section 625, Reports on the Application of Accounting Principles. See FR-31,
Clarification of the Term “Disagreements”; Disclosure of Potential Opinion Shopping Situations.


6-3


6.3.1

Basis of presentation
The amounts reported as audit-related, tax and all other fees should be based on fees billed, including
out-of-pocket expenses, for services rendered during the fiscal year, even if the auditor did not bill the
registrant for those services until after year-end.
The amounts reported as audit fees should be based on fees, including out-of-pocket expenses, for the
current-year audit and related quarterly reviews irrespective of the period in which the related services
are rendered or billed. If the registrant has not received the bill for such services before filing its
definitive proxy statement with the SEC, the registrant should ask the auditor for the amount that will
be billed for such services and include that amount in the disclosure.

6.3.2

Audit fees
SEC rules state that registrants should disclose, under the caption audit fees, the aggregate fees billed
for each of the last two fiscal years for professional services rendered by the principal accountant for the
audit of the registrant’s annual financial statements and review of financial statements included in the
registrant’s Form 10-Q or services that are normally provided by the accountant for statutory and
regulatory filings or engagements for those fiscal years.
This category includes fees for services that generally only the auditor reasonably can provide, such as
statutory audits required domestically and internationally (including statutory audits required for
insurance companies for purposes of state law); comfort letters; consents; assistance with and review of
documents filed with the SEC; Section 404 attest services; other attest services that generally only the
auditor can provide; work done by tax professionals for the audit or quarterly review; and accounting
consultations billed as audit services, as well as other accounting and financial reporting consultation and
research work necessary to comply with the standards of the PCAOB.

6.3.3

Audit-related fees
SEC rules state that registrants should disclose, under the caption audit-related fees, the aggregate fees
billed in each of the last two fiscal years for assurance and related services by the principal accountant
that are reasonably for the performance of the audit or review of the registrant’s financial statements
and are not reported under audit fees.
The SEC’s Final Rule: Strengthening the Commission’s Requirements Regarding Auditor Independence3
(FR-68) and the SEC staff’s Frequently Asked Questions, Application of the Commission’s Rules on Auditor
Independence (Independence FAQs), state that in general this category includes “assurance and related
services (e.g., due diligence services) that traditionally are performed by the independent accountant,”
and “more specifically, these services would include, among others: employee benefit plan audits,
due diligence related to mergers and acquisitions, accounting consultations and audits in connection with
acquisitions, internal control reviews, attest services related to financial reporting that are not required
by statute or regulation and consultation concerning financial accounting and reporting standards [not
classified as audit fees].”4 As indicated above, this caption is intended to include the aggregate fees,
including out-of-pocket expenses, for audit-related services rendered during the year (i.e., January 1 —
December 31 for a calendar year-end company) by the principal accountant. For some projects that are
not billed on a monthly basis, and were in process at the beginning or end of the period, a reasonable
estimate should be made of fees incurred during the fiscal year.

3
4

Final Rule: Strengthening the Commission’s Requirements Regarding Auditor Independence, SEC Release Nos. 33-8183, 34-47265.
An additional example of audit-related fees in the Independence FAQs is an audit of the financial statements of a carve-out entity
in anticipation of a divestiture. In contrast, the Independence FAQs specifically excludes operational audits from this category.


6-4


6.3.4

Tax fees
SEC rules state that registrants should disclose, under the caption tax fees, the aggregate fees billed in
each of the last two fiscal years for professional services rendered by the principal accountant for tax
compliance, tax advice and tax planning.
FR-68 indicates that the tax fees category would “capture all services performed by professional staff in
the independent accountant’s tax division except those services related to the audit…Typically, it would
include fees for tax compliance, tax planning and tax advice. Tax compliance generally involves
preparation of original and amended tax returns, claims for refund and tax payment-planning services.
Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits
and appeals, tax advice related to mergers and acquisitions, employee benefit plans and requests for
rulings or technical advice from taxing authorities.” FR-68 indicates that “the review of a registrant’s tax
returns and reserves is a task that often requires extensive knowledge about the audit client” and for
“many public companies, the fee for tax services is substantial in relation to other services.”
Note — With enhanced disclosure about the types of tax services rendered by the principal accountant,
investors are better able to evaluate the auditor’s work. Many institutional investors rely on this
disclosure when voting for audit committee members and on ratifying the company’s external auditor.
For example, in its review of tax fees, proxy advisory firm Institutional Shareholder Services5 (ISS)
distinguishes between “tax compliance and preparation services” (e.g., preparing original and
amended tax returns and refund claims, tax payment planning) and “other tax services” (e.g., tax
advice, planning or consulting), which ISS categorizes as “other” fees. ISS considers non-audit (other)
fees to be “excessive” when they exceed the sum of audit fees plus audit-related fees plus tax
compliance and preparation fees. When non-audit fees, as defined by ISS, are considered excessive,
ISS recommends that shareholders vote against audit committee members up for election and against
ratification of the external auditor. Companies should consider disaggregating fees categorized as tax
fees to provide more transparency and insight into the types of tax services provided, including the
categories specified by ISS and other proxy advisory firms.

6.3.5

All other fees
SEC rules state that registrants should disclose, under the caption all other fees, the aggregate fees
billed in each of the last two fiscal years for products and services provided by the principal accountant,
other than the services reported in audit fees, audit-related fees and tax fees. All other fees are the fees
for products and services other than those in the above three categories. Generally, this category would
include permitted corporate finance assistance and permitted advisory services.

6.3.5.1

Fees related to the audit of a Conflict Minerals Report
In the final SEC rule release6 on conflict minerals, the SEC staff stated that the engagement to perform
an independent private sector audit of a Conflict Minerals Report should be considered a “non-audit
service” subject to the pre-approval requirements of Rule 2-01(c)(7) of Regulation S-X. Also, the fees for
the independent private sector audit of the Conflict Minerals Report should be included in the all other
fees category of the principal accountant fee disclosures. A description of the nature of the services
comprising the fees also should be disclosed (e.g., “independent private sector audit of the Conflict
Minerals Report”).

5

ISS reviews and updates its proxy voting guidelines each year. ISS’ 2012 US proxy voting summary guidelines are available at
http://www.issgovernance.com/files/2012USSummaryGuidelines1312012.pdf.

6

SEC final rule, Conflict minerals, SEC Release No. 34-67716, issued August 2012.


6-5


A registrant that engages its external auditor to also audit its Conflict Minerals Report should consider
disclosing the fees for that audit, if the amount represents a significant component of ”all other fees.”

6.3.6

Description of nature of services
For audit-related, tax and all other fees, Item 9 requires that registrants describe the “nature of the
services” provided. Item 9 requires a general or “qualitative” description of the principal services that are
included in each category, without a breakdown of the dollar amount by service. While there is no
requirement to disclose the types of services in audit fees, we believe that it would be helpful to include
similar descriptions.

6.3.7

Sample auditor fee disclosure
Registrants may disclose the fee information in either narrative or tabular form. Below are examples of both.

6.3.7.1

Narrative approach
The following is an example of a narrative approach to fee disclosures that would satisfy the SEC’s
disclosure requirements.
Illustration 6-1:

Independent auditor fee information

Audit fees
Fees for audit services and related expenses totaled approximately $16 million in 20X2 and
approximately $12 million in 20X1, including fees associated with the annual audit, including the
integrated audit of internal control over financial reporting, the reviews of the Company’s quarterly
reports on Form 10-Q and statutory audits required internationally.
Audit-related fees
Fees for audit-related services and related expenses totaled approximately $7 million in 20X2 and
approximately $5.2 million in 20X1. Audit-related services principally include due diligence in
connection with acquisitions, accounting consultations, audits in connection with proposed or
consummated acquisitions and information systems audits.
Tax fees
Fees for tax services and related expenses consist of approximately $4 million for tax compliance
including the preparation, review and filing of tax returns and approximately $6 million for tax advice
and tax planning, totaling approximately $10 million in 20X2, compared with approximately $4.5
million for tax compliance and approximately $7.1 million for tax advice and tax planning, totaling
approximately $11.6 million in 20X1.
All other fees
Fees for all other services and related expenses not included above totaled approximately $3.4 million
in 20X2 and $2.3 million in 20X1, principally including support and advisory services for the
Company’s expatriate program and risk management advisory services.


6-6


6.3.7.2

Tabular approach
The following is an example of tabular disclosure of fee information.
Illustration 6-2:

Independent auditor fee information

Fees for professional services provided by our independent auditors in each of the last two fiscal years,
in each of the following categories (in millions) including related expenses are:
20X2
Audit fees

$

16.0

20X1
$

12.0

7.0

Tax fees

5.2

10.0

Audit-related fees

11.6

3.4

All other fees
$

36.47

2.3
$

31.1

Fees for audit services include fees associated with the annual audit, including the audit of internal
control over financial reporting, the reviews of the Company’s quarterly reports on Form 10-Q and
statutory audits required internationally. Audit-related fees principally include due diligence in
connection with acquisitions, accounting consultation, audits in connection with proposed or
consummated acquisitions and information systems audits. Tax fees consist of approximately $4 million
for tax compliance including the preparation, review and filing of tax returns and approximately
$6 million for tax advice and tax planning, totaling approximately $10 million in 20X2, compared with
approximately $4.5 million for tax compliance and approximately $7.1 million for tax advice and tax
planning, totaling approximately $11.6 million in 20X1. All other fees principally include support and
advisory services for the Company’s expatriate program and risk management advisory services.

6.3.8

Disclosure of pre-approval policies and procedures
Rule 2-01(c)(7) of Regulation S-X requires that an issuer’s audit committee pre-approve the specific audit
or non-audit engagement to be rendered by the independent auditor. The rule also permits the company
to engage the independent auditor pursuant to pre-approval policies and procedures established by the
audit committee provided that the policies are detailed as to the particular service, the audit committee is
informed of each service rendered and these policies and procedures do not include delegation of the
audit committee’s responsibilities to management.
Item 9 requires companies to disclose the audit committee’s policies and procedures for pre-approving
audit and non-audit services. FR-68 indicates that the SEC expects registrants to provide clear, concise
and understandable descriptions of the policies and procedures. The SEC notes that, alternatively,
registrants could include a copy of those policies and procedures with the information delivered to
investors and filed with the SEC, and either method should allow shareholders to obtain a complete and
accurate understanding of the audit committee’s policies and procedures.
In the Independence FAQs, the SEC staff noted that for purposes of satisfying the pre-approval
requirements, the audit committee of a parent company may function as the audit committee of a wholly
owned subsidiary that also is an issuer. However, since the wholly owned subsidiary would not be subject
to the proxy rules, the wholly owned subsidiary must disclose its pre-approval policy in its Form 10-K.

7

There is no requirement to show an aggregate total. Also, the Company may at its option show a subtotal for audit and auditrelated fees.


6-7


6.3.9

De minimis exception
Rule 2-01(c)(7)(i)(C) of Regulation S-X provides a de minimis exception to the requirement that all
services be pre-approved by the audit committee. The de minimis exception waives the pre-approval
requirements for non-audit services provided that (1) all such services do not aggregate to more than
5% of total fees paid by the audit client to its accountant in the fiscal year when services are provided,
(2) such services were not recognized as non-audit services at the time of the engagement and (3) such
services are promptly brought to the attention of the audit committee and approved by the audit
committee or one or more designated representatives before the completion of the audit.
If the audit committee has applied the de minimis exception for non-audit services, the company must
disclose the percentage of total fees disclosed in audit-related, tax and all other fees to which the de
minimis exception was applied.

6.3.10

Disclosure of use of leased employees
SEC rules state that, if people other than the principal accountant’s full-time permanent employees
performed more than 50% of the hours of work on the audit of a company’s financial statements for the
most recent fiscal year, the company must disclose the percentage.
This disclosure relates to audits performed by accounting firms that lease their employees from
another party.


6-8

7

Item 10 — Compensation plans
Shareholders frequently are requested to approve the adoption or amendment of employee compensation
or incentive plans at the annual shareholders’ meeting. Item 10 of Schedule 14A specifies information that
must be disclosed in a proxy statement whenever shareholder action is to be taken on a plan involving
either cash or noncash compensation.
The specified information is intended to allow shareholders to evaluate the cost to the registrant of
establishing or amending these plans, including the effect it will have on executive officers’ and directors’
compensation. The information also allows shareholders to consider these effects in relation to the
potential dilution that could occur from past and future equity grants for all existing plans and
arrangements. Three copies of the written document for any proposed plan must be filed with the SEC at
the time the proxy statement is filed. Electronic filers must file with the SEC a copy of the written plan
document in electronic format as an appendix to the proxy statement.
The NYSE and NASDAQ require, as part of their listing standards, shareholder approval of equity
compensation plans, including stock option plans. These rules adopted by the NYSE and NASDAQ provide
only limited exceptions to the shareholder approval requirement. They also require shareholder approval
of repricings and material plan changes.

7.1

General disclosure requirements about plans subject to security
holder action
The proxy rules require general disclosures about the adoption of, or amendment to, all types of
compensation plans submitted to a vote. A registrant must briefly describe the material features of the
plan being acted on and identify each class of persons who will be eligible to participate in the plan,
including the approximate number of persons in each class and the basis of such participation. In
addition, if determinable, the benefits or amounts that will be received by or allocated to each of the
classes must be presented in tabular format, as shown below:

Name and position
PEO
PFO
Named executive A
Named executive B
Named executive C
Executive group (number)
Non-executive director group (number)
Non-executive officer employee group (number)

New plan benefits1
plan name
Dollar value ($)
Number of units
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

yyy
yyy
yyy
yyy
yyy
yyy
yyy
yyy

If such benefits or amounts to be received are not determinable, a registrant must disclose the benefits
that would have been received by, or allocated to, each of the classes for the last completed fiscal year
as if the plan had been in effect, provided such benefits can be determined.

1

If security holders are asked to approve more than one plan (or a material amendment to an existing plan), each plan should be
disclosed separately by inserting additional columns to the table.


7-1

7 Item 10 — Compensation plans

If management can modify the plan without shareholder approval, either by increasing the total cost to
the registrant or by reallocating benefits, that also must be disclosed, including the nature of the
modifications that management can make unilaterally.
If the action to be taken is a material amendment or modification of an existing plan, the registrant is
required to furnish the required Item 10 information for the plan as proposed to be modified or amended
and must indicate any material differences from the existing plan.
In addition to the general disclosures to be made for all compensation plans, the proxy statement must
make additional disclosures, as described below, for pension or retirement plans and options, warrants or
rights submitted for shareholder action.

7.1.1

Pension or retirement plans
An estimate must be made of the total amount necessary to fund the plan with respect to past service
costs, including estimated annual payments and the period over which past service costs will be funded.
The registrant also must disclose the estimated annual payment with respect to current service costs.

7.1.2

Options, warrants or rights
The proxy statement must list basic information about options, warrants or stock rights for the new plan
or the plan being amended. Specifically, it should list the title and amount of securities, prices, expiration
dates, current market value of the related securities, the consideration received or to be received for
granting or extending options, warrants or rights, and the federal income tax consequences of the
issuance and exercise of options to both the registrant and the recipient. Further, the proxy statement
must disclose the number of options received or to be received by each NEO; for current executive
officers as a group; current directors (excluding executive officers) as a group; director nominees;
associates of any of the directors, executive officers or nominees;2 each other person who received or is
to receive 5% of such options, warrants or rights; and all employees, including all current officers
(excluding executive officers) as a group.

7.2

Information about plans and other arrangements not subject to security
holder action
For proxy and information statements for meetings of, or action by, security holders, Item 201(d) of
Regulation S-K requires registrants to furnish certain additional disclosures whenever a compensation
plan is being submitted for shareholder action. These disclosures also are required in every Form 10-K.
The disclosures summarize the potential dilution that could occur from past and future equity grants for all
plans and arrangements.

2

“Associate” is defined in Rule 14a-1 of the Exchange Act as (1) any corporation or organization (other than the registrant or a
majority-owned subsidiary of the registrant) of which such person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities, (2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity and (3) any relative or spouse
of such person or any relative of such spouse, who has the same home as such person or who is a director or officer of the
registrant or any of its parents or subsidiaries.


7-2

7 Item 10 — Compensation plans

The following tabular information is required for all equity compensation plans and individual
compensation arrangements (whether with employees or non-employees, such as directors, consultants,
advisers, vendors, customers, suppliers, and lenders), in effect as of the end of the latest fiscal year:

Plan category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)

Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total

The disclosures are required to be segregated into two categories: plans that have been approved by
security holders and plans that have not been approved by security holders. However, a registrant may
choose to aggregate the data about all plans and arrangements that fall into each respective category.
Further, for individual plans and arrangements assumed in a merger or acquisition, a registrant is
permitted to aggregate data about those plans with the respective tabular information about the
registrant’s own plans, provided that a footnote to the table provides the column (a) and (b) data for any
assumed awards that are still outstanding.
If more than one class of equity security is issuable under the various plans, the tabular information should
be provided separately for each class of security. The disclosure should be provided without regard to
whether the securities to be issued are authorized but unissued securities, or reacquired shares. If column
(c) includes securities available for future issuance other than upon exercise of an option, warrant or right
(e.g., restricted stock), a footnote to the table should disclose for each relevant plan the type of plan and
associated number of securities. If any equity compensation plan includes a formula for calculating the
number of securities available for future issuance (e.g., the plan provides available securities equal to a
percentage of outstanding securities), a footnote to the table should describe such formula.
When a registrant is submitting a new plan for security holder approval, the number of securities subject
to future grants under that new plan would not be included in the table. Instead, the proxy statement
would identify the number of shares to be authorized under any proposed new plan. When a registrant is
submitting a plan amendment for security holder action, the tabular disclosures should include the
information pursuant to the existing plan, and not for any proposed changes subject to security holder
approval. The number of additional securities to be issued under a proposed plan amendment should be
disclosed elsewhere in the proxy statement.
A registrant also must identify and provide a brief narrative summary of the material features of each
equity compensation plan in effect at the end of the most recently completed fiscal year that was
adopted without security holder approval. This requirement may be satisfied by a cross-reference if the
required information is included in the notes to the financial statements. In addition, a registrant must file
as an exhibit to its periodic Exchange Act reports (e.g., Forms 10-K, 10-Q) any equity compensation plan
adopted without the approval of security holders in which any employee participates (including those
assumed in a merger, consolidation or acquisition, under which future grants may be made), unless
immaterial in amount or significance.


7-3

8 Other proxy related disclosures

8

Other proxy related disclosures
In some cases, financial statements and other disclosures must be furnished as part of the proxy
soliciting material. The basic financial statement requirements are set forth in Items 13 and 14 of
Schedule 14A. Item 5 of Schedule 14A requires golden parachute disclosures.
The financial statements that registrants must provide to shareholders under the proxy rules normally
are provided to shareholders in a document that is separate from the annual meeting proxy statement
(e.g., glossy annual report). However, the financial statements must be included or incorporated by
reference in the proxy statement when the proxy is being used to solicit a shareholder vote on any of the
matters under Items 13 or 14 of Schedule 14A, which are summarized below.1
Despite the requirements of Regulation S-X, no financial statement schedules are required in the proxy
statement other than those required by Rules 12-15 (Article 7 of Regulation S-X for insurance
companies), 12-28 and 12-29 of Regulation S-X (or Rule 12-12 through 12-14 of Regulation S-X for
management investment companies).
To assist in its review of proxy statements that contain financial statements, the SEC requests written
representation that the preliminary proxy material has been considered by the auditors and that the
auditors are prepared to permit the use of their report. A manually signed auditors’ report will satisfy
this requirement.

8.1

Item 13. Financial and other information
Registrants must provide the information in Item 13 of Schedule 14A when the proxy is being used to
solicit a shareholder vote to:
•

Authorize or issue additional securities under Item 11 (e.g., securities to be issued for cash in a
public offering) other than for an exchange for outstanding securities of the registrant, which would
fall under Item 12

•

Modify or exchange outstanding securities under Item 12

Registrants are required to provide various information including (1) financial statements meeting the
requirements of Regulation S-X,2 (2) Item 302, Supplementary Financial Information, of Regulation S-K,
(3) Item 303, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of
Regulation S-K, (4) Item 304, Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure, of Regulation S-K, (5) Item 305, Quantitative and Qualitative Disclosures About Market Risk,
of Regulation S-K and (6) a statement as to whether (i) representatives of the principal accountants for
the current year and for the most recently completed fiscal year are expected to be present at the

1

2

The ability to incorporate by reference financial statements required in a proxy statement is specified in Items 13 and 14 of
Schedule 14A. These guidelines generally follow incorporation by reference rules for registration statements on Forms S-1, S-3, and
S-4. Subject to certain conditions required by Item 13(b)(2) of Schedule 14A, all registrants may incorporate by reference financial
statements from the annual shareholders’ report or other previously filed document as long as the report or document is delivered
with the proxy statement.
Registrants also must include any financial information required by Rule 3-05 and Article 11 of Regulation S-X for transactions
other than the one on which action is being taken in the proxy statement. A smaller reporting company may provide the
information in Rules 8-04 and 8-05 of Regulation S-X in lieu of the financial information required by Rule 3-05 and Article 11
of Regulation S-X (see Section 9 of this publication for further information on smaller reporting companies).


8-1


shareholders’ meeting, (ii) they will make a statement and (iii) they are available to respond to questions.
However, any or all of this information may be omitted if it is not material to the exercise of prudent
judgment. For example, Item 13 of Schedule 14A presumes this information would be material to the
decision to authorize or issue a material amount of senior securities. However, the information usually is
not material if shareholders are being asked to authorize or issue common stock (except in an exchange,
merger, consolidation, acquisition or similar transaction); authorize preferred stock that the registrant has
no specific plans to issue; or authorize preferred stock for issuance for cash at fair value.

8.2

Mergers, consolidations, acquisitions and similar matters
Depending on state law and a company’s articles of incorporation, a company often needs shareholder
approval for merger and consolidation transactions.

8.2.1

Golden parachute disclosures and shareholder vote
In any proxy or consent solicitation material for shareholders to approve an acquisition, merger or similar
transaction, including the proposed sale or other disposition of all or substantially all the assets of an
issuer, the soliciting issuer is required to disclose all golden parachute arrangements3 in Item 5 of
Schedule 14A and hold a shareholder advisory vote on certain of these arrangements.

8.2.1.1

Item 402(t) of Regulation S-K
Item 402(t) of Regulation S-K specifies the required golden parachute disclosures.4 All golden parachute
arrangements involving the NEOs of either the acquirer or the target (regardless of whether the acquirer
or target would make the payments and regardless of the identity of the party soliciting the proxy) fall
within the scope of Item 402(t). Thus, Item 402(t) includes disclosure of:
•

Arrangements by the target with its NEOs and the NEOs of the acquirer

•

Arrangements by the acquirer with its NEOs and the NEOs of the target

Item 402(t) requires a table with quantitative disclosure of the individual executive compensation
elements for each NEO with respect to amounts that will be paid or payable in connection with the
transaction subject to shareholder approval.

8.2.1.2

Golden parachute compensation table
Name
(a)

Cash ($)
(b)

Equity ($) Pension/NQDC ($)
(c)
(d)

Tax
reimbursement ($)
(e)

Other ($)
(f)

Total ($)
(h)

PEO
PFO
A
B
C

3

4

Agreements or understandings with NEOs concerning any compensation (present, deferred or contingent) that is based on or
related to a merger or similar transaction.
Agreements or understandings with senior management of a foreign private issuer target or acquirer are exempt from the Item
402(t) disclosures.


8-2


The table requires quantitative disclosure of the following types of compensation for each NEO:
•

Cash severance payment (e.g., base salary, bonus and pro-rata non-equity incentive plan)

•

Dollar value of accelerated stock awards, in-the-money options awards for which vesting would be
accelerated and payments in consideration of cancelling stock and option awards

•

Pension and nonqualified deferred compensation benefit enhancements

•

Perquisites and other personal benefits and health and welfare benefits

•

Tax reimbursements

•

“Other,” for any additional elements not specifically included in other columns of the table5

•

Aggregate total of all golden parachute compensation

In addition, an issuer is required to describe the following in narrative form:
•

Material conditions or obligations applicable to the receipt of golden parachute payments
(e.g., non-compete or confidentiality agreements)

•

Circumstances that would result in payment

•

Whether payments would or could be lump-sum or annual and their duration

•

Who would make the payments

Item 402(t) does not affect the disclosures required by Item 402(j) in Form 10-K and in annual meeting
proxy statements for potential payments that would be made to NEOs of the issuer on termination or
change-in-control.

8.2.1.3

Shareholder vote6
A separate nonbinding shareholder vote is required on golden parachute arrangements between the
soliciting company and its NEOs or the NEOs of the counterparty to the transaction. An advisory vote is
not required on all golden parachute compensation arrangements for which disclosure is required under
Item 402(t) of Regulation S-K. For example, when a target company solicits a proxy to approve a merger,
golden parachute compensation arrangements between the acquiring company and the NEOs of the
target company do not require a shareholder advisory vote, but those arrangements require disclosure
under Item 402(t).
If the golden parachute arrangement has been subject to a previous shareholder advisory vote on
executive compensation, an additional vote is not required. Some issuers, therefore, may voluntarily
provide Item 402(t) disclosures about arrangements with their NEOs as part of their executive
compensation disclosures in annual meeting proxy statements and include them within the scope of the
recurring shareholder advisory votes on executive compensation.
If the golden parachute arrangements change, issuers that already have held votes on these
arrangements would need to hold a vote only on the changes.

5
6

Amounts included in “other” should be identified in a footnote to the table.
As discussed in Section 1, emerging growth companies are not required to comply with the say-on-pay provisions of the DoddFrank Act.


8-3


8.2.2

Financial statements
Item 14 of Schedule 14A requires financial statements of the registrant and the target to be included in
the proxy statement, if shareholders are voting on any transaction involving:
•

The merger or consolidation of the registrant into or with any other company or of any other
company into or with the registrant

•

The acquisition by the registrant of securities of another company

•

The acquisition by the registrant of any other business or of the assets of another business

•

The sale or other transfer of all or any substantial part of the assets of the registrant

•

The liquidation or dissolution of the registrant

The requirements for financial statements are similar to those in a Form S-4 filing, which are discussed
below. Item 14 provides the following relief:
•

If the transaction is a cash merger or third-party cash tender offer, the acquirer’s financial
statements are not required unless the information is material to an informed voting decision
(e.g., the target’s shareholders are voting and financing is not assured). If only the shareholders of
the target are voting, financial statements of the target are not required.

•

If the transaction includes the offer of securities exempt from registration under the Securities Act or
includes a combination of exempt securities and cash to the target’s shareholders and only the
shareholders of the acquirer are voting, the acquirer’s financial statements are not required unless
they would be material to an informed voting decision. If only the shareholders of the target are
voting, financial statements of the target are not required.7

•

No financial statements for either the acquirer or the target are required if the vote only involves the
merger of the acquirer and one or more of its wholly owned subsidiaries.

Despite any Item 14 relief, depending on its significance to the registrant, the target’s audited financial
statements may be required to be filed in a Form 8-K on consummation of the acquisition.
A subpart of Regulation S-K, entitled Regulation M-A, contains the disclosure requirements for tender
offers, going-private transactions and other extraordinary transactions. If action will be taken on any
matter in Item 14, confidential treatment will be available for the preliminary proxy statement as long as:
•

The preliminary proxy statement does not relate to a matter or proposal subject to Rule 13e-3 of the
Exchange Act, or a roll-up transaction as defined in Item 901(c) of Regulation S-K.

•

No party to the transaction has made any public communications relating to the transaction except
for statements in which the content is limited to the information specified in Securities Act Rule 135.

•

The materials are filed in paper and marked “Confidential, For Use of the Commission Only.” In all
cases, the materials may be disclosed to any department or agency of the United States Government
and to the Congress, and the SEC may make any inquiries or investigation into the materials as may
be necessary to conduct an adequate review.

7

However, financial statements of the target must be provided if the transaction is a going-private or a roll-up transaction.


8-4


If communications are made publicly that go beyond the information specified in Securities Act Rule 135,8
the registrant must promptly and electronically re-file the preliminary proxy statement with the SEC as
public information.

8.3

Registration statements on Form S-4
If a merger takes the form of an exchange of one registrant’s securities for the securities or assets of
another company, the securities to be issued usually are registered under the Securities Act using
Form S-4. In these situations, the proxy statement becomes the basis for the prospectus and some
additional information is added. Thus, the registration statement is “wrapped around” the proxy statement.
Form S-4 streamlines the disclosures required to be made to investors for business combinations and
certain other transactions. Form S-4 permits incorporation by reference of the Exchange Act reports to
the same extent as Form S-1 or Form S-3 as applicable. Form S-4 often reduces the complexity and
length of exchange offer registration statements.
The financial statement requirements of a target on Form S-4 are separate from the financial statement
requirements of completed and probable business combinations under Rule 3-05 of Regulation S-X.
Generally, financial statements of the target must be provided, regardless of the target’s level of
significance. Under Form S-4 and Regulation 14A, three years of audited financial information is required
for both the acquirer and a reporting target (whether or not the acquirer’s shareholders are voting) in
takeover transactions. As discussed below, exceptions to this rule exist if the target is a non-reporting
entity and the securities will not be registered for resale. The Form 10-K and registration statement
checklist supplement to GAAP disclosure checklist (Ernst & Young Form No. A69) should be reviewed
when evaluating compliance with Form S-4.

8.3.1

Non-reporting target and acquirer’s shareholders are voting
If the acquirer’s security holders are voting on the transaction, the annual financial statements of the
non-reporting target would be required as if the target were issuing an annual report to shareholders
under Rules 14a-3(b)(1) and (b)(2). If the Form S-4 will be used to register securities for resale to the
public by any person who is deemed an underwriter within the meaning of Rule 145(c) of the Exchange
Act,9 the financial statements of the non-reporting target must be audited for the periods required under
Rule 3-05 of Regulation S-X. Otherwise, financial statements of the non-reporting target must be audited
for the latest fiscal year only if practicable and the financial statements for the two years prior to the
most recent fiscal year need not be audited if they were not previously audited. However, in these
circumstances, the registrant will continue to have the obligation to provide audited financial statements
of the target in a Form 8-K on consummation of the acquisition for the periods required under Rule 3-05
based on the significance of the target company.

8.3.2

Non-reporting target and acquirer’s shareholders are not voting
If the acquirer’s shareholders are not voting on the transaction, and the non-reporting target is not in
excess of 20% significant to the acquirer, no financial information (including interim or pro forma
information) for the target company is required. However, for any subsequent registration statement, a
registrant will continue to have the obligation under Rule 3-05 to evaluate individually insignificant
acquisitions in the aggregate.

8
9

See the discussion in Section 2 of this publication about the provisions of Rule 135.
Exchange Act Rule 145 does not restrict the ability of a non-affiliate to sell registered securities received in a business combination
transaction, unless a shell company was involved in the transaction. See SEC Release No. 33-8869, Revisions to Rules 144 and 145.


8-5


On the other hand, if the acquirer’s shareholders are not voting on the transaction but the non-reporting
target is in excess of 20% significant to the acquirer, annual financial statements of the target for the
most recent fiscal year are required in Form S-4. In addition, if the target has provided its shareholders
GAAP financial statements for either or both of the two fiscal years before the most recent fiscal year,
financial statements for those years are required as well. If Form S-4 will be used to register securities for
resale to the public by any person who is deemed an underwriter within the meaning of Rule 145(c) of
the Exchange Act,9 the financial statements of the non-reporting target must be audited for the periods
required under Rule 3-05. Otherwise, financial statements of the non-reporting target for the latest
fiscal year must be audited only to the extent practicable and the financial statements for the two years
before the most recent fiscal year need not be audited if they were not previously audited. However, in
these circumstances, the registrant will continue to have the obligation to provide audited financial
statements of the target in a Form 8-K on consummation of the acquisition for the periods required
under Rule 3-05 based on the significance of the target company.


8-6

9 Smaller reporting and emerging growth companies

9

Smaller reporting and emerging growth
companies

9.1

Definition of a smaller reporting company
A “smaller reporting company” may use the scaled disclosure and reporting requirements described in
Regulation S-K. In addition to the information presented below, please see Section 9 of our publication,
SEC annual reports (Ernst & Young No. CC0360), for more information about smaller reporting companies.
As defined in Regulation S-K [Item 10(f)(1)], smaller reporting companies must meet one of the
following criteria:
•

For an SEC reporting company, less than $75 million of worldwide public float as of the last business
day of its most recently completed second fiscal quarter (i.e., the amount disclosed on the cover
page of Form 10-K that also is used to determine whether the issuer is an accelerated filer)

•

For an issuer filing its IPO of common equity, less than $75 million of worldwide public float
(calculated within 30 days of its filing using the estimated IPO price and the aggregate number of
shares held by non-affiliates and the number of shares being offered)1

•

For an issuer without publicly traded equity (e.g., a company with only public debt or preferred
stock), annual revenues of less than $50 million during its most recently completed fiscal year for
which audited financial statements are available

However, the following companies are ineligible to qualify as smaller reporting companies: an investment
company, an asset-backed issuer or a majority-owned subsidiary of a non-qualifying parent.
A smaller reporting company may choose, on an item-by-item basis within any filing, whether to apply
Regulation S-K’s scaled disclosure requirements or the more rigorous disclosure requirements applicable
to larger public companies. Nevertheless, the SEC stresses the importance of consistent disclosures that
allow investors to make period-to-period comparisons, whether quarterly or annually.
Article 8 of Regulation S-X requires a smaller reporting company to file an audited balance sheet as of
the end of the two most recent fiscal years and audited statements of income, comprehensive income (if
applicable), cash flows and changes in stockholders’ equity for the two most recent fiscal years
(compared with three fiscal years required of larger issuers).

1

Following an IPO of common equity, an issuer that was not a smaller reporting company may reassess its status at the end of the
offering based on the actual offering price and number of shares sold. If it qualifies, the issuer may begin filing its periodic reports
as a smaller reporting company.


9-1


9.2

Proxy filing by a smaller reporting company
The following summarizes the requirements of Item 7 of Schedule 14A, Directors and Executive Officers,
for smaller reporting companies and which of those disclosures also are required in the Form 10-K of a
smaller reporting company:
Disclosure requirement of Item 7 of Schedule 14A


Regulation S-K Item


Yes (Part III — Item 10;
Part I — Item 3)

401 (a) — (g); 103
(Instruction 4)



407 (a)

Board meetings and committees; annual meeting
attendance

No

407 (b)


No*

407 (c)(1) & (2)


•


No

407 (d)(1)

•


No

407 (d)(2)

•


No

407 (d)(3)

•



407 (d)(4)

•

Audit committee financial expert**


407 (d)(5)


No

407 (e)(1) — (3)


No

407 (f)


No

407(h)



404 (d)(1)

Parents***


404 (d)(3)



405

*

Smaller reporting companies are required to report any material change to the procedures for security holders to recommend a
director candidate in their periodic Exchange Act report for the period that the material change occurs (e.g., for a change that
occurred during the fourth fiscal quarter, the disclosure would be required in the registrant’s annual report on Form 10-K).

** Disclosure requirements for Item 407(d)(5) are discussed in Section 3.3.2.
*** These disclosures are not required for larger issuers.

9.3

Items 402(l) through 402(r) of Regulation S-K requires specific disclosure for smaller reporting
companies. The following summarizes the Compensation of Directors and Executive Officers disclosures
otherwise required in the proxy statement of a larger issuer, along with a designation whether those
disclosures are required for a smaller reporting company2 and the applicable disclosure Item in
Regulation S-K.

2

Emerging growth companies may follow the reporting requirements in Item 402 of Regulation S-K applicable to smaller reporting
companies. See Section 9.6 for further discussion.


9-2


disclosure item

Required for smaller
reporting companies?


No

Summary compensation table (SCT)

Yes*


No

Narrative disclosure to the SCT

Yes

402 (o)


Yes

402 (p)


No


No


No

Other potential post-employment payments

Yes**

402 (q)

Director compensation table (DCT)

Yes*

402 (r)

Narrative disclosures to the DCT

Yes

402 (r)(3)

Disclosure of overall compensation policies and practices
for risk management and risk-taking incentives

No

Board compensation committee report on executive
compensation

No

Disclosure of compensation committee interlocks and
insider participation

No

Golden parachute compensation

Yes***

Regulation S-K item

402 (n)

402(t)

*

The SCT for smaller reporting companies is only required to provide information for the last two fiscal years, and requires
disclosure for only the PEO and the two most highly compensated executive officers other than the PEO. Smaller reporting
companies also are not required to report the change in pension value in the SCT or the DCT.
** Item 402(q) of Regulation S-K requires a narrative description of: (1) the material terms of each plan that provides for the
payment of retirement benefits, or benefits that will be paid primarily following retirement and (2) the material terms of each
contract, agreement, plan or arrangement that provides for payments to an NEO at or following the resignation, retirement or
other termination of the NEO or a change in control of the registrant or a change in the NEO’s responsibilities following a
change in control.
*** Item 402(t) of Regulation S-K is only required for smaller reporting companies for a proxy or consent solicitation material for
shareholders to approve an acquisition, merger, consolidation or the proposed sale or other disposition of all or substantially all
of a company’s assets. Although Item 402(t) is not required in annual meeting proxy statements, smaller reporting companies
also may include disclosure pursuant to Item 402(t) voluntarily if they believe it would permit shareholders to gain a better
understanding of their compensation programs. See Section 8 of this publication for a discussion of Item 402(t).

9.4

Certain relationships and related transactions
Item 404(d) of Regulation S-K, Transactions with Related Persons, Promoters and Certain Control
Persons, has more rigorous disclosure requirements than those otherwise required for larger issuers
under Items 404(a) through 404(c) of Regulation S-K. A smaller reporting company must comply with
these more rigorous disclosures even if it does not otherwise elect to use the scaled disclosures available
under other Items of Regulation S-K.
Instruction 2 to Item 404(d) of Regulation S-K requires a smaller reporting company to provide
disclosures covering a longer period. A smaller reporting company must disclose related person
transactions since the beginning of its two most recent fiscal years, as well as any proposed transactions.
However, the identification of related persons for purposes of smaller reporting company disclosure only
considers relationships with respect to the most recent fiscal year.


9-3


In addition, Item 404(d)(1) of Regulation S-K provides a lower quantitative threshold for reporting related
person transactions. A smaller reporting company is required to describe related person transactions in
which the amount involved exceeds the lesser of $120,000 or 1% of the average of the smaller reporting
company’s total assets at year-end for the last two completed fiscal years (versus a single $120,000
disclosure threshold for larger issuers). An instruction to Item 404(d) of Regulation S-K also requires a
smaller reporting company to provide specific information about material underwriting discounts and
commissions paid when a related person was a principal underwriter (or a controlling person or member
of a firm serving as principal underwriter).
Smaller reporting companies are not required to provide the disclosures otherwise required by Item 404(b)
of Regulation S-K, Review, Approval or Ratification of Transactions with Related Persons. However, under
Item 404(d)(3) of Regulation S-K, a smaller reporting company must provide a list of all its parents, if
any, showing the respective basis of control and the percentage of voting securities owned, or other
basis of control by its immediate parent.

9.5

Annual report to shareholders
As discussed in Section 2 of this publication, management also must provide an annual report to all
shareholders when soliciting proxies for the annual meeting (or a special meeting to elect directors). The
proxy rules require that the following items be included in the annual report to shareholders for registrants
filing under the reduced disclosures available to smaller reporting companies under Regulation S-K:
•

For a smaller reporting company filing its annual report on Form 10-K, audited consolidated
financial statements, including a balance sheet as of the end of the two most recent fiscal years
and statements of income, comprehensive income (if applicable) changes in shareholders’ equity,
and cash flows for each of the two most recent fiscal years, prepared in accordance with GAAP
(Article 8 of Regulation S-X)

•

Management’s discussion and analysis (Item 303 of Regulation S-K) — However, a smaller reporting
company must provide only two years of analysis if it presents only two years of financial statements

•

Changes in and disagreements with accountants on accounting and financial disclosures (Item 304(b)
of Regulation S-K)

•

A brief description of the general nature and scope of the business done by the registrant and its
subsidiaries for the latest fiscal year

•

Director and executive officer information: name, principal occupation or employment and name of
employer and its principal business

•

Common stock market prices and dividends for the last two years, along with other market
information and related shareholder matters (Item 201(a), (b) & (c) of Regulation S-K)

•

A statement, which may be in the proxy statement instead of the annual report to shareholders, that
the annual report (Form 10-K), including the financial statements, will be furnished free of charge on
written request

Note that smaller reporting companies are not required to provide a stock performance graph
(Item 201(e) of Regulation S-K), selected financial data (Item 301 of Regulation S-K), selected
quarterly financial data (Item 302(e) of Regulation S-K), tabular disclosure of contractual obligations
(Item 303(a)(5) of Regulation S-K) or the quantitative and qualitative disclosures about market
risk (Item 305 of Regulation S-K).


9-4


9.6

Emerging growth companies
An EGC is defined as a company with total annual gross revenues of less than $1 billion in its most
recently completed fiscal year. An issuer with EGC status loses its eligibility as an EGC five years after its
common equity IPO or earlier if it meets any of the following criteria:
•

Has annual revenues exceeding $1 billion

•

Issues more than $1 billion in nonconvertible debt securities over a rolling three-year period,
including securities issued in registered or unregistered offerings

•

Becomes a large accelerated filer (i.e., a seasoned issuer with public float of $700 million or more)

The JOBS Act exempts EGCs from certain requirements during the on-ramp period. An EGC is not
required to follow all of the scaled disclosure provisions.
In its proxy statement, an EGC may provide executive compensation disclosures required under Item 402
of Regulation S-K in a manner consistent with a smaller reporting company and therefore is not required
to include a Compensation Discussion and Analysis. Also, there are far fewer tabular executive
compensation disclosure requirements for EGCs. See Section 9.3 of this publication for the Item 402
requirements for smaller reporting companies.
EGCs also are not required to comply with the provisions of the Dodd-Frank Act that require companies
to hold a shareholder advisory vote on executive compensation and golden parachutes. For more
discussion on shareholder advisory votes on executive compensation and golden parachutes, see
Sections 2.5 and 8.2.1.3, respectively.
The provisions in Title I of the JOBS Act for EGCs were effective on 5 April 2012, when the Act was
enacted. The SEC is expected to adopt conforming changes to its existing rules and regulations to resolve
conflicts with the Act’s provisions. In the meantime, the SEC staff has indicated that if an EGC complies
with the scaled executive compensation disclosures allowed by the JOBS Act, it would still be in
compliance with the disclosure provisions of the Exchange Act.


9-5

A Abbreviations

A

Abbreviations
Abbreviation

FASB Accounting Standards Codification

ASC 280

FASB ASC Topic 280, Segment Reporting

ASC 718

FASB ASC Topic 718, Compensation — Stock Compensation

ASC 932

FASB ASC Topic 932, Extractive Activities — Oil and Gas

ASC 942

FASB ASC Topic 942, Financial Services — Depository and Lending

ASC 944

FASB ASC Topic 944, Financial Services — Insurance

ASC 948

FASB ASC Topic 948, Financial Services — Mortgage Banking

ASC 954

FASB ASC Topic 954, Health Care Entities


A-1

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