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SEC Adopts Proxy Disclosure Changes

Yesterday, the SEC approved rules changing the information provided to shareholders in proxy materials about risk, compensation, and corporate governance.  The rule apply to all public companies regulated by the SEC, including investment companies. 

In particular, the new rules require disclosures in proxy and information statements about:

  • The relationship of a company's compensation policies and practices to risk management.
  • The background and qualifications of directors and nominees.
  • Legal actions involving a company's executive officers, directors and nominees.
  • The consideration of diversity in the process by which candidates for director are considered for nomination.
  • Board leadership structure and the board's role in risk oversight.
  • Stock and option awards to company executives and directors.
  • Potential conflicts of interests of compensation consultants.

Of particular interest are the following changes to proxy disclosure, some of which deviate from the provisions originally proposed in July.

Disclosure About Compensation Policies and Practices as They Relate to Risk Management

This disclosure change is intended to provide information on compensation policies that could give incentives to take significant financial risks.  During yesterday's open meeting, the SEC Staff indicated that in assessing whether this particular disclosure is required, companies may take into account controls and other risk management techniques and programs that are in place to mitigate the potential effect of compensation policies that might give executives and other employees the incentive to take undue risks.  Consequently, in order to be able to determine whether this disclosure is required, companies will need to examine closely the potential for, and controls surrounding, risk-based compensation structures. 

Enhanced Information About Directors and Nominees

The new proxy rules require additional disclosures about directors and director nominees:

  • The particular experience, qualifications, attributes or skills that led the company's board to conclude that the person should serve as a director of the company.
  • Any directorships at public companies and registered investment companies that each director and director nominee held at any time during the past five years.
  • Legal proceedings, such as SEC securities fraud enforcement actions against the director or nominee, going back 10 years, instead of the current five years, as well as an expanded list of legal proceedings covered by the rule.

Disclosure About How Diversity Is Considered in the Director Nomination Process

Disclosures about board nominating committees (Regulation S-K, Item 407(c)) now require disclosure of whether, and if so how, a nominating committee considers diversity in selecting nominees for director positions.  If the  the board has a policy regarding the consideration of diversity in director nominations, the rule amendments require disclosure of how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.  The term "diversity" is not defined in the rule, so that companies can develop their own definition, and have the freedom to include factors like diversity of skill sets in their definition.

Disclosure About Board Leadership Structure and the Board's Role in Risk Oversight

The SEC approved rules relating to board leadership structure and the board's role in risk oversight. The rules require disclosure about:

  • A company's board leadership structure, including whether the company has combined or separated the chief executive officer and chairman position, and why the company believes its structure is the most appropriate for the company at the time of the filing.
  • In certain circumstances, whether and why a company has a lead independent director and the specific role of such director.
  • The extent of the board's role in the risk oversight of the company.

The rule amendments also include provisions requiring disclosure of the results of a shareholder vote within four business days after the end of the meeting in which the vote was held, as well as revisions to the Director Compensation Table to better reflect awards of options and performance based compensation to executives, as well as additional disclosures about the use of compensation consultants.

The full text of the final release, Proxy Disclosure Enhancements, is available at:  http://sec.gov/rules/final/2009/33-9089.pdf

The SEC's summary of the release is available at: http://sec.gov/news/press/2009/2009-268.htm