SEC adopts amendments to executive compensation disclosure ...

AUGUST 15, 2006

SEC adopts amendments to executive compensation
disclosure; new Form 8-K rules effective this fall

On August 11, 2006, the Securities and Exchange Commission released final rules regarding
the disclosure requirements for executive and director compensation, related party
transactions, director independence, and other corporate governance matters. The final rules
are designed to provide shareholders with a clearer and more complete picture of director
and officer compensation. They are also designed to add transparency to key financial
relationships among companies and their executive officers, directors, significant
shareholders, and their respective immediate family members. The final rules are available
on the Commission’s web site.1 We will be releasing a number of Securities Law Alerts that
address the changes required by the new rules and highlight the actions you should consider
taking now to prepare for next proxy season. This Securities Law Alert will review the
amendments to the Form 8-K disclosure requirements, which will be effective 60 days from
publication of these rules in the federal register, or approximately mid-October.

Updates to Items 1.01, 1.02 and 5.02 and the general instructions of
Form 8-K

The final rules amend Items 1.01 and 5.02 of Form 8-K (and by reference, Item 1.02 of
Form 8-K). These significant changes concern disclosure of material compensation plans,
contracts, or arrangements, including plans relating to options, warrants, or rights,
retirement, or deferred compensation, or bonus, incentive, or profit sharing plans between a
company and a named executive officer. The Commission adopted these modifications to
Form 8-K in light of the increased frequency, since the effectiveness of the extensive Form
8-K reforms in August 2004, of disclosure under Item 1.01 and 1.02 of director and officer
compensation that falls short of the “unquestionably or presumptively material” standard the

1 http://www.sec.gov/rules/final/2006/33-8732.pdf

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Commission intended for the expanded Form 8-K disclosure items.2 The amendments to
Form 8-K eliminate employment compensation agreements from the scope of Item 1.01,
and instead expand the disclosure required by Item 5.02 to cover only those compensation
agreements with named executive officers3 that are clearly unquestionably or presumptively
material.

The amendments to Form 8-K:

• Add a new Item 5.02(e) to Form 8-K that requires the disclosure of the
adoption, material modification or amendment of, or material grant or award
that is made or materially modified under any compensatory plan, contract or
arrangement in which a principal executive officer, principal financial officer,
or named executive officer participates. Disclosure under this new Item
5.02(e) is required whether or not the occurrence is in connection with a
triggering event specified in Item 5.02 (the appointment, retirement,
resignation or termination of a covered officer or director). However, grants
or awards under or modifications made to these agreements do not have to be
disclosed in a Form 8-K if the awards, grants, or modifications thereto are
consistent with the original terms of the agreement, and the award or grant is
disclosed the next time Item 402 reporting is required. For example, if a
named executive officer enters into an employment agreement that
contemplates future option grants, such grants would not have to be disclosed
in a Form 8-K at the time of the grant so long as this information is provided
the next time Item 402 information is required (i.e. a company’s annual proxy
statement).

• Add a new Item 5.02(f) to Form 8-K requiring disclosure of the payment, grant
or award of a named executive officer’s salary or bonus for the most recently
completed fiscal year, if that information was omitted from the Summary
Compensation Table because it was not available at the time of filing the
company’s Item 402 disclosure in its annual report or proxy. Such Form 8-K
also must include a new total compensation figure for the named executive
officer, based upon information that was previously provided in the Summary
Compensation Table.4

• Add an instruction to Item 5.02 of Form 8-K that clarifies that disclosure
regarding compensatory arrangements is not required under Item 5.02 to the
extent that such arrangements do not discriminate in favor of executive
officers or directors and are generally available to all salaried employees.

2 Much of this increased disclosure is the result of the incorporation of the Item 601(b)(10)(iii) standards from
Regulation S-K for filing employment compensation agreements into Form 8-K, Items 1.01 and 1.02. The
final rules uncouple Item 601(b)(10)(iii) from the Form 8-K disclosure requirements.

3 The amendments define the term “named executive officers” in a revised Item 402(a)(3) of Regulation S-K to

include the principal executive officer, the principal financial officer and the three most highly compensated

executive officers other than the principal executive officer and principal financial officer.

4 Prior to the addition of new Item 5.02(f) to Form 8-K, if a named executive officer’s salary or bonus for the
most recently completed fiscal year was not available at the time of filing a company’s annual report or proxy,
then such amounts were generally not reported until the filing of the annual report or proxy for the following
fiscal year.

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• Expand the persons to which the retirement, resignation or termination
provisions of Item 5.02(b) apply to include all named executive officers for the
company’s previous fiscal year in addition to the persons to whom Item 5.02(b)
previously applied: principal executive officer, president, principal financial
officer, principal account officer, principal operating officer or any person
performing similar functions (referred to here as simply, “covered officers”),
and directors.

• Expand the disclosure presented in connection with the appointment of a
covered officer or director (except by shareholder vote) under Items 5.02(c)(3)
and new Item 5.02(d)(5) beyond a brief description of the material terms of any
employment agreements to also require a brief description of any material plan,
contract or agreement to which a covered officer or director is a party or
participant that is entered into or materially amended in connection with their
appointment.

• Add an instruction to Form 8-K permitting companies to omit the currently
required Item 1.01 heading in a Form 8-K that also discloses information
under any other heading so long as the disclosure mandated by Item 1.01 is
included within the form.

Extension of limited safe harbor under section 10(b) and rule 10b-5 to item
5.02(e) of Form 8-K and exclusion of item 5.02(e) from Form S-3 eligibility
requirements

The Commission recognized that new Item 5.02(e) requires companies and their counsel to
make rapid materiality judgments with respect to whether a particular compensation
arrangement with a principal executive officer, principal financial officer, or named executive
officer requires disclosure. As a result, the Commission expanded the safe harbors for Form
S-3 eligibility and liability under Section 10(b) of the Exchange Act and Rule 10b-5 to new
Item 5.02(e). Therefore, if a company does not timely file a Form 8-K to report a
compensation arrangement under Item 5.02(e), it will not lose Form S-3 eligibility so long as
it discloses this information in its next periodic report on Form 10-K or Form 10-Q.

_________________________

If you have any questions or require further information regarding these or other matters,
please call your regular Nixon Peabody contact or feel free to contact one of the attorneys
listed below:

• in our Boston office, Mary Ellen O’Mara (617-345-6167)

• in our New York City office, Richard Langan (212-940-3140)

• in our Rochester office, Deborah McLean Quinn (585-263-1307)

• in our San Francisco office, Steven Plevin (415-984-8462)

• in our Washington, D.C. office, John Partigan (202-585-8535)

• in our Los Angeles, CA, office, Richard Jones (213-533-1070)

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For a complete list of the Securities Law Practice Group members, please refer to the final
page of this Securities Law Alert.
The foregoing summary is provided by Nixon Peabody for education and informational
purposes only. It is not a full analysis of the matter summarized, and is not intended and
should not be construed as legal advice. This publication may be considered advertising
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Securities Law Practice Team Boston, MA
100 Summer Street
Please feel free to call or e-mail
([email protected]) any of the securities team 617-345-1000
members listed below
Los Angeles, CA
ATTORNEY E-MAIL NAME PHONE 555 West Fifth Street, FL 46
aanderson 585-263-1282
Andrea Anderson 213-533-1050
Gregory Blaski gbalsi 212-940-3789
Constance Boland cboland 212-940-3122 New York, NY
H. Bryan Brewer 437 Madison Avenue
Alexandra Lopez-Casero bbrewer 202-585-8303
Allan Cohen alopezcasero 202-585-8359 212-940-3000
Jeffrey Cohen
Roger Crane acohen 516-832-7522 Rochester, NY
Patricia Dolan jcohen 202-585-8395 1100 Clinton Square
Justin Doyle
Brent Faye rcrane 212-940-3190 585-263-1000
Abel Feldhamer pdolan 617-345-6088
Steven Fuller San Francisco, CA
Richa Gautam jdoyle 585-263-1359 Two Embarcadero Center
Lori Green bfaye 415-984-8365
Fred Grein 415-984-8200
G. M. Grimmett afeldhamer 212-940-3073
Raymond Gustini sfuller 617-345-1349 Washington, DC
Danika Haueisen 401 Ninth Street, NW, Suite 900
Moko Kirayama rgautam 212-940-3063
Richard Jones lgreen 585-2693-1236 202-585-8000
Bradley Kamlet
William Kelly fgrein 617-345-6117 Albany, NY
Frank Lee ggrimmett 585-263-1022 30 South Pearl Street
Richard Langan
James Locke rgustini 202-585-8725 518-427-2650
Daniel McAvoy dhaueisen 617-345-6172
Richard McGuirk Buffalo, NY
Christopher Mason mhirayama 212-940-3075 40 Fountain Plaza, Suite 500
Laura Ariane Miller rjones 213-533-1070
Sheedeh Moayery 716-853-8100
Timothy Mungovan bkamlet 202-585-8180
Carolyn Nussbaum wkelly 617-345-1195 Hartford, CT
Scott O’Connell 185 Asylum Street
Mary Ellen O’Mara flee 212-940-3186
Joseph Ortego rlangan 212-940-3140 860-275-6820
John Partigan
Todd Peterson jlocke 585-263-1613 Long Island, NY
Steven Plevin dmcavoy 202-585-8194 990 Stewart Avenue
Ronelle Porter
Deborah McLean Quinn rmcguirk 585-263-1644 516-832-7500
Joseph Reynolds cmason 212-940-3017
John Riddle Manchester, NH
Bruce Rosenthal lmiller 202-585-8313 900 Elm Street
Peter Rothberg smoayery 212-940-3053 603-628-4000
Jeffrey Selman
Gina Sickinger tmungovan 617-345-1334 McLean, VA
Deborah Thaxter cnussbaum 585-263-1558 2010 Corporate Ridge, Suite 700
James Weller
soconnell 617-345-1150 703-827-8095
momara 617-345-6167
Orange County, CA
jortego 516-832-7564 2040 Main Street, Suite 850
jpartigan 202-585-8535
949-475-6900
tpeterson 212-940-3005
splevin 415-984-8462 Palm Beach Gardens, FL
4400 PGA Boulevard, Suite 900
rporter 212-940-3082
dquinn 585-263-1307 561-626-3011

jreynolds 202-585-8389 Philadelphia, PA
jriddle 415-984-8238 1818 Market Street, FL 11

brosenthal 212-940-3009 215-246-3520
prothberg 212-940-3106

jselman 415-984-8277
gsickinger 585-263-1078

dthaxter 617-345-1326
jweller 516-832-7543