Proposed SEC Rule May Require New Disclosures

on Executive Compensation

The Securities and Exchange Commission (SEC) recently proposed new rules that would require public companies to disclose compensation structures and policies to increase corporate accountability and improve investors' decision-making.  Public company CFOs will feel the impact because the rules would increase their responsibility and accountability to the investing community.

The proposal, Proxy Disclosure and Solicitation Enhancements, Release No. 33-9052, would apply to proxy statement, annual reports and registration statements under the Securities Exchange Act of 1934 as well as the Investment Company Act of 1940.

The SEC aims to take initiative and improve disclosures about executive officer and director compensation by placing the burden directly upon corporations.  In addition to compensation for the principal executive and financial officer, and the three highest paid executive officers, the proposed rules would require a broader analysis of compensation policies for non-executive officers and other employees. 

The supplemental information would include a description of the company's overall compensation policies, including incentives and bonuses, and its relationship to material effects on the companies' risk without appropriate recognition of these risks.  With current government funding of large corporations, enhanced compensation disclosures will support investors’ voting and investment decisions and create more transparency in the market.

In addition, the proposed rules take a stance on improving the information to disclose potential conflict of interest with compensation consultants.  Many companies often work with outside experts to make recommendations on a company's overall compensation policy and risk, implementation of incentive plans, and comparable information from industries' competitors.  The description of these services and fees earned in determining or recommending the amount and form of executive and director compensation must be disclosed.

The SEC believes the proposed disclosures will enable investors to assess the risks and rewards of executive compensation and pay incentives for overall company success.  If enacted, these rules will give investors better and more timely information that is intended to create increased consumer confidence and stronger, more educated investment decisions.