Item 407 of Regulation S-K — Corporate Governance

Last Update: March 13, 2007

These interpretations replace interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations that related to provisions consolidated into Item 407 of Regulation S-K. Some of the interpretations included herein were originally included in the Manual of Publicly Available Telephone Interpretations (as supplemented), and have been revised in some cases to reflect the adoption of Item 407 of Regulation S-K. The bracketed date following each interpretation is the latest date of publication or revision.

QUESTIONS AND ANSWERS OF GENERAL APPLICABILITY

Section 1. Item 407(a) — Director independence

Question 1.01

Question: If a non-listed issuer has independence definitions that are more stringent than those of a national securities exchange, may that issuer provide disclosure based on its own independence definitions in accordance with Item 407(a)(1)(i), rather than provide the disclosure required by Item 407(a)(1)(ii)?

Answer: The non-listed issuer must provide the disclosure required by Item 407(a)(1)(ii). If the non-listed issuer believes that its own independence definitions are more stringent than those of the exchange identified in the required Item 407(a)(1)(ii) disclosure, it may, in addition, disclose that belief and provide the disclosures called for by Item 407(a)(1)(i) based on its own definitions, provided that it also complies with Item 407(a)(2) regarding disclosure of its own definitions of independence. [March 13, 2007]

Section 2. Item 407(b) — Board meetings and committees; annual meeting attendance

None

Section 3. Item 407(c) — Nominating committee

Question 3.01

Question: May a company indicate that the nominating committee’s processes, policies, or minimum director nominee qualifications are included in the company’s governance policies posted on the company’s Web site, rather than including descriptions of the nominating committee’s processes, policies, or minimum nominee qualifications in the proxy statement?

Answer: No. Item 407(c)(2) requires that the descriptions of the processes, policies, and nominee qualifications be included in the proxy statement, and no mechanism for reference to Web site posting of this information is provided for with respect to the Item 407(c)(2) disclosure. [March 13, 2007]

Question 3.02

Question: Item 407(c)(2)(vii) requires the identification of the category of persons or entities that recommended each nominee for director, other than executive officers or nominees that are directors who are standing for re-election. If a director who did not stand for election by shareholders last year (but rather had been named as a director by the board during the year) is to be nominated for election by shareholders for the first time, is disclosure under Item 407(c)(2)(vii) required for that nominee?

Answer: Yes. The nominee for director would not be considered as standing for “re-election”; therefore, disclosure of the category of persons or entities that recommended the nominee is required by Item 407(c)(2)(vii). [March 13, 2007]

Section 4. Item 407(d) – Audit committee

Question 4.01

Question: Does Item 407(d)(3)(i)(D) require the audit committee to state whether it recommended inclusion of the audited financial statements in the Form 10-K for periods prior to the last completed fiscal year?

Answer: No. Item 407(d)(3)(i)(D) requires the audit committee to state whether it recommended inclusion of the audited financial statements in the Form 10-K. This statement need not cover financial statements for periods prior to the last completed fiscal year. [March 13, 2007]

Section 5. Item 407(e) – Compensation committee

Question 5.01

Question: Should all compensation consultants engaged by the company that played a role in determining or recommending the amount or form of executive or director compensation be disclosed, or only those that consulted with the board of directors or the compensation committee?

Answer: All compensation consultants with any role in determining or recommending the amount or form of executive or director compensation must be disclosed under Item 407(e)(3)(iii). [March 13, 2007]

Question 5.02

Question: Is the consent of a compensation consultant required under Securities Act Rule 436 if a compensation consultant is identified in accordance with Item 407(e)(3)(iii) in a filing that is incorporated by reference into a Securities Act registration statement?

Answer: No. Item 407(e)(3) requires a “narrative description of the registrant’s processes and procedures for the consideration and determination of executive and director compensation including … (iii) [a]ny role of compensation consultants in determining or recommending the amount or form of executive and director compensation.” Identifying a compensation consultant and the role that the compensation consultant had in determining or recommending the amount or form of executive and director compensation does not result in the compensation consultant being deemed an “expert” for the purposes of the Securities Act, or mean that the compensation consultant has expertized any portion of the disclosure regarding executive and director compensation or compensation committee processes. Therefore, a consent would not be required. [March 13, 2007]

Question 5.03

Question: Which names of directors must be included below the disclosure required in the Compensation Committee Report by Item 407(e)(5)?

Answer: Item 407(e)(5)(ii) requires that the name of each member of the compensation committee (or other board committee performing equivalent functions, or in the absence of any such committee, the entire board of directors) must appear below the required disclosure in the Compensation Committee Report. The members of the compensation committee (or the full board) who participated in the review, discussions and recommendation with respect to the Compensation Discussion and Analysis must be identified. New members who did not participate in such activities and departed members who are no longer directors need not be included. Members who resigned from the compensation committee during the course of the year, but remain directors of the issuer, may need to be named under the disclosure in the Compensation Committee Report pursuant to Item 407(e)(5)(ii). [March 13, 2007]

Section 6. Item 407(f) — Shareholder communications

None

INTERPRETIVE RESPONSES REGARDING PARTICULAR SITUATIONS

Section 1. Item 407(a) — Director independence

None

Section 2. Item 407(b) — Board meetings and committees; annual meeting attendance

2.01   The “total number of meetings of the board of directors” specified as the basis for calculation of director’s attendance in Item 407(b)(1) does not include board action by written consent. [March 13, 2007]

Section 3. Item 407(c) — Nominating committee

None

Section 4. Item 407(d) — Audit committee

None

Section 5. Item 407(e) — Compensation committee

5.01   If the only disclosure that a registrant is required to provide pursuant to Item 407(e)(4) is the identity of the members of the compensation committee, because the registrant has no transactions or relationships that trigger a disclosure obligation, the registrant may omit the Item 407(e)(4) caption (“Compensation Committee Interlocks and Insider Participation”). [March 13, 2007]

5.02   The Compensation Committee Report must be separately captioned to identify it clearly as specified in Item 407(e)(5). Where there are multiple committees on the board with responsibility for different components of compensation (e.g., a stock option committee) and those committees review and discuss the Compensation Discussion and Analysis with management and, based on that review and discussion, recommend the inclusion of the Compensation Discussion and Analysis in the registrant’s filings, each of these committees has a disclosure obligation under Item 407(e)(5). [March 13, 2007]

Section 6. Item 407(f) — Shareholder communications

None

http://www.sec.gov/divisions/corpfin/guidance/execcomp407interp.htm