Mandatory Risk and Overall Compensation Disclosure

Summary

This template language illustrates the mandated disclosure for the executive compensation section of a public company's annual proxy statement, information statement, or annual report on Form 10-K when the risks arising from the company's compensation policies and practices are reasonably likely to have a material adverse effect on the company. This template includes practical guidance and drafting notes. Item 402(s) (17 C.F.R. § 229.402) of Regulation S-K requires reporting companies (see Item 402(l) of Regulation S-K), other than emerging growth companies and smaller reporting companies, to discuss their compensation policies and practices for their employees, as they relate to risk management practices and risk-taking incentives, if the risks arising from their compensation policies and practices are reasonably likely to have a material adverse effect on the company. This template language describes a hypothetical scenario and is intended to serve as an example. Other situations may present other risks likely to result in material adverse effects and, therefore, the disclosure should be tailored to the specific facts and circumstances of the company. Item 402(s) does not specify where the disclosure should be presented. However, to ease investor understanding, the SEC has indicated that the disclosure should be included as part of the company's executive compensation disclosure but not be included in the Compensation Discussion and Analysis section (CD&A) since the disclosure covers compensation policies and practices that apply to all employees and not just executive officers (see Proxy Disclosure Enhancements 2009 SEC LEXIS 4202 and Question 128A.01 of the SEC Staff's Regulation S-K Compliance & Disclosure Interpretations). To the extent companies still wish to discuss risks arising from compensation policies and practices in the CD&A, such discussions should be limited to executive compensation related risk. A separate section should be maintained for any disclosure addressing risks arising from compensation policies and practices for all employees in response to Item 402(s). For more information on Item 402 disclosure, see Item 402 of Reg. S-K Compliance When Drafting the Proxy Statement. For suggested language for use in making voluntary, as opposed to mandated, disclosure of these risks, see Voluntary Risk and Overall Compensation Disclosure.