The SEC recently proposed rules to implement Dodd-Frank-mandated disclosure regarding permitted hedging by officers and directors. If you have been following the post-Dodd-Frank rulemaking saga, you know that this is one of the last rules on the SEC’s list for adoption.
The proposed rule…
The proposal would add the following new paragraph (i) to Item 407 of Regulation S-K:
“(i) Employee, officer and director hedging. In proxy or information statements with respect to the election of directors, disclose whether the registrant permits any employees (including officers) or directors of the registrant, or any of their designees, to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) or otherwise engage in transactions that are designed to or have the effect of hedging or offsetting any decrease in the market value of equity securities—
(1) Granted to the employee or director by the registrant as part of the compensation of the employee or director; or
(2) Held, directly or indirectly, by the employee or director.”
The SEC notes in its proposing release that:
- Dodd-Frank’s goal was to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform” (thereby enhancing transparency);
- neither Dodd-Frank, nor the proposed rule, require a company to prohibit hedging or to adopt policies or practices related to hedging (meaning that the proposed rule is all about disclosure, not prohibitions).
If the rule is adopted as written, what will change?
Not a lot, really. A company already must disclose in its CD&A, if material, existing equity ownership requirements or guidelines and policies regarding the hedging of economic risk related to that ownership. However, this disclosure requirement is limited to hedging by named executive officers and does not apply to emerging growth companies and smaller reporting companies.
The proposed new rules:
- require disclosure of the (i) categories of price protection transactions permitted, (ii) categories of persons permitted to hedge, and (iii) scope of permitted transactions;
- apply to all employees (not just executives or NEOs) and directors;
- apply to all companies with equity securities registered under Section 12 of the Exchange Act (including emerging growth companies and smaller reporting companies); and
- require that such disclosures be contained in the proxy or information statement related to meetings (or consents) at which directors will be elected.
For most public companies, it is business as usual regarding employee and director hedging activities. Although we are still well within the 60-day comment period for the proposed rules and the SEC has not indicated its timetable for implementation, it would not be surprising to see the new rules (in substantially this same form) be effective for the 2016 spring proxy season.
- Companies that do not currently have hedging policies will want to turn their attention toward implementing them in the next few months.
- Companies that already have such policies will want to review their scope in light of the proposed rules.
- All companies should be prepared for the possibility of additional proxy statement disclosure next year.