Hedging Policy Disclosure Rule Proposed By SEC

The Securities and Exchange Commission (SEC) recently proposed new rules that require enhanced corporate disclosure of hedging policies for officers, directors, and employees.

Mandated under Section 955 of the Dodd-Frank Act, the proposed rules would specifically require disclosure about whether directors, officers and other employees are permitted to hedging or offset any decrease in the market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors.

Many New York and New Jersey corporations likely already have hedging policies in place that either prohibit such transactions or require prior authorization. The proposed SEC rules do not mandate that all companies incorporate specific corporate governance policies, but rather impose new disclosure obligations with regard to existing hedging policies.

Under Item 402(b) of Regulation S-K, corporations must already disclose policies that address hedging by named executive officers. Section 955 of the Dodd-Frank Act directs the SEC to require, by rule, each issuer to disclose whether any employee or member of the board of directors is permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of equity securities either (1) granted to the employee or director by the issuer as part of the compensation of the employee or director; or (2) held, directly or indirectly, by the employee or director.

In fulfilling this mandate, the SEC proposes the following:

• Disclosure as to hedging would be required in a proxy statement or information statement relating to an election of directors, whether by vote of security holders at a meeting or an action authorized by written consent.
• The equity securities that must be disclosed would include equity securities of the company, any parent of the company, any subsidiary of the company or any subsidiary of any parent of the company that are registered under Section 12 of the Exchange Act.
• If the issuer allows some, but not all, of its employees and directors to engage in hedging transactions, the company must disclose which categories of persons are permitted to hedge and which categories of persons are not. Similarly, the company must disclose which categories of transactions it permits and which categories of transactions it prohibits.
• The term “employee” would be interpreted to include everyone employed by an issuer, including its officers.
• The disclosure obligation would apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies with shares listed and registered on a national securities exchange.

Public comments on the proposed SEC rule must be received on or before April 20, 2015.