On February 9, as mandated by Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Securities and Exchange Commission proposed new rules requiring disclosure by US public companies as to whether directors or employees (including officers), or any of their designees, are permitted to “purchase financial instruments (including prepaid variable forward contracts, equity swaps, dollars and exchange funds) or otherwise engage in transactions designed to or have the effect of hedging or offsetting any decrease in the market value of equity securities” either (1) granted as compensation to the director or employee, or (2) held, directly or indirectly, by the director or employee. Although the Dodd-Frank Act referred to the purchase of financial instruments, the proposed rules take a principles-based approach requiring disclosure as to whether a company permits any transaction establishing “downside price protection.” Under the proposed rules, a company would be required to disclose (1) which categories of transactions it permits and which categories it prohibits, (2) if hedging policies apply differently to directors, employees or their designees and (3) if hedging transactions are permitted, sufficient detail to describe the scope of those permitted transactions. The proposed rules would apply to the equity securities of a public company, its parent, its subsidiaries or any subsidiary of any parent of the company.
The proposed rules would not prohibit, or require a company to prohibit, hedging transactions by directors or employees, require companies to adopt policies or practices covering hedging by directors or employees or mandate disclosure by issuers or their directors or employees as to their entry into specific hedging transactions. The proposed rules would treat hedging as a corporate governance matter, adding a new paragraph (i) to Item 407 of Regulation S-K. Disclosure would be required in any proxy statement or information statement relating to any election of directors, but not in registration statements or Annual Reports on Form 10-K.
Item 402(b) of Regulation S-K currently requires that a company disclose in its Compensation Discussion and Analysis (“CD&A”) its policies regarding hedging the economic risk of equity ownership. The CD&A disclosure obligation, however, only applies to policies covering “named executive officers” and does not apply to smaller reporting companies, emerging growth companies, registered investment companies or foreign private issuers. In contrast, the proposed rules would apply to all directors and employees of all “issuers” and registered investment companies with shares listed on a national securities exchange, including smaller reporting companies and emerging growth companies, but excluding foreign private issuers, which are exempt from the US proxy rules. To avoid the necessity of duplicative disclosure, the proposed rules would amend the CD&A disclosure requirement to permit a cross-reference to the new hedging disclosure.
The SEC is seeking public comment on the proposed rules for 60 days following their publication in the Federal Register.
The proposing release can be found here.