KMK Law Corporate & Securities Blog

This week, the SEC released proposed rules intended to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which would require SEC reporting companies to disclose in their annual meeting proxy statements whether the company permits its employees (including officers) and directors to hedge equity securities of the company.

As proposed, the rules would require companies to disclose in their proxy statements whether any employee or director, or any designee of such employee or director, 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. The company would also have to disclose any permitted transactions that would have economic consequences comparable to the purchase of these specified financial instruments, such as short sales or sales of futures. Permitted hedging transactions must be described in sufficient detail to explain the scope of such permitted transactions.

A proposed instruction would clarify that the company must disclose which categories of transactions it permits and which categories of transactions it prohibits. If a company specifically prohibits certain hedging transactions, it could disclose the categories it specifically prohibits and then disclose that it permits all others. Similarly, if the company only permits certain categories of hedging transactions, it could identify those permitted categories and then disclose that it prohibits all others.  If all are permitted or all are prohibited, identifying categories would not be required.

The disclosure would be required in instances when other corporate governance disclosures are required, but would be not part of the proxy statement’s Compensation Discussion and Analysis (”CD&A”) section. However, companies looking to avoid duplicative disclosure could cross reference the new disclosure in their CD&A to the extent that the new disclosure satisfies the CD&A requirement to disclose material policies on hedging by named executive officers.

It is important to note that the proposed rules do not prohibit or restrict hedging activities in any way. Rather, they seek to force companies to be transparent about any means by which executives and directors may purchase these types of protective financial instruments.

The proposed rules would apply to all SEC reporting companies, including emerging growth companies and smaller reporting companies, but final rules will not be issued in time for the 2015 proxy season.

Linked here is a summary chart showing the status of the SEC’s implementation of certain provisions of Dodd-Frank.