As anticipated, the SEC announced late today its adoption of final rules requiring companies to disclose in their proxy (and information) statements for the election of directors their employee and director hedging policies/practices. As noted in last week's post, this was among the Dodd-Frank rulemakings on the SEC's Fall 2018 Reg-Flex agenda active actions list. The proposed rule was issued in February 2015.
The SEC's release highlights these aspects of the rules:
- New Item 407(i) of Regulation S-K will require a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.
- A company could satisfy this requirement by either providing a fair and accurate summary of the practices or policies that apply - including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed or - alternatively - by disclosing the practices or policies in full.
- If the company doesn't have any such practices or policies, the company will be required to disclose that fact or state that hedging transactions are generally permitted.
- In addition, Item 407(i) specifies that the equity securities for which disclosure is required are equity securities of the company, any parent of the company, any subsidiary of the company, or any subsidiary of any parent of the company.
Companies generally must comply with the new disclosure requirements during fiscal years beginning on or after July 1, 2019; however, “Smaller Reporting Companies” or “Emerging Growth Companies” have one additional year to comply (July 1, 2020). Listed closed-end funds and foreign private issuers aren't subject to the new disclosure requirements.
Chair Clayton commented:
The new rules will provide for clear and straightforward disclosure of company policies regarding hedging. These disclosures in themselves, and in combination with our officer and director purchase and sale disclosure requirements, should bring increased clarity to share ownership and incentives that will benefit our investors, registrants, and our markets.
Watch for more information & resources on our Hedging page.