SEC Proposes Rules Requiring Disclosure of Company Hedging Policies for Employees, Officers and Directors
Public companies are already required to disclose, in CD&A, any policies on hedging by named executive officers, if material. In addition, in 2012, Institutional Shareholder Services (“ISS”) announced that it views any amount of hedging of company stock by directors or executives as a “failure of risk oversight” that may lead to voting recommendations against individual directors, committee members or the full board of directors. In response to the CD&A requirement and ISS’ policy position and anticipating the implementation of Section 955 of the Dodd-Frank Act, many public companies already have adopted anti-hedging policies and disclose these policies in their proxy statements.
Summary of Rule Proposal
The rule proposal would add a new paragraph to the corporate governance disclosure requirements in Item 407 of Regulation S-K. Specifically, proposed Item 407(i) would require disclosure, in any proxy or information statement relating to the election of directors, of whether any employee or director, or any of their designees, is permitted to purchase any financial instruments 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 that are granted to the employee or director by the company as compensation or held, directly or indirectly, by the employee or director. Notably, the rule proposal does not require companies to prohibit hedging by employees or directors.
As used in proposed Item 407(i):
- the term “employee” specifically includes officers;
- whether someone is a “designee” of an employee or director would be determined by a company based on the facts and circumstances; and
- “equity securities” means equity securities registered under Section 12 of the Exchange Act and issued by the company and its parents, its subsidiaries or any subsidiary of the company’s parent.
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