On February 9, the Securities and Exchange Commission proposed rules to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires annual meeting proxy statement disclosure of a company’s policy on hedging transactions by directors, officers or employees. The proposed rules can be found here.
Currently, companies are required to disclose any policies that address hedging activities by named executive officers in the Compensation Discussion and Analysis. Additionally, the disclosure of officer and director ownership of company stock required under Item 403(b) of Regulation S-K also requires disclosure of the amount of shares that have been pledged as security for hedging transactions.
The proposed rules add a new paragraph (i) to Item 407 of Regulation S-K and require companies to disclose, in their proxy or information statements with respect to the election of directors, company policy regarding hedging transactions. The proposed rules require disclosure of whether the company has a hedging policy and, if the company has a policy, what the policy prohibits and does not prohibit. In particular, the company must describe its policies with respect to:
- any type of transaction that offsets decreases in the market value of equity securities;
- hedging transactions by any director or employee (including officers) of the company; and
- hedging transactions related to any equity securities of the company, a parent of the company, a subsidiary of the company or a subsidiary of a parent of the company, that are registered under Section 12 of the Exchange Act.
The proposed disclosure rules cover hedging transactions by a much broader group of individuals than the existing rules, but do not require companies to adopt policies addressing hedging transactions or that such policies, if adopted, comprehensively prohibit hedging transactions. Nevertheless, companies should take this opportunity to review their insider trading policy and code of conduct and to consider whether they adequately address the company’s policies on hedging transactions. We invite you to reach out to us for any assistance you may require as you review your policies and consider how to prepare for the upcoming hedging policy disclosure requirements.