On December 18, 2018, the Securities and Exchange Commission (SEC) approved long-awaited final rules implementing Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Consistent with the proposed rules, the final rules require U.S. public companies to disclose any company policy on the ability of directors, officers or employees to hedge the market value of equity securities granted as compensation or held directly or indirectly by such person. The new rules do not dictate that public companies adopt a practice or policy that prohibits or restricts hedging transactions in any way.
The new rules added Item 407(i) to Regulation S-K, which will require public companies to disclose in any proxy or information statement relating to the election of directors, any company practices or policies relating to the ability of the company’s employees, officers or directors to purchase securities or other financial instruments (including prepaid forward variable contracts, equity swaps, collars and exchange funds) or otherwise enter into 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, officer or director. The new rules do not define the term “hedge” or “hedging,” but rather use terms that are intended to encompass a broad range of transactions serving to offset a decrease in the market value of the covered equity securities.
Hedging disclosure will be required in proxy or information statements for the election of directors for fiscal years beginning on or after July 1, 2019. Smaller reporting companies and emerging growth companies will need to provide the disclosure in fiscal years beginning on or after July 1, 2020. Therefore, the new hedging policy disclosure rules should not apply to most companies this proxy season.
The new rules do not prescribe where in the proxy statement the hedging practices and policies disclosures are to be included, which means it can be included within or outside of the Compensation Discussion & Analysis.
The disclosure rules apply to hedging policies of not only the public reporting company, but also its parent, subsidiaries and other subsidiaries of the parent. Listed closed-end funds and foreign private issuers are excluded from the new disclosure requirements.
A U.S. public company can satisfy the disclosure requirements under the final hedging rule by:
If a company does not have a practice or policy regarding hedging, the company will need to disclose that fact or state that hedging transactions are generally permitted.
As many public companies already disclose their hedging practices and policies, companies should consider what, if any, additional disclosures are needed to comply with the new requirements. As compliance with this new requirement will not, for most companies, be too onerous, companies should consider reviewing hedging disclosure in the coming proxy season in an effort to comply in advance of the required date.
Final rules on clawbacks, pay-for-performance and incentive-based compensation requirements remain on the SEC’s long-term agenda, so the final rules on hedging disclosure may be a sign of further activity in 2019.