Five Things to Know: SEC Adopts Final Rules on Hedging Policies
On December 18, 2018, the Securities and Exchange Commission (“SEC”) approved final rules to require disclosure in annual proxy statements of a company’s practices or policies related to the ability of employees or directors to engage in hedging transactions involving company equity securities. Although the final rules have not yet been published, the SEC has issued a Press Release summarizing the final rules. Here are five things public companies should know about the new rules.
1. The Background of the New Rules
The final rules implement Section 14(j) of the Securities Exchange Act of 1934, which was created by Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Section 955 is one prong of Dodd-Frank’s executive compensation reforms, which have now stretched out over the better part of a decade. The SEC’s announcement completes a rulemaking process that began in April 2015.
2. What’s required?
A public company must disclose in its annual meeting proxy statement its practices or policies related to the ability of 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 do so), any decrease in the market value of company equity securities either (i) granted as compensation or (ii) held directly or indirectly by the employee or director. The new rules will be codified in Item 407(i) of Regulation S-K.
3. How broad is the scope?
The new rules apply to hedging policies for equity securities of (i) the company, (ii) any parent of the company, (iii) any subsidiary of the company, or (iv) any subsidiary of any parent of the company.
4. How are the new rules satisfied?
Disclosure must be included in proxy and information statements for the election of directors. There are three ways for companies to satisfy the disclosure requirements:
- Disclose the company’s practices or policies in full;
-
Provide a fair and accurate summary of the applicable practices or policies, including categories of persons affected and categories of transactions specifically permitted or disallowed; or
-
If the company does not have hedging practices or policies, disclose that fact (or state that hedging transactions are generally permitted).
5. What’s next?
A public company must comply with the new rules in its annual meeting proxy statement during fiscal years beginning on or after July 1, 2019. “Smaller reporting companies” and “emerging growth companies” have until proxy statements during fiscal years beginning on or after July 1, 2020. Listed closed-end funds and foreign private issuers are not subject to the new rules.
Given the upcoming compliance deadline, we recommend companies review their insider trading and other applicable policies to determine if they are comfortable describing their current approach to hedging or, alternatively, whether changes to practices and policies are needed before mandatory disclosure is required.