The Securities and Exchange Commission recently proposed rules to implement Section 955 of the Dodd-Frank Act, which calls for disclosure of whether a company’s employees and directors are permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) designed to hedge or offset any decrease in the market value of the company’s equity securities. Note that neither Dodd-Frank nor the proposed rules require that a company actually have a hedging policy or that a hedging policy contain any particular terms.
Disclosure of hedging policies is not a new concept. Companies are currently required to disclose in the Compensation Discussion and Analysis (CD&A) section of their proxy statements whether they maintain policies regarding hedging of economic risk of company stock ownership by named executive officers (if material). The proposed rules expand/impact the current CD&A requirements as follows:
- The proposed rules will require disclosure of hedging policies covering all employees and directors – not just the NEOs.
- The proposed rules will require disclosure of hedging policies without regard to materiality.
- The current CD&A requirement merely requires disclosure of “any policy regarding hedging”, whereas the proposed rules require disclosure of specific items, including:
- Which categories of hedging transactions are permitted and which are prohibited (although blanket statements that all hedging transactions are permitted or prohibited, as applicable, will be permissible).
- Which categories of persons are permitted to engage in hedging transactions and which are not (if treatment differs).
- The scope of permitted transactions in sufficient detail to provide adequate explanation.
- Hedging disclosures will no longer be required in the CD&A so long as the company cross references to the expanded hedging policy discussion contained elsewhere in its proxy statement.
The proposed rules are subject to a 60-day comment period before they can be finalized and thus will not impact most companies until the 2016 proxy season. Until then, companies should assess their current policies (or lack thereof), keeping in mind that the sufficiency of their policy will most likely be scrutinized by stockholders and institutional investors in the years to come.
We will track the proposed rules as they move toward finalization and provide updates as material developments occur. In the interim, please let us know if you have any questions.
For more information on this and other corporate finance questions, please contact your Kutak Rock attorney.