On February 9, 2015, the SEC issued a proposing release to
implement certain provisions of the Dodd-Frank Wall Street Reform
and Consumer Protection Act ("Dodd-Frank"). This proposed
rule will require companies to disclose whether employees and
directors are permitted to or prohibited from engaging in hedging
transactions offsetting any decrease in the market value of equity
securities issued by the company or specified affiliates of the
company. Currently, companies must include in their Compensation
Discussion and Analysis ("CD&A") disclosure
describing any policies regarding hedging of economic risk by
named executive officers, if material.
The current proposal does not require companies to prohibit hedging
transactions or adopt policies addressing them. However, it does
require companies to disclose whether any employee or director is
permitted to engage in hedging transactions. Companies that elect
to prohibit only specified hedging transactions must disclose the
types of transactions that are permitted and those that are
prohibited. Similarly, companies that elect to implement policies
governing only certain employees must disclose generally which
employees are covered by the policy. The proposal also would
require companies to report the lack of a hedging policy if no
policy has been implemented. This disclosure would be included in
any proxy or information statement relating to the election of
directors.
The current proposal significantly broadens the scope of existing
disclosure requirements because it contemplates disclosure of a
company's policy for all employees instead of the more limited
universe of individuals such as named executive officers, who have
a more direct impact on the value of a company's securities. In
addition, the proposal broadens the scope of disclosure that was
expected in response to Dodd-Frank because it applies to smaller
reporting companies and emerging growth companies, which are not
currently required to provide a CD&A in their proxy
statements.
Although the current proposal does not require companies to adopt a
hedging policy, companies will need to consider the impact of
certain proxy advisory firms' positions that hedging in company
securities is a "failure of oversight," which may result
in a voting recommendation against certain directors. Although the
current proposal will not be effective for the 2015 proxy season,
companies should determine if they need to adopt new hedging
policies or revise their existing hedging policies based on these
proposals by the SEC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
