SEC adopts new hedging disclosure rules

Category: SEC, disclosure, proxy

SEC adopts new hedging disclosure rules


The Securities and Exchange Commission (SEC) will now require companies to disclose any practices or policies that allow for employees or directors to engage in certain hedging transactions with respect to company equity securities.

The new rules implement Section 14(j) of the Securities Exchange Act of 1934, which was enacted by Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The highlights of the rules provided by the SEC are as follows:

• Item 407(i) of Regulation S-K will require a company to describe any practices or policies it has adopted regarding the ability of its 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 hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.

• A company could satisfy this requirement by either providing a fair and accurate summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed, or, alternatively, by disclosing the practices or policies in full.

• If the company does not have any such practices or policies, the rule will require the company to disclose that fact or state that hedging transactions are generally permitted.

• In addition, Item 407(i) specifies that the equity securities for which disclosure is required are equity securities of the company, any parent of the company, any subsidiary of the company, or any subsidiary of any parent of the company.

In general, companies will not have to worry about these rules for their 2018 and 2019 fiscal year proxy or information statements, as companies have to comply with these new disclosure requirements for fiscal years beginning on or after July 1, 2019.

However, companies that qualify as “smaller reporting companies” or “emerging growth companies” (each as defined in Securities Exchange Act Rule 12b-2) must comply with the new disclosure requirements in proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2020. Listed closed-end funds and foreign private issuers will not be subject to the new disclosure requirements.

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