Disclosure of Hedging by Employees, Officers and Directors [*]
Feb. 13, 2019
On December 20, 2018, the Securities and Exchange Commission (“SEC”) adopted rule amendments requiring a company to disclose in proxy or information statements for the election of directors any practices or policies it has adopted regarding the ability of employees (including officers) or directors to engage in hedging transactions regarding company equity securities granted as compensation to, or otherwise held by, those persons. The amendments implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 14(j) to the Securities Exchange Act of 1934 (“Exchange Act”).
Who is affected by the new rule?
The amendments affect all companies with a class of securities registered under Section 12 of the Exchange Act that file with the SEC proxy or consent solicitation material for the election of directors. Registered investment companies and foreign private issuers are not subject to the new disclosure requirements.
What disclosure is required by the new rule?
New Item 407(i) of Regulation S-K provides that in its proxy statement or information statement for the election of directors, a company must 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 to, or held directly or indirectly by, those persons.
A company may satisfy this requirement by either disclosing the practices or policies in full, or, alternatively, providing a fair and accurate summary of the practices or policies that apply. Such a summary must include the categories of persons covered and any categories of hedging transactions that are specifically permitted or specifically disallowed. If the company does not have any such practices or policies, the company must disclose that fact or state that hedging transactions are generally permitted. 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.
What is the compliance date of the new rule for small entities?
Companies that qualify as “smaller reporting companies” or “emerging growth companies” (each as defined in 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. Other companies must comply in proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2019.
The adopting release for the new rules can be found on the SEC’s website at https://www.sec.gov/rules/final/2018/33-10593.pdf.
Contacting the SEC Staff
The SEC’s Division of Corporation Finance is happy to assist small companies and others with questions regarding the new rule. You may contact the Division for this purpose at (202) 551-3500 or at https://www.sec.gov/forms/corp_fin_interpretive.
Questions on other SEC regulatory matters concerning smaller reporting companies may be directed to the Division’s Office of Small Business Policy at (202) 551-3460.
[*] This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for the rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.