Dodd-Frank.com

SEC Finalizes Dodd-Frank Hedging Rules

By | December 19, 2018

On December 18, 2018, the SEC approved final rules on hedging that require companies to disclose practices or policies related to the ability of employees or directors to engage in hedging transactions with respect to a company’s equity securities.

The hedging rules, as mandated by Section 955 of the Dodd-Frank Act, add Item 407(i) to Regulation S-K to require disclosures of policies impacting employees (including officers) and directors ability to purchase securities or other instruments to hedge or offset equity securities held or issued to an employee or director. The rules expressly apply to equity securities of a company, any parent of the company, any subsidiary of the company, or any subsidiary of any parent of the company.

Companies can comply with the new requirement by disclosing their hedging policies in full or by providing a “fair and accurate” summary of the hedging policy including the category of persons subject to the policy and the specific hedging transactions that are permitted or prohibited under the policy.

A 2010 report from the Senate Committee on Banking, Housing, and Urban Affairs suggests that the rule is intended to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform.” As such, like many of the Commission’s disclosure rules, the finalized rules are intended to provide additional transparency to shareholders but do not require companies to prohibit hedging transactions or to otherwise adopt practices or a policy addressing hedging by any category of individuals. In this respect, the rules require companies that do not have any hedging policy only to state that fact and acknowledge that hedging transactions are generally permitted.

Large accelerated and accelerated filers will need to include the hedging disclosures in proxy and information statements for the election of directors for fiscal years beginning on or after July 1, 2019.  Smaller reporting companies and emerging growth companies were given an additional year to phase-in the disclosures which will be required for SRCs and EGCs in proxy and information statements on or after July 1, 2020.

Contact Bryan Pitko for more information.