The Securities and Exchange Commission has proposed rule amendments to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.  No. 111-203, 124 Stat. 1900 (July 21, 2010).  Among other things, the SEC is proposing to add a new paragraph (i) to Item 407 of Regulation S-K. This new paragraph would require disclosure of “whether the registrant permits any employees (including officers) or directors of the registrant, or any of their designees,” to engage in specified hedging transactions in the registrant’s securities.  But what exactly does the SEC mean by “permits”?

The verb “permit” means to give assent to some action or event.  This implies an affirmative action on the part of the registrant.  Applying this definition, a registrant that has no policy on hedging would conclude that it does not permit hedging because it has never affirmatively assented to it.  However, the verb “permit” also means to allow something to happen.  Applying this passive definition, a registrant that has no policy on hedging would treat the absence of consent as permission.

This ambiguity only underscores the fundamental problem with the proposed rule – it implicitly presumes that an employee, officer or director may not hedge in the absence of their company’s consent.  In fact, the relevant disclosure should be whether a registrant prohibits hedging.