On February 9, 2015, the Securities and Exchange Commission (the “SEC”) proposed long-awaited equity hedging disclosure rules to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The proposed rules adopt Item 407(i) of Regulation S-K, which would require issuers to disclose in any proxy or information statement relating to the election of directors whether any employee, officer or director (or the designee of any employee, officer or director) is permitted to purchase financial instruments (including prepaid forward variable contracts, equity swaps, collars and exchange funds) or otherwise engage in transactions that are designed to hedge or offset any decrease in the market value of equity securities (1) granted to the employee or director as compensation, or (2) held directly or indirectly by the employee or director.

Statutory Purpose -

Based on its review of the legislative history, the SEC interpreted the statutory purpose of Section 14(j) of the Exchange Act, as being to “provide transparency to shareholders if action is to be taken with respect to the election of directors, about whether employees or directors are permitted to engage in transactions that mitigate or avoid the incentive alignment associated with equity ownership.” The proposed rules provide for a “principles based” approach, rather than a “rules based” approach, to allow for more flexibility to fulfill this legislative purpose. The SEC has noted that the proposed rules would not require an issuer to prohibit hedging transactions or to otherwise adopt a policy addressing hedging. Moreover, the proposed rules do not require disclosure of actual hedging activity, although the SEC has requested comments as to whether it should so require.