SEC Proposes Rules for Hedging Disclosure

by McGuireWoods LLP

The Securities and Exchange Commission (SEC) recently released proposed rules to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which calls for disclosure of whether employees or members of boards of directors are permitted to purchase financial instruments that are designed to hedge or offset any decrease in the market value of company equity securities. Neither Dodd-Frank nor the proposed rules require that a company actually have a hedging policy or that a hedging policy contain any particular terms.

The proposed rules come on the heels of efforts by the major proxy advisory firms in recent years to have companies adopt hedging policies (by treating the absence of such a policy as a basis for recommending “against” votes for sitting directors). In response to these efforts, many companies have begun disclosing in their proxy statements that they have anti-hedging policies for executive officers. If the SEC’s proposed disclosure requirements are adopted in their present form, companies likely would need to reexamine the terms of their existing policies and assess whether changes or clarifications would be appropriate.

Expansive View of Covered Transactions

The proposed rules begin by adopting an expansive interpretation of transactions covered by Section 955 of Dodd-Frank. While that section concerns only the purchase of financial hedging instruments, the SEC has proposed a “principles-based” disclosure regime in which companies would be required to report any transactions under which employees or directors could effectively avoid compensation requirements that they hold stock long-term, thus enabling them to receive their compensation even in the case that their companies do not perform. Such transactions could include:

  • the purchase of a financial instrument (including prepaid variable forward contracts, equity swaps, collars and exchange funds);
  • short sales; or
  • sales of security futures.

As a result of this broadly defined set of covered transactions, the proposed rules suggest companies will need to disclose the categories of permitted and prohibited transactions. The proposed rules recognize that, depending upon how a company defines its policies, there may be an infinite set of either permitted or prohibited transactions. Therefore, disclosures that list permitted transactions and state that all others are prohibited (and vice versa) are acceptable.

Covered Securities – May Include More than the Company’s and Equity Held Outright

The proposed rules define the equity securities covered by the disclosure requirements as any equity securities − as defined by Section 3(a)(11) of the Securities Exchange Act of 1934 (Exchange Act) and its accompanying Rule 3a11-1 − that are registered on a national securities exchange or under Section 12 of the Exchange Act that are issued by:

  • the company;
  • any parent of the company;
  • any subsidiary of the company; or
  • any subsidiary of any parent of the company.

For many companies, determining the equity securities covered by the proposed rules likely will be fairly straightforward. However, a company may be required to disclose its policies as a broader array of equity securities, as would be the case, for example, of a company that has undergone reorganization and has a publicly traded subsidiary.

In addition, the source from which an employee or director obtains the equity securities would be irrelevant under the proposed rules. Thus, both compensatory equity securities grants and other equity securities holdings would be covered by the disclosure regime.

Disclosure Required for All Employees and Directors

Following their approach to the transactions and types of equity securities covered, the proposed rules state that companies must report their hedging policies as to all employees, including officers, as well as directors. Such an approach would be an expansion beyond the disclosures companies are required to provide as to their named executive officers in proxy materials.

This aspect of the proposed rules likely will be the subject of comment. It is anticipated that commenters will suggest that hedging policies for employees other than executive officers are not material to shareholders, and thus should not be subject to disclosure.

Disclosure Required Whenever Directors Elected

The proposed rules contemplate companies providing these disclosures whenever action is to be taken as to the election of directors. As a result, companies would be required to include information regarding hedging policies in materials provided to shareholders at annual and special meetings, as well as in connection with an action authorized by written consent.

Interplay with CD&A – Cross References Allowed

As mentioned earlier and required by Item 402(b) of Regulation S-K, many companies already provide disclosures regarding hedging policies applicable to named executive officers as part of the compensation discussion and analysis (CD&A) found in their proxy statements. The proposed rules are intended to operate outside of the CD&A rules, by creating a new Item 407(j) to Regulation S-K. To avoid potentially duplicative disclosures, the proposed rules allow companies to satisfy their CD&A disclosure obligations by cross-referencing the new Item 407(j) disclosures if those disclosures otherwise satisfy the CD&A standards.

Small Reporters, Listed Investment Companies and Emerging Growth Companies Covered

The proposed rules conclude by indicating that they would apply to traditional, publicly traded companies and that there will be no relief for:

  • closed-end investment companies that have shares listed and registered on a national securities exchange;
  • smaller reporting companies; or
  • emerging growth companies.

However, the proposed rules would exempt non-listed closed-end investment companies and foreign private issuers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McGuireWoods LLP | Attorney Advertising

Written by:

McGuireWoods LLP

McGuireWoods LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.