On February 9, 2015, the SEC proposed amendments requiring disclosure in proxy and information statements regarding issuers' policies governing the entrance of employees, officers, and directors into hedging transactions related to securities of the issuer or its affiliates. The amendments, which are being proposed pursuant to Section 14(j) of the Exchange Act, would apply to all reporting issuers, including those classified as smaller reporting companies and emerging growth companies. The full proposing release can be found here.
The New Item 407(i)
The proposed amendments install a new Item 407(i) in Regulation S-K, requiring disclosure—in any proxy or information statement for the election of directors—of the issuer's policies restricting the ability of employees, officers, or directors (or any of their designees) to purchase financial instruments, or otherwise engage in transactions, that are designed to or have the effect of hedging or offsetting any decrease in the market value of equity securities granted by the issuer or otherwise held by such employee, officer, or director. (The instructions to the proposed Item 407(i) clarify that "equity securities" means only equity securities of the issuer—or its parents or subsidiaries, or any subsidiaries of its parents—that are registered under Section 12 of the Exchange Act.)
While larger issuers already make disclosures about hedging policies applicable to certain executive officers as a part of the compensation discussion and analysis ("CD&A") required under Item 402(b) of Regulation S-K, those disclosures are not required to cover policies applicable to directors or employees other than executive officers. The new requirements may require certain issuers to revisit their policies regarding hedging transactions and either expand them to include all directors and employees or make disclosures regarding the categories of persons not covered.
A New Burden for Smaller Issuers
For issuers that are classified as "emerging growth companies" or "smaller reporting companies" under the Exchange Act, the new requirements may be even more significant, as these issuers are currently permitted to use scaled disclosure requirements that allow them to avoid the CD&A entirely. Additionally, many smaller issuers may not have policies regarding hedging transactions, and may be forced to develop such policies for the first time. The SEC acknowledges in the proposing release that smaller issuers' securities are less likely to be traded on major exchanges, reducing the availability of hedging transactions with respect to such securities and potentially limiting the utility of the new requirements with respect to such securities. But the proposing release also notes that these issuers are far more likely to be subject to downside risk, increasing the utility of hedging transactions for holders of their securities and making the new disclosures that much more valuable to outside shareholders.
Though it is still possible that smaller issuers could ultimately be exempted from these new requirements once the amendments are finalized, all issuers need to be prepared for the additional disclosure burden of the amendments and possible changes in corporate governance that might result from their adoption.
