United States: Better Late Than Never? New Disclosure Requirements For Hedging Policies

The Securities and Exchange Commission has finally adopted new rules that will require public companies to include in proxy statements for their annual meetings a description of their hedging policies and practices applicable to employees and directors.  These rules were called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010  but weren't proposed until February 2015. The new rules will apply to proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019 (or July 1, 2020 for smaller reporting companies and emerging growth companies).

The required disclosure must include a description of all policies and practices, which need not be in writing, regarding the ability of the company's employees or directors to purchase financial instruments or engage in other transactions to hedge or offset a decrease in the market value of the company's securities granted to or held by its employees or directors.  If a company does not have any established policy or practice for these transactions, it will be required to disclose that fact and note that they are permitted.  While companies other than emerging growth companies and smaller reporting companies previously had to report this information in the Compensation Discussion & Analysis section of their proxy statements as it applied to their named executive officers, the new rules are applicable to all reporting companies and expand the scope of the disclosure to all employees and directors.

Though the Commission was clear in its adopting release that these rules do not require a company to adopt any particular policy or practice with respect to hedging by its employees and directors, company boards should carefully consider how the investment community is likely to perceive their current policies and practices (or lack thereof) and decide whether to implement any revisions before the new disclosure regime comes into effect.

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