SEC proposes requiring companies to disclose hedging policies for personnel

By Ken Tysiac

Rules proposed by the SEC on Monday would require certain companies to disclose their hedging policies for directors and employees.

Under the proposal, companies would be required to disclose whether directors, officers, and other employees are permitted to hedge or offset any decrease in the market value of equity securities granted by the company.

The proposed rules would apply to securities granted as compensation or held—directly or indirectly—by employees or directors.

SEC Commissioner Luis Aguilar said during a commission meeting Monday that hedging of companies’ equity securities may allow corporate insiders to receive incentive compensation even if the companies perform poorly and the stock value drops.

He said this information would help investors better understand whether the interests of company employees, officers, and directors are aligned with the interests of investors.

“Better information about equity incentives could be useful for investors’ evaluation of companies, enabling investors to make more informed investment and voting decisions,” Aguilar said.

SEC Chair Mary Jo White said in a news release: “Increasing transparency into hedging policies will help investors better understand the alignment of the interests of employees and directors with their own.”

The disclosures would be required in proxy statements and information statements for the election of directors. The proposed rules would apply to companies subject to the federal proxy rules, including:

  • Smaller reporting companies.
  • Emerging growth companies.
  • Business development companies.
  • Registered closed-end investment companies with shares listed and registered on a national securities exchange.

Disclosure would apply to equity securities of the company, its parent, subsidiary, or any subsidiary of any parent of the company that is registered under Section 12 of the Exchange Act.

The proposed rules were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203.

The SEC will seek public comment on the proposed rule amendments for 60 days following their publication in the Federal Register. Comments can be made at the SEC’s website.

Ken Tysiac is a JofA editorial director.


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