The US Securities and Exchange Commission (SEC) issued final rules on December 20, 2018, requiring companies to disclose, in proxy or information statements for the election of directors, their policies and procedures on the ability of employees and directors to engage in certain hedging transactions with respect to company securities. The final rules closely track the 2015 rules proposed by the SEC pursuant to the mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to adopt rules to enhance corporate disclosure of hedging policies applicable to employees and directors. SEC Chairman Jay Clayton stated that the final rules, together with existing reporting requirements regarding insider transactions in company securities, would serve to “bring increased clarity to share ownership and incentives” of company insiders.
The final rules, which will be reflected in new Item 407(i) of Regulation S-K, apply broadly to both company insiders and securities of affiliate entities, and will be in effect for large, calendar year-end companies for the 2020 proxy season.
New Item 407(i) will require a company to describe any practices or policies it has adopted regarding
Item 407(i) will apply to hedging transactions in equity securities of not only the company itself, but also of any parent, subsidiary, or any subsidiary of any parent of the company. Consistent with the proposed rules, the final rules do not define the term “hedge,” and therefore are broad-based and designed to capture any hedging transactions germane to a company’s (or its affiliate’s) equity securities.
Companies may comply with the disclosure requirement either by
If the company does not have any such practices or policies in place, Item 407(i) will require the company to disclose that fact in its proxy or information statement, or disclose that hedging transactions are generally permitted, as applicable.
New Item 407(i) does not obviate the disclosure requirement in Item 402(b)(2) of Regulation S‑K, which currently requires companies to disclose within Compensation Discussion and Analysis (CD&A) any material policies relating to hedging by named executive officers. Rather, the final rules added a new instruction to Item 402(b) that states a company “may satisfy its CD&A obligation to disclose material policies on hedging by named executive officers by cross referencing the information disclosed pursuant to new Item 407(i) to the extent that the information disclosed there satisfies this CD&A disclosure requirement.”
If you have any questions or would like further information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Laurie Cerveny
Michael Conza
Bryan Keighery
Carl Valenstein
Julio Vega
New York
Thomas P. Giblin, Jr.
Howard A. Kenny
Christina Melendi
Kimberly M. Reisler
Palo Alto
Albert Lung
Philadelphia
Justin W. Chairman
James W. McKenzie
Joanne R. Soslow
Pittsburgh
Celia Soehner
Washington, DC
David A. Sirignano
Frankfurt
Torsten Schwarze
Hong Kong
June Chan
Eli Gao
Louise Liu
Edwin Luk
Billy Wong
London
Timothy J. Corbett
Iain Wright
Moscow/London
Carter Brod
Singapore
Bernard Lui*
Joo Khin Ng*
*A solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP