SEC Adopts Final Rules to Disclose Hedging Policies

January 04, 2019

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.

Summary of the Final Hedging Disclosure Rules

New Item 407(i) will require a company to describe any practices or policies it has adopted regarding

  • the ability of company employees (including officers) and directors to purchase securities or other financial instruments, or otherwise engage in transactions
  • that hedge or offset, or are designed to hedge or offset
  • any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.

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.

Disclosure Alternatives

Companies may comply with the disclosure requirement either by

  • providing a “fair and accurate” summary of their hedging policies and practices, including to whom such policies and procedures apply and any categories of hedging transactions that are specifically permitted or disallowed; or
  • fully describing the hedging policies and practices.

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.

Interplay with Item 402(b) of Regulation S-K

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.”

Compliance Timeframe

  • Generally, companies must provide disclosure under Item 407(i) for proxy and information statements involving the election of directors that relate to fiscal years beginning on or after July 1, 2019. For calendar year-end companies, this means that the disclosure requirements are effective for the 2020 proxy season, although companies can elect to “early adopt” and provide the disclosure in 2019 proxy statements.
  • Phase-In for SRCs and EGCs. Companies that qualify as “smaller reporting companies” or “emerging growth companies” (each as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) must comply with the new disclosure requirements in proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2020. 
  • FPI and closed-end fund exemptions. Listed closed-end funds and foreign private issuers are exempt from Item 407(i) disclosure requirements.


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