SEC Proposes Disclosure Regarding Hedging Policies
On February 9, 2015, the SEC issued a proposing release to implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). This proposed rule will require companies to disclose whether employees and directors are permitted to or prohibited from engaging in hedging transactions offsetting any decrease in the market value of equity securities issued by the company or specified affiliates of the company. Currently, companies must include in their Compensation Discussion and Analysis ("CD&A") disclosure describing any policies regarding hedging of economic risk by named executive officers, if material.
The current proposal does not require companies to prohibit hedging transactions or adopt policies addressing them. However, it does require companies to disclose whether any employee or director is permitted to engage in hedging transactions. Companies that elect to prohibit only specified hedging transactions must disclose the types of transactions that are permitted and those that are prohibited. Similarly, companies that elect to implement policies governing only certain employees must disclose generally which employees are covered by the policy. The proposal also would require companies to report the lack of a hedging policy if no policy has been implemented. This disclosure would be included in any proxy or information statement relating to the election of directors.
The current proposal significantly broadens the scope of existing disclosure requirements because it contemplates disclosure of a company's policy for all employees instead of the more limited universe of individuals such as named executive officers, who have a more direct impact on the value of a company's securities. In addition, the proposal broadens the scope of disclosure that was expected in response to Dodd-Frank because it applies to smaller reporting companies and emerging growth companies, which are not currently required to provide a CD&A in their proxy statements.
Although the current proposal does not require companies to adopt a hedging policy, companies will need to consider the impact of certain proxy advisory firms' positions that hedging in company securities is a "failure of oversight," which may result in a voting recommendation against certain directors. Although the current proposal will not be effective for the 2015 proxy season, companies should determine if they need to adopt new hedging policies or revise their existing hedging policies based on these proposals by the SEC.
For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.
Bradley C. Brasser
Charles T. Haag
J. Eric Maki
Joel T. May
W. Stuart Ogg
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