Digging back into its Dodd-Frank Act “to-do” list—and a proposal that has lingered since 2015—the Securities and Exchange Commission on Wednesday approved final rules that require companies to file an annual meeting proxy statement that discloses whether employees and directors are allowed to hedge or offset any decrease in the market value of equity securities granted as compensation.
The intent is to inform shareholders if executives are permitted to purchase financial instruments that allow them to avoid compensation restrictions and receive their compensation even if the firm's performance fails to meet expectations.
The disclosure requirement would apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies with shares listed and registered on a national securities exchange. The 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 the Exchange Act. Financial instruments covered by the rule—if intended to be designed to hedge or offset any decrease in the market value of company equity securities—include prepaid variable forward contracts, equity swaps, collars, and exchange funds.
Public companies will be required to disclose relevant practices or policies in full, or, alternatively, file a summary of those practices or policies that includes a description of any categories of hedging transactions that are specifically permitted or disallowed. If the registrant does not have any such practices or policies, it will disclose that fact or state that hedging is generally permitted.
“The new rules will provide for clear and straightforward disclosure of company policies regarding hedging,” said SEC Chairman Jay Clayton. “These disclosures in themselves, and in combination with our officer and director purchase and sale disclosure requirements, should bring increased clarity to share ownership and incentives that will benefit our investors, registrants, and our markets."
Companies will need to 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, 2019. Companies that qualify as “smaller reporting companies” or “emerging growth companies” 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. Listed closed-end funds and foreign private issuers will not be subject to the new disclosure requirements.