SEC Proposed Hedging Transaction Disclosure Rules

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Much attention has been given to recent proposed rulemaking by the U.S. Securities and Exchange Commission (SEC) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that would require disclosure of CEO pay ratios and a new pay for performance table. There is another proposed rule that could cause significant headaches for public companies during the 2016 proxy season. As we previously reported, the SEC has proposed rules that would require disclosure of which categories of hedge transactions are—and are not—allowed under issuer hedging policies. These rules would implement Section 955 of the Dodd-Frank Act. We believe that this issue has not received significant attention because most public companies already have hedging policies. The scope of the proposed rules has not been fully appreciated—it is quite broad and could cover many common investment transactions, which may not be considered a hedge under many public company hedging policies. For example, purchasing the stock of other issuers could be considered a hedge under the proposed rules. If the proposed rules are implemented in their current form, public companies could be forced to choose between (i) disclosing that some forms of hedging are allowed under their hedging policies—thereby risking adverse voting recommendations from proxy advisory services (such as Institutional Shareholder Services and Glass-Lewis, at least under current voting guidelines)—or (ii) modifying existing hedging polices to limit investment approaches used to diversify concentrated stock positions, which would complicate compliance oversight of hedging policies and lead to changes by executives in their investment strategies, including potentially more sales of issuer stock under 10b5-1 programs. McDermott Will & Emery has submitted comments urging the SEC to clarify and narrow the scope of hedging transactions that would be covered as part of the final rules. We recommend that public companies keep in mind the need to review existing hedging polices in light of the final rules on hedging policy disclosures adopted by the SEC. These final rules could be finalized by early-fall 2015.