Reed Smith Client Alerts

The Securities and Exchange Commission (SEC) approved final rules requiring U.S. public companies to disclose in proxy or information statements for the election of directors any practices or policies regarding the ability of employees (including officers) or directors to engage in hedging transactions with respect to company equity securities.1 The purpose of the requirement is to provide transparency to shareholders at the time they are asked to elect directors, about whether a company’s employees or directors may engage in transactions that could reduce the extent to which their equity compensation and equity holdings are aligned with shareholder interests. The rules do not require a company to prohibit hedging transactions or implement hedging policies or practices or dictate their content.

Authors: Danielle Carbone Wendy A. Grasso

Highlights of the rules

  • New Item 407(i) of Regulation S-K requires a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers), directors or their designees to purchase 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 company equity securities.
  • A company can satisfy this requirement by either providing a fair and accurate summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or disallowed, or alternatively, by disclosing the practices or policies in full.
  • If a company does not have hedging practices or policies, the rules require the company to disclose that fact or state that hedging transactions are generally permitted.
  • The equity securities for which disclosure is required are equity securities of the company, any parent of the company, any subsidiary of the company, or any subsidiary of any parent of the company.
  • The new disclosure is required in proxy or information statements relating to the election of directors.