SEC Adopts Final Rules for Disclosure of Hedging Policies

By Dina Bernstein, Bindu M. Culas


On December 18, 2018, the SEC approved final rules requiring the disclosure of hedging policies in annual proxy statements.  The rules, which become effective for fiscal years beginning on or after July 1, 2019, are an implementation of a Dodd-Frank mandate.  The rules do not require that companies have a hedging policy or practice in place; rather, the rules relate only to disclosure. 

The rules add a new Item 407(i) of Regulation S-K, which provides for the following:

  • Required disclosure: Description of any practices or policies that a company has adopted regarding the ability of employees (including officers) or directors, or any of their designees, to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds), 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 granted to the employee or director by the company as part of the compensation of the employee or director; or held, directly or indirectly, by the employee or director.

  • Covered equity securities:  Equity securities of the company, a parent of the company, a subsidiary of the company, or a subsidiary of a parent of the company.
  • Manner of compliance: A company can provide either full disclosure of a hedging policy or practice, or alternatively, a summary.  A summary would need to describe the categories of people subject to the policy or practice and the categories of transactions that are permitted or specifically prohibited.  A company without a hedging policy or practice will need to either say it has no such policy or practice or provide that it permits hedging.

Note that the final rule applies to all employees. For companies that currently have hedging policies, the prevalent practice to date has been to limit application of the policy to executive officers and directors. The governance rationale for this approach was two-fold: first, because significant equity holdings are typically concentrated at the “top of the house”, regulating hedging by executive officers and directors is an important governance matter; and, second, the administrative cost of ensuring compliance by the entire workforce (including employees with de minimis equity holdings) outweighed the potential governance benefit of applying the policy on an all-employee basis. In view of the final rule, companies will need to determine whether to expand their existing hedging polices (or adopt new policies) to apply to all employees, or limit the policy to executive officers and directors and explain the rationale for doing so.

The new Item 407(i) hedging disclosure requirements are effective for proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019.  Smaller reporting companies and emerging growth companies have an additional year to comply; listed closed-end funds and foreign private issuers are not subject to the new requirements.  This means that for most calendar year companies, disclosure will not be required until the 2020 proxy season. 

The SEC final rule release is available here and the SEC press release is available here.

Dina Bernstein

Dina Bernstein has extensive experience advising on all aspects of executive compensation, working with companies on an ongoing basis, as well as in the context of mergers and acquisitions, spin-offs, initial public offerings, and other corporate events. Dina provides guidance to private and public companies across various industries regarding cash and equity incentive compensation arrangements, employment, severance and change in control agreements, overall compensation program design, pay governance practices, taxation, stock exchange listing requirements and securities regulation compliance.

Portrait of Bindu M. Culas, PrincipalBindu M. Culas
Managing Director

Bindu Culas has over 15 years of experience advising clients on the US and international legal, tax and regulatory aspects of designing and structuring equity incentive programs, employment agreement, and severance and change-of control plans. Bindu has worked with both domestic and foreign publicly traded and privately held companies as well as pre-IPO companies.