Next in our series of posts on the SEC’s new hedging disclosure rules is: Who should the hedging policy cover? Neither the statute nor the SEC’s rules are limited to named executive officers. Both require disclosure of hedging policies or practices that the company has adopted as to employees (including officers) or directors, or any of their designees. Nearly every company in America already discloses that it prohibits hedging by its officers and directors. (ClearBridge released a survey indicating that 97% of companies disclosed an anti-hedging policy in 2018 and 79% of companies disclosed an anti-pledging policy in 2018.) Yet even the precise meaning of the term officer is not necessarily consistent among all companies.
Remember, the rules do not require a company to adopt any policies or practices as to any specific employees, only to disclose the policies it has adopted. Therefore, it is up to each company to decide and define which employees and other individuals in the organization its hedging policies cover. Some companies will establish (and publicize to employees) policies that broadly prohibit all employees from engaging in hedging transactions, at least with respect to stock received as compensatory awards, under the theory that the prohibition alone will deter most from hedging, even though the company may not be able to monitor compliance effectively. Maybe we are over-cautious, but we are concerned that litigation or SEC claims could arise over a company’s failure to enforce its anti-hedging policy. Perhaps a company should not risk undertaking an obligation to monitor and apply its anti-hedging policies to employees outside the Section 16/executive officer group. Alternatively, maybe the policy should only apply to individuals to whom the company has applied stock ownership guidelines or alternatively, those employees who regularly receive awards of equity-based compensation. Those are the employees whose fortunes we want to link to the company’s performance.
We suggest that a company make this decision by first asking: For which individuals in our organization can we realistically monitor compliance? As a practical matter, most companies’ current hedging policies are limited to senior executives and directors. It may sound grand for a company to apply its anti-hedging policies to all employees, directors and independent contractors. But how will the company enforce that policy or prohibition? For most companies, the answer is that there is simply no way for them to oversee compliance by all of their employees. Lawyers tend to dislike policies that are not backed up by some oversight mechanism.
Additionally, most employees outside the senior executive ranks are highly unlikely to use hedging transactions. They will simply sell their company stock.
As we complete the filing of our 2019 proxy statements, this (and certain compensation committee and charter tweaks) might be the next issue for companies and committees to consider.