On February 9, 2015, the Securities and Exchange Commission proposed rule amendments to require annual meeting proxy statement disclosure of policies permitting or prohibiting hedging of  company securities by employees (including officers) and directors. The proposed rules do not,  however, require companies to prohibit hedging transactions or adopt policies addressing hedging.  The rule’s purpose is to provide transparency to shareholders in the context of director elections  regarding whether employees and directors are permitted to engage in transactions that mitigate the  long-term incentive alignment associated with employee and director equity ownership. Companies  should consider these proposed disclosure requirements when assessing corporate governance controls  and procedures, as this proposed rule may heighten scrutiny of hedging policies this proxy season,  and if implemented, will create additional disclosure requirements going forward.


The SEC proposed an amendment to annual meeting corporate governance disclosure that primarily  amends Regulation S-K Item 407. The proposed amendments implement Section 955 of the Dodd-Frank  Wall Street Reform and Consumer Protection Act, which added Section 14(j) of the Securities  Exchange Act of 1934 (the “Exchange Act”). The SEC seeks comments on the proposed rules on or  before April 20, 2015.

The proposed Item 407(i) would require issuers to disclose whether any employee or director is  permitted to purchase financial instruments that are designed to hedge or offset any decrease in  the market value of equity securities either (1) granted to the employee or director as part of   their compensation, or (2) held, directly or indirectly, by the employee or director. The proposed  rule clarifies that the term “employee” specifically includes officers of the company by adding   the parenthetical “(including officers)” after the term “employees” within the language of the  disclosure requirement. 

The Compensation Discussion and Analysis section of the proxy statement already requires disclosure  of hedging policies that are material and necessary to an understanding of named executive officers  compensation policies and decisions. To reduce duplicative disclosure, the amendments would also  provide instructions to Item 402(b) specifying that the Compensation Discussion and Analysis  section of the proxy statement requiring disclosure on policies regarding hedging by named  executive officers may be satisfied by cross-reference to its Item 407(i) disclosure. Note that by  amending Item 407, the SEC would apply these hedging policy disclosure requirements to smaller  reporting companies to which 402(b) otherwise does not apply.

The proposal only would require disclosure in proxy or consent solicitation materials and  information statements in connection with the election of directors. By requiring disclosures in  such circumstances, shareholders would be able to consider the proposed hedging policy disclosure  at the same time they consider the company’s other corporate governance disclosures and vote for  the election of directors.


The proposed rule would apply a principles-based approach to hedging policy disclosure, covering  all transactions designed to hedge or offset any decrease in the market value of equity securities.  It covers financial instruments specified in Section 14(j) of the Exchange Act, including prepaid  variable forward contracts, equity swaps, collars, and exchange funds hedging transactions, as well as other transactions with comparable economic consequences.

Furthermore, in order to provide a complete understanding of the scope of permitted hedging transactions and the range of persons permitted to engage in such transactions, the proposed rule would require companies to disclose the categories of both permitted transactions and prohibited transactions.

The proposed rule would require Item 407(i) disclosure for equity securities of the company, any parent, subsidiary, or subsidiary of any parent of the company that are registered under Section 12 of the Exchange Act.


Proxy advisory firms consider anti-hedging policies an important compensation risk mitigation measure. ISS proxy voting policy flags any hedging by directors or executive officers as a “material failure of risk oversight” and may recommend negative votes for individual directors, members of the governance committee, or the whole board. ISS will also “red flag” a company’s lack of any anti-hedging policy. Glass Lewis’s proxy voting policy provides that hedging by executive employees severs the alignment of interest of the executive with shareholders and that companies should adopt strict anti-hedging policies.


Companies should consider these proposed disclosure requirements when assessing corporate governance controls and procedures, because this proposed rule may heighten scrutiny of hedging policies this proxy season. In particular, companies should assess any policies permitting hedging transactions and how they may be viewed in light of these disclosure requirements.

Companies that anticipated this Dodd-Frank rule making and amended their policies to address hedging by executive officers, directors, and employees should include disclosure of the hedging policies in 2015 proxy statements. Those without policies on hedging should consider whether these disclosure requirements warrant the implementation of anti-hedging policies.