SEC proposes new rules concerning the disclosure of hedging by employees, officers, and directors of issuers, including certain closed-end investment companies

On February 9, 2015, the SEC proposed rules to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Proposed Rules”). The Proposed Rules would require issuers of “equity securities” – defined as securities issued by the issuer, any parent or subsidiary of the issuer, and any subsidiary of the parent of an issuer, that are registered under Section 12 of the Securities Exchange Act of 1934 – to disclose whether the issuer permits any of its employees, officers or directors, or any of their designees, to purchase financial instruments or otherwise engage in transactions that hedge against any decrease in the market value of the equity securities (1) granted to the employee, officer or director as part of their compensation; or (2) held directly or indirectly by the employee, officer or director. 

The Proposed Rules would not affect open-end investment companies (mutual funds) or exchange-traded funds (ETFs). However, closed-end investment companies with shares listed on a national securities exchange, as well as business development companies (BDCs), would be required to follow the new disclosure requirements discussed above (closed-end funds, but not BDCs, would be excluded if not listed on an exchange). With respect to a listed closed-end fund, in the Proposed Rules release, the SEC posited that the disclosure required by the Proposed Rules may be important to investors’ voting decisions when evaluating the degree to which the interests of investors and the interests of fund directors and employees (if any) are aligned, especially with respect to seeking to decrease any discount at which the fund’s shares are trading relative to the shares’ NAV.

The SEC requests comments on, among other things, the application of the Proposed Rules’ disclosure requirements to listed closed-end funds and to business development companies. Further, the SEC seeks input and data on the prevalence of such hedging by directors or employees (if any) for all types of registered investment companies. Comments must be received by the SEC no later than April 20, 2015.