SEC Proposes Hedging Disclosure Rule For Directors,' Employees' Company Stock

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Rob Tricchinelli

Feb. 9 — The Securities and Exchange Commission proposed a rule to require public companies to disclose whether they allow their officers, directors and employees to hedge against declines in the company stock.

The proposed rule (RIN 3235-AL49), issued Feb. 9, affects officers, directors and employees whose compensation includes company stock as well as those who “directly or indirectly” hold it.

“The proposed rules would provide investors with additional information about the governance practices of the companies in which they invest,” SEC Chairman Mary Jo White said in a news release. “Increasing transparency into hedging policies will help investors better understand the alignment of the interests of employees and directors with their own.”

The proposed rule is required by Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and is one of several on executive compensation that the SEC has been delayed in finishing.


The disclosure would apply to “equity securities of the company, any parent of the company, any subsidiary of the company or any subsidiary of any parent of the company,” according to the proposal.

It would require the disclosure in proxy statements and information about board of directors elections.

The proposed rule adds a new paragraph (i) to the corporate governance disclosure requirements of Item 407 of Regulation S-K.

The proposed rule would also amend Item 402(b), which requires disclosure of hedging policies applicable to named executive officers in the Compensation Discussion and Analysis section of the proxy statement.

In a new instruction to Item 402(b), issuers would be able to satisfy their CD&A obligations to disclose hedging policies applicable to named executive officers by cross-reference to the Item 407(i) disclosure, to the extent disclosures under the new item satisfy the CD&A requirement, the proposed rule said.

Once the proposal is published in the Federal Register, members of the public will have 60 days to comment.


“In the absence of this proposed disclosure, shareholders may not be aware of the executive officers' and directors' true economic exposure to the company's equity,” if they are hedging in secret, SEC Commissioner Luis A. Aguilar said in a statement. The proposal is designed “to provide greater clarity to investors regarding employees' and directors' actual incentives to create shareholder wealth.”

Aguilar also said that the proposed rule would not prohibit hedging by company employees and directors.

Republican Commissioners Daniel M. Gallagher and Michael S. Piwowar released a joint statement to say they supported proposing the rules but wanted some revisions, including an exemption for emerging growth and smaller reporting companies.

They also want to limit the disclosure to employees who can affect the price of their company's stock and to exempt certain closed-end investment companies from the rule.

“We remain quite concerned by several aspects of the proposal, and we hope to receive robust public comment on them,” they said.

—With assistance from Mary Hughes in Washington

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Susan Jenkins at

Text of the proposed rule is at Aguilar's statement is at The joint statement by Gallagher and Piwowar is at


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