The SEC has proposed new rules that would require companies to disclose whether directors, officers and other employees are allowed to hedge, or offset the market value of, equities they receive as performance-based compensation.
The rules, which are part of the Dodd-Frank Act, would oblige companies to outline their policies regarding this type of hedging in proxy statements and information statements issued for the election of directors, the regulator says.
The change would apply to equities of the employer company, the parent company and any subsidiary of the parent. It is intended to inform investors whether directors can skirt the restrictions in their compensation package that are meant to ensure they hold their stock for longer terms.
The proposal is not mean to prohibit the practice of hedging in such cases, which is already often forbidden by the policies of many companies. But it aims to comply with a Dodd-Frank directive for disclosure of transactions that would let directors and others ‘avoid the incentive alignment associated with equity ownership’.
‘The proposed rules would provide investors with additional information about the governance practices of the companies in which they invest,’ says SEC chair Mary Jo White in a press release. ‘Increasing transparency in hedging policies will help investors better understand the alignment of the interests of employees and directors with their own.’
The SEC proposal specifically mentions the purchase by directors, officers and other employees of ‘financial instruments, including prepaid variable forward contracts, equity swaps, collars and exchange funds that are designed to hedge or offset any decrease in the market value of company equity securities.’
The proposal, which covers ‘smaller reporting companies, emerging growth companies, business development companies and registered closed-end investment companies’, now faces a 60-day public comment period before it is published in the Federal Register.
