SEC Proposed Hedging Transaction Disclosure Rules

By and on May 4, 2015

Much attention has been given to recent U.S. Securities and Exchange Commission (SEC) proposed rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) that would require disclosure of chief executive officer pay ratios and a new pay-for-performance table.  But there’s another proposed rule that could cause significant headaches for public companies during the 2016 proxy season.  As we previously reported, the SEC has proposed rules that would require disclosure of what categories of transactions are – and are not – allowed under issuer hedging policies. These rules would implement Section 955 of the Dodd-Frank Act.  We believe that this issue has not received significant attention because most public companies already have hedging policies.  What’s not appreciated is that the scope of the proposed rules is quite broad and could cover many common investment transactions that would not be a hedge under many public company hedging policies.  For example, purchasing the stock of other issuers could be a hedge under the proposed rules.  If the proposed rules are implemented in their current form, public companies could be forced to choose between (i) disclosing that some forms of hedging are allowed under their hedging policies, thereby risking adverse voting recommendations from proxy advisory services (such as ISS and Glass-Lewis, at least under current voting guidelines) or (ii) modifying existing hedging polices to limit investment approaches used to diversify concentrated stock positions, which would complicate compliance oversight of hedging policies and lead to changes by executives in their investment strategies, including potentially more sales of issuer stock under 10b5-1 programs. McDermott Will & Emery has submitted comments urging the SEC to clarify and narrow the scope of hedging transactions that would be covered as part of the final rules – click here for a copy of the comment letter. We recommend that public companies keep in mind the need to review existing hedging polices in light of what the SEC adopts as final rules on hedging policy disclosures, which could be finalized by early this fall.

Andrew Liazos
Andrew C. Liazos is the global chair of McDermott’s Benefits & Compensation Practice Group and has practiced at McDermott for over 25 years. Andrew focuses his practice on compensation and benefit matters, including related securities, M&A, IPO, private equity, international and litigation matters. Clients range from Fortune 500 companies to compensation committees to individual executives in employment and severance negotiations. Read Andrew Liazos' full bio.


William R. Pomierski
William (Bill) R. Pomierski focuses his practice on the taxation of financial products and capital markets transactions, as well as on executive compensation matters. He is a former chair of the Firm’s Executive Compensation Practice Group. Bill advises clients on the federal income tax implications of a variety of domestic, cross-border and global financial products and related transactions. Read William Pomierski's full bio.

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