The SEC proposed rules to enhance the corporate disclosure of company hedging policies for directors and employees. The proposal requires an issuer to disclose whether it permits directors and employees to hedge their exposure to the company’s securities that they own or that are granted to them as compensation.
The proposal amends Regulation S-K to require annual proxy disclosures about whether directors and employees are permitted to hedge or offset any decrease in the market value of equity securities granted by a company as compensation or otherwise held by them, as well as the equity securities of their employer’s parent, any subsidiary or any affiliate of the company that is registered under Exchange Act Section 12. The disclosures apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies and registered closed-end investment companies with shares listed and registered on a national securities exchange.
SEC Commissioners Gallagher and Piwowar (the “Commissioners”) issued a statement that offered their qualified support for the proposed rule, but also identified several aspects of the proposal that they found “troubling.” The Commissioners questioned whether costs of the proposed requirement could fall disproportionately on emerging growth companies and smaller reporting companies, since they are less able to bear the fixed costs of disclosure financially than larger established companies. The Commissioners also explained that certain externally managed investment companies have few employees who are compensated by hedging and would be subject to the proposal.
Furthermore, the Commissioners stated, the SEC should have exempted disclosures from the rule that relate to employees who cannot affect the company’s share price. According to the Commissioners, the scope of securities of the issuer and the issuer’s affiliates – including subsidiaries, parents, and brother-sister companies – is “overbroad.”
By failing to address certain exceptions and exemptions from the proposed rule, the Commissioners stated, the SEC runs the risk of “disclosure overload.” The Commissioners questioned whether prioritizing the release “over the Division of Corporation Finance’s comprehensive disclosure review was the highest and best use of that Division’s expert staff.”
Lofchie Comment: Congressional legislation requires the SEC, as well as the CFTC, to adopt too many rules within wholly impractical timeframes. Thus, the SEC is effectively given the authority (even if that authority is not provided by legislation) to determine which Congressional directives should be prioritized. Should legislation be implemented on a first-in, first-out basis or in response to political pressures (the directives of the Congressional majority), or should rules that seem more sensible to the SEC as a matter of policy be implemented first? It seems reasonable that the SEC clarify the policy and communicate the order in which laws will be subject to rulemaking. Perhaps more important than the Commissioners’ specific comments is the question of whether the development of this proposed rule was a good use of the SEC’s resources.