The Securities and Exchange Commission issued Feb. 9 draft rules regarding corporate disclosure of company hedging policies for directors and employees, as mandated under the 2010 Dodd-Frank Act. This week’s release leaves three remaining governance-related Dodd-Frank provisions the commission has yet to act on.
The hedging policies proposal would require disclosure about whether directors, officers, and other employees are permitted to hedge or offset any decrease in the market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors.
“The proposed rules would provide investors with additional information about the governance practices of the companies in which they invest,” said SEC Chair Mary Jo White. “Increasing transparency into hedging policies will help investors better understand the alignment of the interests of employees and directors with their own.”
An analysis of ISS Governance QuickScore data finds 54.3 percent of Russell 3000 companies have a policy prohibiting hedging of company shares by employees, while 84 percent of large capital, S&P500 companies have such a policy. Executive or director pledging of company shares was prevalent at just 14.2 percent of Russell 3000 companies, and, notably, 15.8 percent of S&P500 companies, according to QuickScore.
The draft regulations would require disclosure in proxy and information statements for the election of directors and 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.
The proposal also specifies that disclosure would apply to equity securities of the company, its parent, subsidiary, or any subsidiary of any parent of the company that is registered under Section 12 of the Exchange Act, the SEC said in a statement.
Despite voting to support issuance of the draft rules, the scope of the proposal drew the ire of Republican Commissioners Michael Piowar and Daniel Gallagher who underscored in a joint statement following the release that their support was qualified.
“[W]e remain quite concerned by several aspects of the proposal, and we hope to receive robust public comment on them,” Piowar and Gallagher said, objecting to various provisions including the failure to exempt emerging growth companies or smaller reporting companies and the proposing release’s coverage of securities not just of the issuer, but also of the issuer’s affiliates, including subsidiaries, parents, and brother-sister companies, which they deemed overbroad.
Meanwhile, Democratic Commissioner Luis Aguilar lauded the release, calling it a “positive step in the direction of providing more information to shareholders as to whether the interests of corporate insiders are truly aligned with their own.”
Aguilar also noted the commission had more to do to carry through in full on Dodd-Frank mandates regarding corporate governance. Other significant executive compensation-related disclosure rules have yet to be adopted, including disclosures related to: the relationship between executive compensation actually paid and the financial performance of the issuer (known as “pay-for-performance”); the ratio between the compensation of the chief executive officer and the total annual compensation of its average worker (known as “pay ratio”); and reports by large investment managers of their advisory shareholder votes about executive compensation and golden parachutes.
The SEC will seek public comment on the proposed rule amendments for 60 days following their publication in the Federal Register.
Staff Review of Conflicting Shareholder Proposals
Separately, the SEC recently announced it would seek input with respect to review of Exchange Act Rule 14a-8(i)(9), the basis for excluding a shareholder proposal that “directly conflicts” with a management proposal. On Jan. 16, White directed SEC staff to review the provision and report back to the commission on its review. Comments can be submitted to i9review@sec.gov and the agency will post publicly all comments received.–Subodh Mishra, Governance Exchange
