In a long-awaited development, the SEC has adopted its final rule "requiring companies to disclose, in proxy or information statements for the election of directors, any practices or policies allowing employees or directors to engage in certain hedging transactions with respect to company equity securities," (SEC press release).
With the 2010 congressional passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the SEC was required to adopt rules requiring public companies to disclose their respective hedging policies, and in 2015, a set of rules were proposed.
The adoption of a final rule was announced in an SEC press release dated December 18, 2018.
The Disclosure Requirements
In the final rule, a firm is required to disclose a complete and accurate summary of its existing applicable hedging practices or policies, including the categories of persons covered by the rule and what, if any, categories of hedging transactions are specifically disallowed.
Disclosure is required for all equity securities of the company, any parent of the company, any subsidiary of the company, or any subsidiary of any parent of the company.
Also of note, while existing policies pertaining to hedging practices must be disclosed, a firm is not directed to adopt rules governing hedging activities if it does not currently have them in place. Instead, a firm must disclose its absence of governing policy.
The Deadline for Disclosure Compliance
Companies will be required to comply with the new disclosure requirements during fiscal years beginning on or after July 1, 2019.
However, companies deemed smaller reporting companies or emerging growth companies, which are defined in Securities Exchange Act Rule 12b-2, will be granted an additional year to comply, so that the rule goes into effect for those companies for fiscal years beginning on or after July 1, 2020.
Due Diligence: Reviewing Hedging Disclosures
While hedging practices and the associated regulations that govern them apply to public companies likely to include equity securities as part of executive compensation packages, investment advisers (IAs) need to be aware of the new disclosure requirements.
IAs should factor into their decision-making process the possibility that permission to conduct hedging activities may lead to increased risk-taking behavior on the part of executives at the helm of public companies, as those executives have been allowed to insure themselves against personal loss.
While such activities may not affect an IA's final decision to invest in a company, due diligence requires taking all information available into account in order to make the most informed decision possible on behalf of investment clients. It is recommended that IAs review the disclosures and consider their ramifications, if any, before making their final determination to invest.
Should your firm need clarification on new SEC policies and how they impact your processes for conducting due diligence, the attorneys at Jacko Law Group, PC., are here to help. We would be happy to apply our years of experience to your unique situation - contact us here.
A Reminder to Our Readers
We'd like to remind our readers to file form ADV in a timely manner with the necessary regulatory bodies, including the SEC and state securities authorities, and to provide the required updated informational brochures to clients. This must be done regardless of the operational status of the SEC. Should your firm need any assistance with filing requirements, contact Jacko Law Group, PC - click here.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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