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Although Dodd-Frank was enacted in 2010, the rule needed to implement one of its provisions – the requirement to disclose hedging policies – only recently took effect.  In fact, for calendar-year companies, 2020 will be the first year in which the proxy statement will have to contain the mandated disclosures.

Of course, quite a few companies have been disclosing their hedging policies for years, including disclosures in the CD&A required under Item 402 of Regulation S-K.  However, the new rule is more detailed and contains some quirky provisions that should be considered in preparing the proxy statement language.

Here are a few high spots.

What Is “Hedging?”

The rule does not define the term “hedging.”  Instead, it refers to “the ability of employees (including officers) or directors…, or any of their designees, to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds), or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of registrant equity securities.”  I know that sounds circular, but the SEC doesn’t usually adopt rules that define terms by saying “you know what we mean.”

One particular pitfall may be the rule’s reference to exchange funds.  Unlike forward contracts, equity swaps, and so on, the use of an exchange fund may not intuitively seem like a hedging device.  And a company may well decide to exclude exchange funds from its hedging policy.  However, if that’s the case, the company will need to disclose that exclusion.

Practices and Policies 

The rule requires disclosure of a company’s “practices or policies … regarding the ability of employees (including officers) or directors, or any of their designees” to engage in hedging transactions (see the prior section).  The practices or policies need not be in writing.  Note that companies are not required to have hedging practices or policies.  However, a company that has no such policies or practices has to say so, which means that few if any companies will have no such policies or practices.  (Sound familiar?  Companies are not required to have an audit committee financial expert, but I’ve never encountered any company that doesn’t.)

While the rule doesn’t discuss what qualifies as a “practice,” some companies prohibit hedging indirectly, by requiring directors and officers to clear every transaction and declining to approve any transactions believed to constitute “hedging.”

Who’s Covered?

The rule refers to policies applicable to directors, officers, and employees, “or any of their designees.”  In my experience, companies generally avoid making hedging and some other policies applicable to all employees (much less their designees), for the simple reason that it’s practically impossible to monitor compliance with, much less to enforce, such a broad-based policy.  Given my view that having a policy you don’t or can’t enforce is worse than having no policy at all, I’d like to think that companies will be OK with limiting their policies (or practices) to officers and directors and, as required, describing that limitation in their proxy statements, but time will tell.

What’s Covered?

Disclosure is required with respect to equity securities of the company, any of its parents or subsidiaries, and any subsidiary of any parent.  Disclosure is also required regardless of whether the securities are held directly or indirectly and whether they were part of the individual’s compensation or otherwise.


As with any SEC rule, the devil is in the details, so you should read the rule carefully to better understand how it applies to your company’s unique facts and circumstances.