On February 9, 2015, the Securities and Exchange Commission (the “Commission”) proposed rules to require disclosure of a company’s equity hedging policies under Section 955 of the Dodd-Frank Act. Specifically, the proposed rules would require a company to disclose, in its proxy or information statement with regard to the election of directors, whether its employees (including officers) or members of its board of directors, or any of their designees, are permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars and exchange funds) or otherwise engage in transactions to hedge or offset any decrease in the market value of equity securities granted to the employee or board member as compensation, or held directly or indirectly by the employee or board member.

The proposed rules will be open for public comment for 60 days following the publication of the proposing release in the Federal Register.

Overview

The Commission is proposing to add a new paragraph (i) to Item 407 of Regulation S-K that would implement Section 14(j) of the Securities Exchange Act of 1934 (the “Exchange Act”), as added by Section 955 of the Dodd-Frank Act. The proposed amendment would keep disclosure requirements relating to corporate governance matters together in a single item in Regulation S-K. The Commission stated that it “infer[s] that the statutory purpose of Section 14(j) is to provide transparency to shareholders, if action is to be taken with respect to the election of directors, about whether employees or directors are permitted to engage in transactions that mitigate or avoid the incentive alignment associated with equity ownership.”

Covered Hedging Transactions

The proposed rules are not limited to any particular types of hedging transactions and would cover all transactions that establish downside price protection. A proposed instruction to proposed Item 407(i) would clarify that companies would be required to disclose the (i) categories of persons who are permitted to engage in hedging transactions and those who are not and (ii) the hedging transactions it permits. Additionally, the disclosure must be in sufficient detail to explain the scope of such permitted transactions, as well as those it prohibits.

Equity Securities

The Commission has proposed that the term “equity securities” would mean any equity securities, as defined in the Exchange Act rules, issued by a company, any parent of the company, any subsidiary of the company or any subsidiary of any parent of the company, that are registered under Section 12 of the Exchange Act.