On Monday, the Securities and Exchange Commission (the “SEC”) proposed rules requiring disclosure of companies’ policies with respect to hedging transactions, in order to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The rules do not prohibit hedging transactions or require companies to adopt policies with respect to hedging, but would instead require companies to disclose whether any corporate hedging policies exist and whether they permit directors, officers or other employees who receive equity securities as part of their compensation, or otherwise hold equity securities of the issuer, whether directly or indirectly, to hedge or offset any declines in the market value of those equity securities.

Many companies already prohibit hedging transactions as part of their corporate governance policies, or at the least require pre-approval by a policy administrator before such transactions can be entered into. Hedging by company personnel is generally frowned upon as a means of reducing the economic risks of share ownership.

Currently, Item 402(b) of Regulation S-K requires certain disclosures related to hedging policies, but only with respect to named executive officers of an issuer.  Furthermore, Item 402(b) does not apply to smaller reporting companies, emerging growth companies or registered investment companies.

The rules proposed on Monday would add new paragraph (i) to Item 407 of Regulation S-K, and would require companies to disclose, in annual meeting proxy and information statements, whether they permit employees and directors to hedge their companies’ securities.  Unlike existing requirements, the rules would not exempt smaller reporting companies, emerging growth companies, or closed-end investment companies that have shares listed on a national securities exchange, and would instead apply to all companies subject to the federal proxy rules.

Congress, as part of the Dodd-Frank Act, mandated the proposed rules to provide shareholders with information regarding whether employees or directors are permitted to engage in transactions that “avoid the incentive alignment associated with equity ownership.”  The proposed rules are the second of four sets of rules required to be adopted by the SEC under the Dodd-Frank Act relating to executive compensation, each of which is intended to provide investors with additional information about the governance practices of the companies in which they invest. The first set of these rules, pertaining to the ratio of the CEO’s compensation to that of a company’s median employee, have remained in proposal form since September 2013.

The SEC will collect public comments on the rule for 60 days following publication in the Federal Register. We’ll provide additional information as to the rules when they are finalized.