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Hedging Disclosures for Employees and Directors

Section 955 of the Dodd-Frank Act requires the SEC to adopt rules requiring companies to disclose in proxy statements for annual meetings whether any employee, director or designee may hedge ownership of the company’s equity securities.  Although some companies disclose that their executive officers or directors are subject to anti-hedging policies, section 955 goes further by requiring such disclosure also with respect to employees.  Despite the nature of this provisions, section 955 does not require companies to specifically disclose actual hedging transactions.

Section 955 is designed to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform.”  The simplest way for firms to comply with the legislation would be to implement a ban on hedging.  Such a policy may not be feasible to implement in a large firm as it would to be too costly in those cases it may make more sense to simply keep an eye on upper level management as they would pose the greatest risk.