2402 Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Rules and Regulations 

1 17 CFR 229.10 et seq. 

2See Rel. No. 33–9723 (Feb. 9, 2015) [80 FR 8485 

(Feb. 17, 2015)] (the ‘‘Proposing Release’’), available 

at: http://www.sec.gov/rules/proposed/2015/33- 

9723.pdf. 

3Public Law 111–203, 124 Stat. 1900 (July 21, 

2010). 

4 15 U.S.C. 78a et seq. 

5See Report of the Senate Committee on Banking, 

Housing, and Urban Affairs, S. 3217, Report No. 

111–176 (Apr. 30, 2010) (‘‘Senate Report 111–176’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229 and 240 

[Release No. 33–10593; 34–84883; IC– 

33333; File No. S7–01–15] 

RIN 3235–AL49 

Disclosure of Hedging by Employees, 

Officers and Directors 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: We are adopting a rule to 

implement a provision of the DoddFrank Wall Street Reform and Consumer 

Protection Act. The new rule requires a 

company to describe any practices or 

policies it has adopted regarding the 

ability of its employees (including 

officers) or directors to purchase 

financial instruments, or otherwise 

engage in transactions, that hedge or 

offset, or are designed to hedge or offset, 

any decrease in the market value of 

equity securities granted as 

compensation, or held directly or 

indirectly by the employee or director. 

The new rule requires a company to 

describe the practices or policies and 

the categories of persons they affect. If 

a company does not have any such 

practices or policies, the company must 

disclose that fact or state that hedging 

transactions are generally permitted. 

The new disclosure is required in a 

proxy statement or information 

statement relating to an election of 

directors. 

DATES: 

Effective date: March 8, 2019. 

Compliance dates: Companies that do 

not qualify as ‘‘smaller reporting 

companies’’ or ‘‘emerging growth 

companies’’ (each as defined in 17 CFR 

240.12b–2) must comply with these 

disclosure requirements for proxy and 

information statements with respect to 

the election of directors during fiscal 

years beginning on or after July 1, 2019. 

Companies that qualify as ‘‘smaller 

reporting companies’’ or ‘‘emerging 

growth companies’’ must comply with 

these disclosure requirements for proxy 

and information statements with respect 

to the election of directors during fiscal 

years beginning on or after July 1, 2020. 

FOR FURTHER INFORMATION CONTACT: 

Carolyn Sherman, Special Counsel, or 

Anne Krauskopf, Senior Special 

Counsel, at (202) 551–3500, in the 

Office of Chief Counsel, Division of 

Corporation Finance, U.S. Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: We are 

amending 17 CFR 229.402 (‘‘Item 402’’ 

of Regulation S–K 1) by revising 

paragraph (b) to add Instruction 6; 17 

CFR 229.407 (‘‘Item 407’’ of Regulation 

S–K) to add new paragraph (i); and 17 

CFR 14a–101 (‘‘Schedule 14A’’) to 

revise Item 7. 

Table of Contents 

I. Introduction 

II. Background 

III. Discussion of the Amendments 

A. Scope of the Disclosure Requirement 

1. Proposed Amendments 

2. Comments on the Proposed 

Amendments 

3. Final Amendments 

B. Defining the Term ‘‘Equity Securities’’ 

1. Proposed Amendments 

2. Comments on the Proposed 

Amendments 

3. Final Amendments 

C. Employees and Directors Subject to the 

Disclosure Requirement 

1. Proposed Amendments 

2. Comments on the Proposed 

Amendments 

3. Final Amendments 

D. Implementation 

1. Manner and Location of Disclosure 

a. Proposed Amendments 

b. Comments on Proposed Amendments 

c. Final Amendments 

2. Disclosure on Schedule 14C 

a. Proposed Amendments 

b. Comments on Proposed Amendments 

c. Final Amendments 

3. Relationship to Existing CD&A 

Obligations 

a. Proposed Amendments 

b. Comments on Proposed Amendments 

c. Final Amendments 

4. Issuers Subject to the Amendments 

a. Proposed Amendments 

b. Comments on Proposed Amendments 

c. Final Amendments 

i. Investment Companies 

ii. Emerging Growth Companies and 

Smaller Reporting Companies 

iii. Foreign Private Issuers 

IV. Other Matters 

V. Compliance Dates 

VI. Economic Analysis 

A. Background 

B. Baseline and Affected Parties 

C. Discussion of Economic Effects 

1. Effects of the Item 407(i) Disclosure 

Requirements 

a. Benefits 

b. Costs 

c. Exclusion of Listed Closed-End Funds 

d. Disclosure in Schedule 14C 

e. Compliance Dates 

2. Efficiency, Competition, and Capital 

Formation 

3. Reasonable Alternatives 

VII. Paperwork Reduction Act 

A. Background 

B. Summary of Information Collections 

C. Burden and Cost Estimates Related to 

the Amendments 

VIII. Final Regulatory Flexibility Act 

Analysis 

A. Need for, and Objectives of, the 

Amendments 

B. Significant Issues Raised by Public 

Comments 

C. Small Entities Subject to the 

Amendments 

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

E. Agency Action To Minimize Effect on 

Small Entities 

Statutory Authority and Text of Amendments 

I. Introduction 

On February 9, 2015, the Commission 

proposed rule amendments 2 to 

implement Section 955 of the DoddFrank Wall Street Reform and Consumer 

Protection Act (the ‘‘Act’’).3 Section 955 

added Section 14(j) to the Securities 

Exchange Act of 1934 (the ‘‘Exchange 

Act’’).4 Section 14(j) directs the 

Commission to require, by rule, each 

issuer to disclose in any proxy or 

consent solicitation material for an 

annual meeting of shareholders whether 

any of its employees or members of its 

board of directors, or any designee of 

such employee or director, is permitted 

to purchase financial instruments 

(including prepaid variable forward 

contracts, equity swaps, collars, and 

exchange funds) that are designed to 

hedge or offset any decrease in the 

market value of equity securities either 

(1) granted to the employee or director 

by the issuer as part of the 

compensation of the employee or 

director; or (2) held, directly or 

indirectly, by the employee or director. 

The Senate Committee on Banking, 

Housing, and Urban Affairs stated in its 

report on the Act that Section 14(j) is 

intended to ‘‘allow shareholders to 

know if executives are allowed to 

purchase financial instruments to 

effectively avoid compensation 

restrictions that they hold stock longterm, so that they will receive their 

compensation even in the case that their 

firm does not perform.’’ 5 In this regard, 

we infer that the statutory purpose of 

Section 14(j) is to provide transparency 

to shareholders at the time of an annual 

meeting, which is when directors are 

elected, about whether a company’s 

employees or directors may engage in 

transactions that reduce or avoid the 

incentive alignment associated with 

equity ownership related to their 

employment or board service. 


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6See, e.g., letters from Chris Barnard, Council of 

Institutional Investors dated Apr. 16, 2015 and 

Sept. 7, 2017 (collectively ‘‘CII’’), Taylor Dove, 

Susie E. Hawthorne, Michael Nau and Public 

Citizen expressing general support for the proposed 

rules. 

7See, e.g., letters from American Bar Association 

Section of Business Law Committee on Federal 

Regulation of Securities dated Jul. 8, 2015 and Oct. 

13, 2015 (collectively ‘‘ABA’’ unless specified by 

date), Keith P. Bishop, Business Roundtable, and 

Davis Polk suggesting modifications. 

8As defined in Item 402(a)(3) of Regulation S–K, 

‘‘named executive officers’’ are all individuals 

serving as the company’s principal executive officer 

during the last completed fiscal year, all individuals 

serving as the company’s principal financial officer 

during that fiscal year, the company’s three other 

most highly compensated executive officers who 

were serving as executive officers at the end of that 

year, and up to two additional individuals who 

would have been among the three most highly 

compensated but for not serving as executive 

officers at the end of that year. 

9As defined in Exchange Act Rule 12b–2 [17 CFR 

240.12b–2]. The Commission recently amended the 

definition of ‘‘smaller reporting company’’ to 

include registrants with a public float of less than 

$250 million, as well as registrants with annual 

revenues of less than $100 million for the previous 

year and either no public float or a public float of 

less than $700 million. See Smaller Reporting 

Company Definition, Release No. 33–10513 (Jun. 28, 

2018) [83 FR 31992 (Jul. 10, 2018)]. 

10Section 101 of the Jumpstart Our Business 

Start-Ups Act (the ‘‘JOBS Act’’) [Pub. L. 112–106, 

126 Stat. 306 (2012)] codified the definition of 

‘‘emerging growth company’’ in Section 3(a)(80) of 

the Exchange Act and Section 2(a)(19) of the 

Securities Act. See also Exchange Act Rule 12b–2 

[17 CFR 240.12b–2], which reflects inflation 

adjustments to the definition of ‘‘emerging growth 

company.’’ 

11Registered investment companies are 

investment companies registered under Section 8 of 

the Investment Company Act of 1940 (‘‘Investment 

Company Act’’). 15 U.S.C. 80a et seq. 

12As defined in Rule 3b–4 [17 CFR 240.3b–4]. 

13 15 U.S.C. 78l. 

14 15 U.S.C. 78p(a). For Section 16 purposes, the 

term ‘‘derivative securities’’ is defined in Exchange 

Act Rule 16a–1(c) [17 CFR 240.16a–1(c)], which 

excludes rights with an exercise or conversion 

privilege at a price that is not fixed. Exchange Act 

Rule 16a–1(d) defines ‘‘equity security of the 

issuer’’ as any equity security or derivative security 

relating to the issuer, whether or not issued by that 

issuer. See also Exchange Act Rule 16a–4, which 

provides that for Section 16 purposes, both 

derivative securities and the underlying securities 

to which they relate shall be deemed to be the same 

class of equity securities. 

The Commission has clarified that Section 16 

applies to equity swap and similar transactions that 

a Section 16 insider may use to hedge and has 

addressed how these derivative securities 

transactions should be reported, including 

specifically identifying them through the use of 

transaction code K. See Ownership Reports and 

Trading by Officers, Directors and Principal 

Security Holders, Release No. 34–34514 (Aug. 10, 

1994) [59 FR 42449 (Aug. 17, 1994)] at Section III.G; 

and Ownership Reports and Trading by Officers, 

Directors and Principal Security Holders, Release 

No. 34–37260 (May 31, 1996) [61 FR 30376 (Jun. 14, 

1996)] at Sections III.H and III.I. The Commission 

also has clarified how transactions in securities 

futures should be reported. Commission Guidance 

on the Application of Certain Provisions of the 

Securities Act of 1933, the Securities Exchange Act 

of 1934, and Rules thereunder to Trading in 

Security Futures Products, Release No. 33–8107 

(June 21, 2002) [67 FR 43234 (Jun. 27, 2002)] at Q. 

13. 

15A prepaid variable forward contract obligates 

the seller to sell, and the counterparty to purchase, 

a variable number of shares at a specified future 

maturity date. The number of shares deliverable 

will depend on the per share market price of the 

shares close to the maturity date. The contract 

specifies maximum and minimum numbers of 

shares subject to delivery, and at the time the 

contract is entered into, the seller will pledge to the 

counterparty the maximum number of shares. The 

Commission has indicated that forward sales 

contracts are derivative securities transactions 

subject to Section 16(a) reporting. Mandated 

Electronic Filing and Website Posting for Forms 3, 

4 and 5, Release No. 33–8230 (May 7, 2003) [68 FR 

25788 (May 18, 2003)], text at n. 42. 

16 Item 403(b) of Regulation S–K [17 CFR 

229.403(b)]. Disclosure is required on an individual 

basis as to each director, nominee, and named 

executive officer, and on an aggregate basis as to 

executive officers of the issuer as a group and must 

be provided in proxy statements, annual reports on 

Form 10–K [referenced in 17 CFR 240.310], and 

registration statements under the Securities Act and 

under the Exchange Act on Form 10. 

17See Executive Compensation and Related 

Person Disclosure, Release No. 33–8732A (Aug. 29, 

2006) [71 FR 53158 (Sept. 8, 2006)] (the ‘‘2006 

Executive Compensation Disclosure Release’’) at 

Section IV. 

Twenty-two commenters, including 

individuals, professional and trade 

associations, law firms, consulting 

firms, pension funds, and institutional 

investor associations, submitted 

comment letters in response to the 

Proposing Release. We have reviewed 

and considered all of the comments that 

we received on the Proposing Release. 

In general, commenters supported the 

proposed amendments and their 

objectives,6 although several 

commenters provided suggestions for 

clarifying the proposed amendments’ 

disclosure standard.7

As discussed below, we are adopting 

new Item 407(i) of Regulation S–K, 

along the lines proposed, but with 

certain modifications, consistent with 

commenters’ suggestions. We believe 

the adopted amendments will fulfill the 

statutory purpose of Section 14(j), while 

providing a clearer and more 

straightforward standard of disclosure 

that should benefit both registrants and 

investors. 

II. Background 

The Commission’s rules currently 

require some disclosure about company 

hedging policies and practices. Item 

402(b) of Regulation S–K requires a 

Compensation Discussion and Analysis 

(‘‘CD&A’’) that discloses material 

information necessary to an 

understanding of a company’s 

compensation policies and decisions 

regarding the ‘‘named executive 

officers.’’ 8 Under Item 402(b)(2)(xiii), an 

example of the kind of information that 

should be provided, if material, 

includes a description of the company’s 

equity or other security ownership 

requirements or guidelines (specifying 

applicable amounts and forms of 

ownership) and any company policies 

regarding hedging the economic risk of 

such ownership. This CD&A disclosure 

item requirement by its terms addresses 

only hedging by the named executive 

officers. In providing their CD&A 

disclosure, however, some companies 

describe policies that address hedging 

by employees and directors, as well as 

the named executive officers. CD&A 

does not apply to smaller reporting 

companies (‘‘SRCs’’),9 emerging growth 

companies (‘‘EGCs’’),10 registered 

investment companies 11 or foreign 

private issuers (‘‘FPIs’’).12

Other disclosure requirements also 

may reveal when company equity 

securities have been hedged: 

• For companies with a class of 

equity securities registered pursuant to 

Section 12 of the Exchange Act,13

hedging transactions by officers and 

directors in transactions involving one 

or more derivative securities—such as 

options, warrants, convertible securities, 

security futures products, equity swaps, 

stock appreciation rights and other 

securities that have an exercise or 

conversion price related to a company 

equity security or derive their value 

from a company equity security—are 

subject to reporting within two business 

days on Form 4, pursuant to Exchange 

Act Section 16(a).14

• Some hedging transactions, such as 

prepaid variable forward contracts,15

may involve pledges of the underlying 

company equity securities as collateral. 

Item 403(b) of Regulation S–K, which 

requires disclosure of the amount of 

company equity securities beneficially 

owned by directors, director nominees 

and named executive officers,16 also 

requires disclosure of the amount of 

shares that are pledged as security.17

The rule amendments we are adopting 

today will require additional disclosure 

about an issuer’s hedging practices or 

policies, but will not affect these 

existing requirements. 

III. Discussion of the Amendments 

The Commission proposed to 

implement Section 14(j) by amending 

Item 407 of Regulation S–K, to add new 

paragraph (i), which would require 

companies to disclose whether they 

permit employees and directors to 

hedge their company’s equity securities. 

The disclosure called for by Section 

14(j) is primarily corporate governancerelated because it requires a company to 

provide information in its proxy 

statement about whether the company’s 

employees and directors may engage in 


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2404 Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Rules and Regulations 

18See letters from Business Roundtable and CFA 

Institute. 

19As a result, the new disclosure would not be 

subject to shareholder advisory votes to approve the 

compensation of named executive officers, as 

disclosed pursuant to Item 402, that are required 

pursuant to Section 14A(a)(1) of the Exchange Act 

and Rule 14a–21(a) [17 CFR 240.14a–21(a)]. We 

recognize, however, that there is an executive 

compensation component of the new disclosure as 

it relates to existing CD&A obligations. See Section 

III.D.3, below. 

20 17 CFR 240.14c–101. 

21By covering ‘‘exchange funds,’’ we believe that 

Section 14(j) should be interpreted to cover 

transactions involving dispositions or sales of 

securities. This is because an employee or director 

can acquire an interest in an exchange fund only 

in exchange for a disposition to the exchange fund 

of equity securities held by the employee or 

director. 

22 In the context of Section 16, the Commission 

has stated that ‘‘[t]he term ‘hedging’ means 

lessening the risk of loss by offsetting the risk of a 

securities position with an opposite position in a 

related security.’’ See Release No. 34–26333 (Dec. 

2, 1988) [53 FR 49997 (Dec. 13, 1988)] at n. 137. 

23Proposed Instructions 3 and 4 to Item 407(i). 

24See letter from CFA Institute. 

25See letter from CII. 

26See letter from Keith P. Bishop. 

transactions that could reduce the 

extent to which their equity holdings 

and equity compensation are aligned 

with shareholders’ interests. Because 

Section 14(j) calls for disclosure about 

employees and directors and their 

alignment with shareholders’ interests, 

it is more closely related to the Item 407 

corporate governance disclosure 

requirements than to Item 402 of 

Regulation S–K, which focuses only on 

the compensation of named executive 

officers and directors. Two commenters 

expressed general support for locating 

the new disclosure requirement in the 

Commission’s corporate governancerelated disclosure rules.18 Accordingly, 

we are implementing Section 14(j) by 

amending Item 407 to keep the 

disclosure requirements relating to 

corporate governance matters together 

in a single item of Regulation S–K.19

The final amendments will: 

• Require the company to describe 

any practices or policies regarding the 

ability of employees, directors or their 

designees to purchase financial 

instruments, or otherwise engage in 

transactions, that hedge or offset, or are 

designed to hedge or offset, any 

decrease in the market value of 

company equity securities. A company 

will be required either to provide a fair 

and accurate summary of any practices 

or policies that apply, including the 

categories of persons covered and any 

categories of hedging transactions that 

are specifically permitted and any 

categories that are specifically 

disallowed, or to disclose the practices 

or policies in full; 

• if the company does not have any 

such practices or policies, require the 

company to disclose that fact or state 

that hedging transactions are generally 

permitted; 

• specify that the equity securities for 

which disclosure is required are only 

equity securities of the company or of 

any parent or subsidiary of the company 

or any subsidiary of any parent of the 

company; 

• require the disclosure in any proxy 

statement on Schedule 14A or 

information statement on Schedule 

14C 20 with respect to the election of 

directors; and 

• clarify that the term ‘‘employee’’ 

includes officers of the company. 

Nothing in these amendments or this 

release should be construed as 

suggesting companies need to have a 

practice or policy regarding hedging, or 

a particular type of practice or policy. 

These amendments relate only to 

disclosure of hedging practices or 

policies. 

A. Scope of the Disclosure Requirement 

1. Proposed Amendments 

Section 14(j) was enacted to require 

disclosure of whether any employee or 

director of the issuer, or any designee of 

such employee or director, is permitted 

to purchase financial instruments 

(including prepaid variable forward 

contracts, equity swaps, collars, and 

exchange funds) that are designed to 

hedge or offset any decrease in the 

market value of equity securities. While 

Section 14(j) specifically refers to 

particular transactions,21 it also requires 

disclosure more generally of whether 

any employee or director of the issuer, 

or any designee of such employee or 

director, is permitted to purchase 

financial instruments that are designed 

to hedge or offset any decrease in the 

market value of equity securities. 

The proposed amendments would 

have implemented Section 14(j) by 

requiring disclosure of ‘‘whether the 

registrant permits’’ any employees 

(including officers) or directors, or any 

of their designees, to purchase these 

specific types of financial instruments, 

and also would have required the same 

disclosure with respect to other 

transactions that could have the same 

economic effects as those specified in 

the statute, consistent with the purpose 

of Section 14(j). The proposed 

amendments were intended to cover all 

transactions that establish downside 

price protection—whether by 

purchasing or selling a security, 

derivative security or otherwise. 

Consistent with the statute, the 

proposed amendments applied to 

hedging transactions relating to equity 

securities that are held, directly or 

indirectly, by employees or directors. 

The proposal did not define the 

circumstances in which securities 

would be considered held, directly or 

indirectly. 

Establishing downside price 

protection is the essence of the 

transactions contemplated by Section 

14(j). While this principle guided the 

Commission’s consideration of the 

transactions subject to disclosure, the 

Commission did not propose to define 

the term ‘‘hedge.’’ 22 Under the 

proposed amendments, a company 

would disclose the categories of 

transactions it permits and the 

categories of transactions it prohibits.23

The proposed amendments would have 

required a company that permits 

hedging transactions to disclose 

sufficient detail to explain the scope of 

the permitted transactions. 

Additionally, the proposed amendments 

would have required a registrant that 

permits hedging by some, but not all, of 

the categories of covered persons to 

disclose the categories of persons who 

are permitted to engage in hedging 

transactions and those who are not. 

2. Comments on the Proposed 

Amendments 

Commenters expressed a variety of 

views on the scope of the proposed 

amendments. One commenter expressed 

general support for requiring disclosure 

of the types of hedging transactions that 

a company permits as well as those that 

it prohibits, and the categories of 

persons that it allows and does not 

allow to hedge.24 Similarly, another 

commenter stated that the rule, as 

proposed, would provide investors with 

a more complete understanding 

regarding the persons permitted to 

engage in hedging transactions and the 

types of hedging transactions allowed.25

Another commenter stated that 

mandating disclosure of whether a 

company ‘‘permits’’ hedging would 

imply that affirmative company 

permission is required for these 

transactions and suggested that the 

relevant disclosure requirement instead 

should be whether the company 

prohibits hedging by employees.26

Several other commenters similarly 

indicated that requiring disclosure of 

the categories of hedging transactions 

that a registrant permits as well as 

prohibits could result in a disclosure 

standard that is confusing, overly broad 

and onerous for registrants to satisfy 

without accurately reflecting the policy 

decisions that a company has made with 


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27See letters from ABA, Business Roundtable and 

Davis Polk. 

28See letters from Business Roundtable and Davis 

Polk. 

29See letters from ABA, Business Roundtable, 

CFA Institute and Chris Barnard. 

30See letter from Chris Barnard. 

31See letter from ABA. 

32See letter from Clinton Carlisle. 

33See letter from McDermott Will & Emery 

(‘‘McDermott’’). See also letter from ABA 

(recommending that we consider this approach). 

34As defined in Exchange Act Rule 16a–l(c) [17 

CFR 240.16a–1(c)]. 

35See letter from McDermott. 

36See letters from ABA, McDermott and Society 

of Corporate Secretaries & Governance Professionals 

(‘‘SCSGP’’). 

37See letter from McDermott. 

38See letter from ABA. 

39See letter from SCSGP, recommending that it 

cover ‘‘. . . transactions that are designed to or and 

have the direct effect of hedging or offsetting any 

decrease in the market value of equity 

securities. . .,’’ and to add a new instruction stating 

that ‘‘[t]he disclosure mandated here is limited to 

instruments that are tied to and principally 

designed to perform opposite of the [company’s] 

equity securities. It does not include investments 

that provide general portfolio diversification.’’ 

40See letters from ABA and McDermott. 

41See e.g., letters from Business Roundtable, 

Davis Polk & Wardwell LLP (‘‘Davis Polk’’), 

McDermott and SCSGP. In contrast, one commenter 

did not agree that the new disclosure requirement 

should explicitly distinguish between instruments 

that provide exposure to a broad range of 

companies or securities and those that are designed 

to hedge particular securities or have that effect, 

and that all should be covered by the disclosure 

requirement. See letter from Joyce Dillard. 

42See letters from ABA, Business Roundtable, 

Clearly Gottlieb, Davis Polk, McDermott and 

SCSGP. 

43See letters from ABA, Business Roundtable, 

Cleary Gottlieb Steen & Hamilton LLP (‘‘Cleary 

Gottlieb’’) and McDermott. 

44See letter from Davis Polk. 

45See letter from SCSGP. 

46See letters from ABA, Davis Polk and Joyce 

Dillard. 

47 17 CFR 240.13d–3(d)(1). See letters from ABA 

and Davis Polk. 

48See letters from Clinton Carlisle and Joyce 

Dillard. 

49See letters from ABA and Business Roundtable. 

50For example, a company that does not have a 

written hedging policy might have a practice of 

reviewing, and perhaps restricting, hedging 

transactions as part of its program for reviewing 

employee trading in company securities. Similarly, 

a company might have a practice of including antihedging provisions in employment agreements or 

equity award documentation. 

respect to hedging.27 Instead, these 

commenters recommended that the 

Commission adopt a more focused 

disclosure standard. For example, two 

of these commenters recommended an 

approach that would require companies 

to describe the material aspects of their 

policies regarding hedging.28

In response to a specific request for 

comment on the scope of transactions 

covered by the proposed amendments, 

commenters made varying 

recommendations. Some supported a 

principles-based approach to defining 

the scope of covered hedging 

transactions.29 One stated that covering 

all transactions with comparable 

economic consequences to the specified 

financial instruments would provide 

more complete disclosure and would be 

in line with legislative intent.30 Another 

said that the proposed approach is 

preferable to defining the term ‘‘hedge,’’ 

because any definition of that term 

would encourage circumvention and 

may require constant updating as new 

financial instruments are developed.31

In contrast, two commenters 

specifically recommended defining the 

term ‘‘hedge.’’ One commenter 

suggested including common examples 

of derivative instruments and any 

instrument that produces the effect of 

limiting the insider’s equity risk in the 

company without engaging in an 

outright sale, while explicitly excluding 

exchange funds from the definition.32

The other commenter suggested limiting 

the definition to financial instruments 

that are substantially similar to those 

listed in Section 14(j) and providing 

objective criteria for determining what 

is, and is not, a financial instrument 

subject to the new disclosure 

requirement.33 This commenter 

recommended excluding any financial 

instrument that is not a ‘‘derivative 

security’’ 34 with respect to the 

company’s equity securities that is 

designed to hedge or offset decreases in 

the market value of a company’s equity 

securities.35

In addition, some commenters 

recommended that the proposed 

amendments be modified to clarify that 

the new disclosure requirement will not 

apply to portfolio diversification 

transactions.36 For example, these 

commenters noted that the purchase of 

equity securities of one or more 

unrelated companies as an investment 

strategy could be considered a hedging 

transaction subject to the proposed 

disclosure if those securities ‘‘are 

negatively correlated at any level as 

compared to the company’s equity 

securities,’’ 37 or if they are 

diversification transactions in securities 

of market sectors that are countercyclical to the company’s equity 

securities.38 One commenter 

recommended specific language to 

clarify that portfolio diversification is 

not within the scope of the new 

disclosure requirement.39 Two 

commenters also recommended that all 

long and short positions relating to 

equity securities other than the 

company’s own equity securities be 

excluded from the scope of the new 

disclosure requirement.40

The Commission solicited comment 

on whether it is necessary to clarify the 

application of the proposed 

amendments to account for the view 

that there is a meaningful distinction 

between an index that includes a broad 

range of equity securities, one 

component of which is company equity 

securities, and a financial instrument, 

even one nominally based on a broad 

index, designed to or having the effect 

of hedging the economic exposure to 

company equity securities. Commenters 

generally agreed that there is a 

meaningful distinction between such a 

broad-based index and a financial 

instrument designed to, or having the 

effect of, hedging the economic 

exposure to company equity 

securities.41 In this regard, several 

commenters recommended that the new 

disclosure requirement not apply to 

certain categories of transactions.42 For 

example, commenters suggested that a 

company be able to disclose that it 

prohibits all hedging transactions even 

if it permits: (1) Transactions in a broadbased index that includes company 

equity securities; 43 (2) the purchase and 

sale of mutual funds, index funds and 

other diversified investment vehicles; 44

or (3) the purchase of broad-based 

indexes, exchange traded funds, indexes 

and baskets.45

Some commenters recommended that 

we provide guidance on the meaning of 

the concept of ‘‘held, directly or 

indirectly’’ as used in the new 

disclosure requirement,46 for example 

by reference to the term ‘‘beneficial 

ownership’’ as defined in Exchange Act 

Rule 13d–3(d)(1).47

Finally, the Commission requested 

comment on whether to require 

disclosure of any hedging transactions 

that have occurred—in the annual proxy 

statement as well as in promptly filed 

Form 4 filings. Comments on whether to 

require new annual proxy statement 

disclosure of hedging transactions were 

mixed, with some commenters generally 

supporting requiring such disclosure,48

and others stating that it is unnecessary 

due to the existing Section 16 reporting 

requirements.49

3. Final Amendments 

The scope of the disclosure 

requirement we are adopting is in line 

with the proposed amendments but 

with certain modifications to address 

commenters’ concerns about potential 

implementation challenges. As adopted, 

Item 407(i) requires the company to 

describe any practices or policies it has 

adopted (whether written or not) 50

regarding the ability of employees 

(including officers) or directors of the 


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51 Item 407(i) of Regulation S–K. For example, if 

a company does not have any such practices or 

policies, it could state: ‘‘Our company does not 

have any practices or policies regarding hedging or 

offsetting any decrease in the market value of 

registrant equity securities.’’ 

52See letter from Keith P. Bishop. 

53See letters from ABA, Business Roundtable and 

Davis Polk. 

54Proposing Release at 8490. 

55See letter from Business Roundtable. 

56See letter from John A. Olagues. 

57For example, a short sale can hedge the 

economic risk of ownership, as can entering into a 

borrowing or other arrangement involving a nonrecourse pledge of securities. Similarly, selling a 

security future that establishes a position that 

increases in value as the value of the underlying 

equity security decreases can provide the downside 

price protection that is the essence of the 

transactions contemplated by Section 14(j). 

58See letters from ABA, McDermott and SCSGP. 

59 Item 402(b)(2)(xiii) of Regulation S–K, 

discussed in Section II.D, below. 

company, 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 

company equity securities granted to the 

employee or director by the company as 

part of the compensation of the 

employee or director, or held, directly 

or indirectly, by the employee or 

director. The company will be required 

to provide a fair and accurate summary 

of the practices or policies that apply, 

including the categories of persons 

covered and any categories of hedging 

transactions that are specifically 

permitted and any categories that are 

specifically disallowed. Alternatively, 

the company will be required to 

disclose the practices or policies in full. 

The rule does not direct companies to 

have practices or policies regarding 

hedging, or dictate the content of any 

such practice or policy. If the company 

does not have any such practices or 

policies, the company must disclose 

that fact or state that hedging 

transactions are generally permitted.51

Although Section 14(j) refers to 

whether certain categories of persons 

are ‘‘permitted’’ to engage in covered 

transactions, we recognize, as one 

commenter observed, that the statute’s 

use of ‘‘permitted’’ is potentially 

confusing, as companies generally do 

not affirmatively permit hedging 

transactions, and could result in 

uncertainty in making the required 

disclosure.52 We also are mindful of 

concerns that requiring disclosure of 

categories of hedging transactions that 

are permitted could result in lengthy 

disclosures that do not accurately reflect 

the policy decisions that a company has 

made with respect to hedging.53

In implementing Section 14(j), we 

have sought to fulfill the statutory 

purpose of informing shareholders 

whether the covered persons can avoid 

downside price risk with respect to 

company equity securities with a clear 

and simple disclosure requirement. In 

doing so, we have construed the 

statute’s use of the term ‘‘permit’’ as 

calling for disclosure as to whether the 

company has a practice or policy 

regarding the ability of covered persons 

to engage in such transactions. 

Therefore, as adopted, Item 407(i) 

requires disclosure about whether the 

company has adopted any practices or 

policies regarding the ability of covered 

persons to engage in transactions that 

hedge or offset any decrease in the 

market value of these securities. If the 

company does not have any such 

practices or policies, Item 407(i) 

requires it to disclose that fact or state 

that hedging transactions are generally 

permitted. 

In the Proposing Release, the 

Commission solicited comment on 

whether, as an alternative to the 

proposed disclosure, the company 

should be required to describe its 

applicable hedging policies.54 As noted 

above, some commenters recommended 

such an approach, with one such 

commenter stating that it would focus 

the required disclosures on material 

information.55 After considering the 

comments received, we are persuaded 

that the approach we are adopting is a 

better means of achieving Section 14(j)’s 

statutory purpose. By requiring the 

company to describe any practice or 

policy it has adopted and the categories 

of persons covered, we believe investors 

will be informed with greater clarity as 

to the scope of the company’s practices 

or policies regarding hedging 

transactions, and the compliance 

challenges associated with the proposed 

approach will be addressed. One 

commenter expressed concern that the 

proposed rules would discourage the 

use of hedging.56 Neither Section 14(j) 

nor the rule amendments would require 

a company to prohibit hedging 

transactions or to otherwise adopt 

practices or policies addressing hedging 

by any category of individuals. 

As in the proposal, Item 407(i) as 

adopted does not define the term 

‘‘hedge’’ because we believe the 

language of Section 14(j), which refers 

to financial instruments ‘‘that are 

designed to hedge or offset any decrease 

in the market value’’ is clear and 

indicates that ‘‘hedge’’ should be 

applied as a broad principle. Like the 

proposed rule, the rule as adopted 

applies to transactions with the same 

economic effects—to hedge or offset any 

decrease in the market value of 

company equity securities—as the 

transactions specified by the statute, the 

disclosure of which is consistent with 

the purpose of Section 14(j).57 While we 

recognize commenters’ observations that 

the language of the proposal could be far 

reaching,58 potentially scoping in 

transactions that may not necessarily 

raise the same concerns as the financial 

instruments specified by Section 14(j), 

such as portfolio diversification 

transactions, we believe the adopted 

approach will alleviate these concerns 

by requiring disclosure of any practice 

or policy the company has adopted 

regarding these types of transactions. In 

this regard, a company would only need 

to describe portfolio diversification 

transactions, broad-based index 

transactions, or other types of 

transactions, if its hedging practice or 

policy addresses them. 

As in the existing CD&A disclosure 

item, which applies to company policies 

regarding hedging the economic risk of 

named executive officers’ ownership of 

the company’s securities,59 the scope of 

the new disclosure requirement is not 

limited to any particular types of 

hedging transactions. Moreover, by 

focusing on the company’s practices or 

policies, the rule avoids adopting a 

definition that could prove either overor under-inclusive, and allows for 

flexibility to address new downside 

price protection techniques as they 

develop. Based on their CD&A 

disclosures, it appears that many 

companies already have, and 

presumably enforce, practices or 

policies that rely on an undefined 

concept of ‘‘hedging.’’ Under the final 

amendments, each company will 

continue to make its own judgments in 

determining what activities, if any, 

should be covered by a practice or 

policy. Further, to the extent a company 

currently discloses its practices or 

policies regarding hedging transactions 

in the CD&A, (either in full or in a 

summary that would meet the 

requirements of Item 407(i)), the 

amendments will not require the 

company to revise its practices or 

policies—or its disclosure. A company 

that has disclosed a policy that covers 

only a subset of employees or directors 

would not be required to further 

disclose that it did not have a policy 

with regard to the company’s other 

employees or directors. 

Consistent with the statutory 

language, Item 407(i) as adopted applies 

to hedging transactions relating to 


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60Further, the final amendments do not reference 

the term ‘‘beneficial ownership,’’ as determined 

under Exchange Act Rule 13d–3(d)(1), as suggested 

by some commenters, because the voting power and 

investment power standards articulated in that rule 

do not necessarily correlate to whether a person has 

the risk of loss in an equity security that would be 

mitigated by a hedge. 61See letter from Clinton Carlisle. 62 In addition, the Exchange Act’s and Exchange 

Act Rules’ definitions of ‘‘equity security’’ do not 

limit the scope of this term to equity securities of 

a particular company. 

63 15 U.S.C. 78c(a)(11). Exchange Act Section 

3(a)(11) defines ‘‘equity security’’ as any stock or 

similar security; or any security future on any such 

security; or any security convertible, with or 

without consideration, into such a security, or 

carrying any warrant or right to subscribe to or 

purchase such a security; or any such warrant or 

right; or any other security which the Commission 

shall deem to be of similar nature and consider 

necessary or appropriate, by such rules and 

regulations as it may prescribe in the public interest 

or for the protection of investors, to treat as an 

equity security. 

64 17 CFR 240.3a11–1. Exchange Act Rule 3a11– 

1 defines ‘‘equity security’’ to include any stock or 

similar security, certificate of interest or 

participation in any profit sharing agreement, 

preorganization certificate or subscription, 

transferable share, voting trust certificate or 

certificate of deposit for an equity security, limited 

partnership interest, interest in a joint venture, or 

certificate of interest in a business trust; any 

security future on any such security; or any security 

convertible, with or without consideration into 

such a security, or carrying any warrant or right to 

subscribe to or purchase such a security; or any 

such warrant or right; or any put, call, straddle, or 

other option or privilege of buying such a security 

from or selling such a security to another without 

being bound to do so. 

65Proposed Instruction 1 to Item 407(i). 

66See, e.g., letters from CFA Institute, CII and 

Florida State Board of Administration. 

67See letter from Florida State Board of 

Administration. 

68See letter from Joyce Dillard. 

69See letters from Joyce Dillard and Michael Nau. 

70See letters from ABA and SCSGP. 

71See letter from SCSGP. 

72 Instruction 1 to Item 407(i). 

73This term also avoids confusion with the 

broader definitions of ‘‘equity security’’ in 

Exchange Act Section 3(a)(11) [15 U.S.C. 78c(a)(11)] 

and Rule 3a11–1 [17 CFR 240.3a11–1]. 

74 Item 407(i)(1)(i). 

75 Item 407(i)(1)(ii). 

76An example is where a company creates a 

publicly-traded subsidiary. 

company equity securities that are 

‘‘held, directly or indirectly,’’ by 

employees (including officers) or 

directors. This terminology covers a 

broad variety of means by which equity 

securities can be held. As adopted, the 

new disclosure requirement does not 

define the term ‘‘held, directly or 

indirectly.’’ 60 Rather, under the 

amendments as adopted, companies 

will describe the scope of their hedging 

practices or policies, which may include 

whether and how they apply to 

securities that are ‘‘indirectly’’ held. 

Because companies can address this 

issue in describing the scope of their 

practices or policies, we do not believe 

that further guidance on this topic is 

necessary. 

As noted above, while comments 

were mixed on whether to require 

disclosure in the annual proxy 

statement of any hedging transactions 

that have occurred, the final 

amendments will not require annual 

meeting proxy statement disclosure 

about such hedging transactions. We 

believe that such disclosure would be 

largely duplicative of disclosures 

required by the existing Section 16 

reporting requirements, which 

shareholders can review to determine if 

officers and directors are in fact 

hedging, and take into consideration in 

their voting decisions. In addition, 

while disclosing information about 

hedging transactions of employees other 

than officers and directors may 

potentially provide some benefits to 

investors, collecting such information 

and preparing the disclosure would 

likely impose significant additional 

costs on companies.61

B. Defining the Term ‘‘Equity Securities’’ 

1. Proposed Amendments 

Section 14(j) uses the term ‘‘equity 

securities,’’ but does not by its terms 

limit disclosure to equity securities of 

the reporting company.62 As such, the 

term ‘‘equity securities’’ could be 

interpreted to include the equity 

securities of any company that an 

employee or director holds. A proposed 

instruction specified that the term 

‘‘equity securities,’’ as used in the 

proposed rule, would mean any equity 

securities (as defined in Exchange Act 

Section 3(a)(11) 63 and Exchange Act 

Rule 3a11–1 64) issued by the company, 

or of any parent or subsidiary of the 

company or any subsidiary of any 

parent of the company, which equity 

securities are registered under Section 

12 of the Exchange Act.65

2. Comments on the Proposed 

Amendments 

Commenters recommended various 

approaches to defining the scope of 

‘‘equity securities’’ for purposes of the 

new disclosure requirement. Some 

commenters agreed with the proposal,66

with one expressing the view that the 

level of complexity of disclosure due to 

including equity securities of affiliated 

companies would reflect the level of 

complexity of the hedging policy of the 

company in question.67 Others 

suggested using a broader definition, for 

example by including ‘‘equity 

securities’’ of additional categories of 

affiliated entities.68 Two commenters 

stated that the new disclosure 

requirement should not be limited to 

transactions relating to equity securities 

that are registered under Exchange Act 

Section 12 or traded in an established 

public market.69 Some commenters 

recommended including only ‘‘equity 

securities’’ of the company,70 or 

otherwise narrowing the definition, for 

example by including equity securities 

of certain other entities if they are 

reported as compensation under Item 

402, or if the company allows them to 

count towards an executive’s equity 

retention requirements.71

3. Final Amendments 

As was proposed, the Item 407(i) 

disclosure requirement will apply to 

equity securities issued by the company 

and its parents, subsidiaries or 

subsidiaries of the company’s parents.72

We have included these other entities 

within the scope of ‘‘registrant equity 

securities’’ because we understand that 

these equity securities can be relevant to 

the compensation practices of some 

issuers. Further, in a change from the 

proposal, Item 407(i) uses the term 

‘‘registrant equity securities,’’ rather 

than ‘‘equity securities,’’ to indicate the 

scope of the rule is narrower than 

potentially any equity security, but 

broader than only the equity security of 

the particular company that is the 

employer or on whose board the 

director sits.73 The relevant instruction 

specifies the scope of covered equity 

securities for both compensatory equity 

securities grants 74 and other equity 

securities holdings.75

Disclosure of whether a company has 

adopted practices or policies regarding 

a director’s or employee’s ability to 

hedge such equity securities granted as 

compensation or otherwise held from 

whatever source acquired will more 

fully inform shareholders whether 

employees and directors are able to 

engage in transactions that reduce the 

alignment of their interests with the 

economic interests of other shareholders 

of the company and any affiliated 

company in which the employees or 

directors might have an interest. For 

example, companies may grant equity 

securities of affiliated companies to 

their employees or directors that are 

intended to achieve similar incentive 

alignment as grants in the company’s 

equity securities, or have ownership 

requirements or guidelines regarding 

such equity securities.76 In instances 

such as these, the rule would require 

disclosure regarding whatever practice 

or policy regarding hedging applies. 

Consistent with Item 407(i)’s focus on 

the company’s hedging practices or 

policies, the final amendments do not 

limit coverage to company equity 


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77See letters from CII, Florida State Board of 

Administration and Public Citizen. 

78See letters from CII and Florida State Board of 

Administration. 

79See letters from CII and Public Citizen. 

80See letter from Joyce Dillard. 

81See letters from CFA Institute and Florida State 

Board of Administration. 

82See letters from ABA, Business Roundtable, 

Cleary Gottlieb, Davis Polk, McDermott and SCSGP. 

83See, e.g., letters from Business Roundtable, 

Cleary Gottlieb and SCSGP. 

84See letter from Davis Polk. 

85See, e.g., letters from Cleary Gottlieb and 

SCSGP. Exchange Act Rule 3b–7 [17 CFR 240.3b– 

7] defines ‘‘executive officer’’ as a company’s ‘‘. . . 

president, any vice president of the [company] in 

charge of a principal business unit, division or 

function (such as sales, administration or finance), 

any other officer who performs a policy making 

function or any other person who performs similar 

policy making functions for the [company],’’ and 

includes executive officers of subsidiaries of the 

company if they perform such policy making 

functions for the company. 

86See letters from ABA and Davis Polk. Exchange 

Act Rule 16a–1(f) defines ‘‘officer’’ as ‘‘. . . an 

issuer’s president, principal financial officer, 

principal accounting officer (or, if there is no such 

accounting officer, the controller), any vicepresident of the issuer in charge of a principal 

business unit, division or function (such as sales, 

administration or finance), any other officer who 

performs a policy-making function, or any other 

person who performs similar policy-making 

functions for the issuer,’’ and if they perform 

policy-making functions for the issuer, includes 

officers of a company’s parent(s) or subsidiaries and 

officers or employees of the general partner(s) or of 

the trustee(s), respectively, of an issuer that is a 

limited partnership or a trust. 

87See, e.g., letters from ABA, Davis Polk and 

SCSGP. 

88See letters from ABA, Davis Polk and Keith P. 

Bishop. 

89See letter from Davis Polk. 

90See letter from ABA. 

91For example, the Senate Report 111–176 

contemplates disclosure under Section 14(j) 

regarding ‘‘executives.’’ 

92This clarification is needed because Exchange 

Act Rule 12b–2 defines ‘‘employees’’ as not 

including a ‘‘director, trustee or officer,’’ unless the 

context otherwise requires. 

93We have not, however, specified that 

‘‘employees’’ includes consultants, because we have 

not heard concerns about the alignment of their 

interests with those of shareholders and they may 

be more likely to monetize their equity 

compensation. 

securities that are registered under 

Exchange Act Section 12. Instead, the 

company’s practices or policies will 

determine which, if any, classes of 

securities are covered. For example, to 

the extent a company has a different 

hedging practice or policy with respect 

to different classes of equity securities, 

the company’s disclosure should reflect 

that fact. 

C. Employees and Directors Subject to 

the Disclosure Requirement 

1. Proposed Amendments 

Section 14(j) covers hedging 

transactions conducted by any 

employee or member of the board of 

directors or any of their designees. The 

Commission proposed to apply the term 

‘‘employee’’ to anyone employed by an 

issuer, including its officers. Further, 

under the proposed rule, whether 

someone is a ‘‘designee’’ would be 

determined based on the particular facts 

and circumstances. 

2. Comments on the Proposed 

Amendments 

Some commenters supported the 

proposed Item 407(i) disclosure 

requirement covering all employees of 

the company.77 These commenters 

expressed the view that shareholders 

should have information about whether 

employees can dilute the original 

intention of company-provided 

compensation incentives,78 and that all 

employees have an ability to affect share 

price and contribute to the prosperity of 

a company.79 Another commenter 

recommended expanding the scope to 

include consultants.80 Two commenters 

specifically supported the inclusion of 

‘‘officers’’ in the group of employees, 

which the proposed disclosure 

requirement would cover.81

The Commission requested comment 

on whether to limit the definition of 

‘‘employee’’ to the subset of employees 

that participate in making or shaping 

key operating or strategic decisions that 

influence the company’s stock price, or 

to add an express materiality qualifier to 

the definition to permit each issuer to 

determine whether disclosure about all 

of its employees would be material 

information for its investors. Some 

commenters suggested narrowing the 

scope of the new disclosure requirement 

to cover a more limited group of 

employees,82 such as directors and 

executive officers,83 or only requiring 

disclosure about a policy that governs 

non-executive employees if a company 

determines the information is material 

to its investors.84 Some of these 

commenters stated that including only 

‘‘executive officers’’ as defined by 

Exchange Act Rule 3b–7 85 or ‘‘officers’’ 

as defined in Exchange Act Rule 16a– 

1(f) 86 would result in disclosure of the 

information that is material to 

shareholders, and that limiting the 

scope of covered ‘‘employees’’ would 

reduce company costs.87

The Commission also requested 

comment about whether to include an 

instruction clarifying who is a 

‘‘designee.’’ Some commenters 

expressed the view that it is not clear 

who the term ‘‘designee’’ is intended to 

cover, and recommended that the 

Commission provide guidance as to its 

meaning.88 One of these commenters 

recommended defining ‘‘designee’’ as 

someone specifically appointed to make 

decisions that the authorizing person 

would reasonably believe could result 

in the hedging of equity securities the 

person beneficially owns.89 Another 

recommended defining ‘‘designee’’ to 

include immediate family members and 

family or affiliated investment 

vehicles.90

3. Final Amendments 

The final amendments require 

disclosure of practices or policies that 

apply to employees, including officers, 

as well as directors. We believe the 

inclusion of officers is consistent with 

Congress’ intent.91 Accordingly, as was 

proposed, Item 407(i) adds the 

parenthetical ‘‘(including officers)’’ after 

the term ‘‘employees’’ in the language of 

the new disclosure requirement.92

Describing the persons covered by the 

new disclosure requirement as ‘‘any 

employees (including officers) or 

directors of the registrant, or any of their 

designees’’ is consistent with the 

mandate in Section 14(j). Although 

some commenters suggested that we 

limit the persons covered by Item 407(i), 

in light of the statutory mandate, we 

have not narrowed the scope of the 

requirement to address only policies 

directed at directors and executive 

officers or to add a materiality qualifier. 

We also note that the change in the final 

rules to focus Item 407(i)’s disclosure on 

the company’s practices or policies 

should help to alleviate concerns about 

the rule’s compliance costs. Companies 

of different sizes, industries and 

workforces may have different kinds of 

practices or policies with respect to 

hedging, and each company will make 

its own judgments in determining the 

categories of persons to which they 

apply. The rule as adopted will require 

companies to provide disclosure 

reflecting their particular policy choices 

with respect to hedging.93

The amendments as adopted require 

disclosure of any company practices or 

policies regarding ‘‘designees.’’ While 

we continue to believe that whether 

someone is a ‘‘designee’’ depends on the 

particular facts and circumstances 

involved, the focus of Item 407(i), as 

adopted, is on disclosure of a company’s 

particular practices or policies. Because 

companies with hedging practices or 

policies will determine who is covered 

by the scope of the practice or policy, 

we do not believe that further guidance 

on this topic is necessary. 


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94The Commission has previously recognized 

that directors ordinarily are elected at annual 

meetings. See, e.g., Rule 14a–6(a) [17 CFR 240.14a– 

6(a)], which acknowledges that registrants soliciting 

proxies in the context of an election of directors at 

an annual meeting may be eligible to rely on the 

exclusion from the requirement to file a proxy 

statement in preliminary form. Rule 14a–3(b) [17 

CFR 240.14a–3(b)] requires proxy statements used 

in connection with the election of directors at an 

annual meeting to be preceded or accompanied by 

an annual report containing audited financial 

statements. The requirement for registrants to hold 

an annual meeting at which directors are to be 

elected, however, is imposed by a source of legal 

authority other than the federal securities laws, 

such as state corporate law. See, e.g, Delaware 

General Corporate Law, Section 211(b). 

95Rule 14a–1(f) [17 CFR 240.14a–1(f)] defines the 

term ‘‘proxy’’ to include every proxy, consent or 

authorization within the meaning of Section 14(a) 

of the Exchange Act. A solicitation of consents 

therefore constitutes a solicitation of proxies subject 

to Section 14(a) and Regulation 14A. 

96See Items 7(b)–(d) and 8(a) of Schedule 14A. 

97This approach is consistent with the disclosure 

requirements for registration statements under the 

Securities Act and for annual reports on Form 10– 

K, which include only selected provisions of Item 

407. See Item 11(l) and 11(o) on Form S–1 and 

Items 10, 11 and 13 in Part III of Form 10–K. 

98As permitted by General Instruction G to Form 

10–K. 

99See letters from ABA, Business Roundtable, CII 

and Davis Polk. 

100See letters from ABA and Davis Polk. 

101See letter from Clinton Carlisle. 

102See letter from ABA. 

103We are not adopting the proposed amendment 

to Item 22 of Schedule 14A because, as discussed 

in Section III.D.3.c.i., below, we are excluding listed 

closed-end funds from the new disclosure 

requirement. 

104We note that an annual meeting, the meeting 

at which companies generally provide for the 

election of directors, could theoretically not include 

an election of directors. For reasons explained 

above, an annual meeting ordinarily involves an 

election of directors. In the unlikely event that a 

company is not conducting a solicitation for the 

election of directors but is otherwise soliciting 

proxies at an annual meeting, the amendments do 

not require Item 407(i) disclosure in the proxy 

statement. 

105 Instruction 2 to Item 407(i), providing that 

information disclosed pursuant to Item 407(i) is not 

deemed incorporated by reference into any filing 

under the Securities Act or the Exchange Act, 

except to the extent the company specifically 

incorporates that information by reference. The 

disclosure also is not subject to forward 

incorporation by reference under Item 12(b) of 

Securities Act Form S–3 [17 CFR 239.13] or Item 

12 of Securities Act Form S–1 [17 CFR 239.11]. 

106Amended Item 7(b) and Instruction to Item 7 

of Schedule 14A. 

107Section 14(c) of the Exchange Act was enacted 

to ‘‘reinforce [ ] fundamental disclosure principles 

[for companies] subject to the proxy rules which 

did not solicit proxies . . .’’ By enacting Section 

14(c), Congress was advised that these companies 

‘‘would be required to furnish shareholders with 

information equivalent to that contained in a proxy 

statement. . . . [and that such legislation was 

needed] [b]ecause evasion of the disclosures 

required by the proxy rules is made possible by the 

simple device of not soliciting proxies . . .’’ 

Statement of William L. Cary, Chairman, Securities 

and Exchange Commission, Part I. K. Other 

Amendments Proposed by S. 1642, Hearings before 

a Subcommittee of the Committee on Banking and 

Currency for the U.S. Senate, Eighty-Eighth 

Congress, First Session on S. 1642, June 18–21 and 

24–25, 1963. 

D. Implementation 

1. Manner and Location of Disclosure 

1. Proposed Amendments 

Section 14(j) calls for disclosure in 

any proxy or consent solicitation 

material for an annual meeting of the 

shareholders. Shareholder annual 

meetings are typically the venue in 

which directors are elected.94 We 

proposed to implement Section 14(j) by 

amending Items 7 and 22 of Schedule 

14A to require the new Item 407(i) 

information if action is to be taken with 

respect to the election of directors. 

Although the language of Section 14(j) 

refers to disclosure in any proxy or 

consent solicitation material for an 

annual meeting of the company’s 

shareholders, this language, construed 

strictly, could result in the disclosure 

appearing in different instances than we 

currently require other corporate 

governance related disclosure. In 

particular, under our current rules, if a 

company solicits proxies 95 with respect 

to the election of directors, its proxy 

statement must include specified 

corporate governance information 

required by Item 407 of Regulation S– 

K, whether or not the election takes 

place at an annual meeting.96 The 

proposal reflected the view that Item 

407(i) disclosure similarly would be 

relevant information for shareholders 

evaluating a company’s corporate 

governance practices in the context of 

director elections. 

The proposal did not call for Item 

407(i) disclosure to be included in 

Securities Act or Exchange Act 

registration statements or in the Form 

10–K Part III disclosure,97 even if that 

disclosure is incorporated by reference 

from the company’s definitive proxy 

statement or information statement.98

In addition to including the new 

disclosure requirement, the Commission 

proposed to amend Item 7 of Schedule 

14A to streamline its current provisions 

by more succinctly cross-referencing 

disclosure Items. 

2. Comments on Proposed Amendments 

Most commenters supported requiring 

the new Item 407(i) disclosure only in 

proxy or consent solicitation material 

and information statements with respect 

to the election of directors.99 Two of 

these commenters stated that the new 

Item 407(i) disclosure would not be 

relevant to investors in Securities Act or 

Exchange Act registration statements or 

annual reports.100 In contrast, one 

commenter stated that the new Item 

407(i) disclosure also should be 

required in annual reports to capture 

companies that are not holding annual 

meetings.101

One commenter expressed support for 

the proposal to streamline Item 7, and 

stated that it would facilitate 

compliance with the new item.102

3. Final Amendments 

We are adopting the amendments to 

Item 7 of Schedule 14A as proposed. By 

providing the disclosure in a proxy 

statement when action is to be taken 

with respect to the election of directors, 

shareholders will be able to consider the 

new disclosure at the same time they are 

considering the company’s other 

corporate governance disclosures and 

voting for directors.103 The disclosure 

will provide additional information on 

whether the company has practices or 

policies affecting the alignment of 

incentives for employees and directors 

of the company whose securities they 

hold. We believe that this disclosure is 

most relevant when providing 

information about the election of 

directors. This will be the case whether 

shareholders are voting for directors at 

an annual or special meeting of 

shareholders, or in connection with an 

action authorized by written consent.104

As adopted, the amendments provide 

that the new Item 407(i) information 

will not be required in Form 10–K Part 

III disclosure even if that disclosure is 

incorporated by reference from the 

company’s definitive proxy statement or 

information statement.105

In addition, we are amending Item 7 

of Schedule 14A to streamline its 

current provisions in the manner 

proposed.106

2. Disclosure on Schedule 14C 

1. Proposed Amendments 

Exchange Act Section 14(c) applies to 

companies not soliciting proxies or 

consents from some or all holders of a 

class of securities registered under 

Exchange Act Section 12 entitled to vote 

at a meeting or authorize a corporate 

action by execution of a written 

consent.107 It creates disclosure 

obligations for a company that chooses 

not to, or otherwise does not, solicit 

proxies, consents, or other 

authorizations from some or all of its 

security holders entitled to vote. Section 

14(j) expressly calls for proxy or consent 

solicitation materials for an annual 

meeting of the shareholders of the issuer 

to include the required disclosure. Our 

proxy rules require these solicitation 


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108As noted above, Exchange Act Rule 14a–1(f) 

[17 CFR 240.14a–1(f)] defines the term ‘‘proxy’’ to 

include every proxy, consent or authorization 

within the meaning of section 14(a) of the 

[Exchange] Act. Exchange Act Rule 14a–3(a) [17 

CFR 240.14a–3(a)] prohibits any proxy solicitation 

unless each person solicited is currently or has been 

previously furnished with a publicly-filed 

preliminary or definitive proxy statement 

containing the information specified in Schedule 

14A [17 CFR 240.14a–101], and Exchange Act Rule 

14a–6(m) [17 CFR 240.14a–6(m) requires proxy 

materials to be filed under cover of Schedule 14A. 

109Specifically, Item 1 of Schedule 14C permits 

the exclusion of information called for by Schedule 

14A Items 1(c) (Rule 14a–5(e) information re 

shareholder proposals), 2 (revocability of proxy), 4 

(persons making the solicitation), and 5 (interest of 

certain persons in matters to be acted upon). Other 

Items of Schedule 14C prescribe the information to 

be provided with regard to such of these topics that 

are relevant to information statements. Specifically, 

Item 3 addresses the interest of certain persons in 

or opposition to matters to be acted upon, and Item 

4 addresses proposals by security holders. In 

addition, Notes A, C, D and E to Schedule 14A are 

applicable to Schedule 14C [17 CFR 240.14c–101]. 

110Because the proposed amendments did not 

add a new exclusion for information called for by 

the amendment to Item 7 of Schedule 14A, the 

effect of the proposal was to require Item 407(i) 

disclosure in Schedule 14C. 

111See letter from ABA dated Oct. 13, 2015. 

112 Item 402(b)(2)(xiii) of Regulation S–K. 

113Proposed Instruction 6 to Item 402(b). 

114See letters from ABA and Chris Barnard. 

115See letter from ABA. 

116See letter from Florida State Board of 

Administration. 

117See letter from Davis Polk. 

118We have modified the text of new Instruction 

6 to clarify that this new instruction applies to 

CD&A disclosure in these proxy or information 

statements. 

119Exchange Act Rule 14a–21(a) [17 CFR 

240.14a–21(a)] provides that shareholder advisory 

say-on-pay votes apply to executive compensation 

disclosure pursuant to Item 402 of Regulation S–K, 

which includes CD&A. Because Item 407(i) 

disclosure will not be subject to these votes except 

to the extent a company chooses to make it part of 

CD&A either directly or pursuant to the new crossreference instruction, the final rule will not effect 

any change in the scope of disclosure currently 

subject to say-on-pay votes. We note that issuers 

may, if they prefer, avoid making the Item 407(i) 

disclosure part of CD&A by not cross-referencing or 

directly including that disclosure in their Item 402 

disclosure. 

120Exchange Act Rule 3a12–3(b) [17 CFR 

240.3a12–3(b)] specifically exempts securities 

registered by a FPI from Exchange Act Sections 

14(a) and 14(c). 

materials to be filed under cover of 

Schedule 14A.108 As provided in Item 1 

of Schedule 14C, however, an 

information statement filed on Schedule 

14C must include the information called 

for by all of the items of Schedule 14A 

to the extent each item would be 

applicable to any matter to be acted 

upon at a meeting if proxies were to be 

solicited, with only limited 

exceptions.109 An information statement 

filed on Schedule 14C in connection 

with an election of directors therefore 

already is required to include the 

information required by Item 7 of 

Schedule 14A. 

The Commission did not propose to 

exclude the new Item 407(i) disclosure 

from Schedule 14C.110

2. Comments on Proposed Amendments 

One commenter supported the 

inclusion of new Item 407(i) disclosure 

in Schedule 14C, noting that the Item 

407(i) disclosure differs in type and 

nature from the disclosures currently 

excludable.111 The commenter 

indicated that the proposed approach 

was appropriate because it would 

maintain consistency in the corporate 

governance disclosure provided in 

proxy statements and information 

statements with respect to the election 

of directors. No commenters opposed 

the proposed approach. 

3. Final Amendments 

As proposed, the final amendments 

do not exclude Item 407(i) disclosure 

from Schedule 14C. Applying the 

disclosure obligation to Schedule 14C 

filings will have the effect of applying 

the new Item 407(i) requirement to 

companies that do not solicit proxies 

from any or all security holders but are 

otherwise authorized by security 

holders to take an action with respect to 

the election of directors. Consistent with 

the views of one commenter, we believe 

that doing so is appropriate to retain 

consistency in the corporate governance 

disclosure provided in proxy statements 

and information statements with respect 

to the election of directors. 

3. Relationship to Existing CD&A 

Obligations 

a. Proposed Amendments 

As noted above, one of the nonexclusive examples currently listed in 

the Item 402(b) requirement for CD&A 

calls, in part, for disclosure of any 

company policies regarding hedging the 

economic risk of company securities 

ownership,112 to the extent material. 

CD&A requires information about 

named executive officers. 

The Commission proposed amending 

Item 402(b) of Regulation S–K to add an 

instruction providing that a company 

may satisfy its CD&A obligation to 

disclose material policies on hedging by 

named executive officers by cross 

referencing the information disclosed 

pursuant to new Item 407(i) to the 

extent that the information disclosed 

there satisfies this CD&A disclosure 

requirement.113

b. Comments on Proposed Amendments 

Comments on this proposed 

instruction were mixed. Two 

commenters supported permitting crossreferencing, stating that this may reduce 

potentially duplicative disclosure in 

proxy and information statements.114

One of these commenters suggested also 

permitting companies to include the 

new Item 407(i) disclosure in their 

CD&A,115 expressing the view that 

companies should have the flexibility to 

locate the disclosure where it best 

fulfills their communication objectives. 

Another commenter expressed concern 

about permitting cross-referencing the 

new Item 407(i) disclosure in CD&A, 

noting the importance of hedging policy 

disclosure and its direct relevance to the 

CD&A.116 In contrast, a different 

commenter recommended eliminating 

the Item 402(b) hedging disclosure 

requirement as unnecessary and 

redundant in light of the new Item 

407(i) disclosure.117

c. Final Amendments 

We are amending Item 402(b) of 

Regulation S–K to add the instruction as 

proposed. We believe this new 

instruction to Item 402(b) will allow 

companies that are subject to both Item 

407(i) and Item 402(b) to avoid the 

potential for duplicative disclosure in 

their proxy or information statements 

with respect to the election of 

directors.118 We are not eliminating 

Item 402(b), as one commenter 

suggested, as it applies to Item 402 

disclosure in registration statements and 

annual reports, as well as proxy 

statements. 

In response to comments, we note that 

companies have flexibility in where 

they present the new Item 407(i) 

disclosure. A company could choose to 

include its Item 407(i) disclosure 

outside of CD&A and provide a separate 

Item 402(b) disclosure as part of CD&A 

without a cross reference. Alternatively, 

it could incorporate the Item 407(i) 

disclosure into CD&A, either by directly 

including the information or by 

providing the Item 407(i) information 

outside of CD&A and adding a crossreference within CD&A.119

4. Issuers Subject to the Amendments 

a. Proposed Amendments 

The Proposing Release discussed 

whether certain categories of issuers 

should be exempted from the new Item 

407(i) disclosure requirement, or, 

alternatively, whether they should be 

subject to a delayed implementation 

schedule. Under the proposal, the new 

disclosure requirement would apply to 

EGCs and SRCs. Securities registered by 

an FPI are not subject to the proxy 

statement requirements of Exchange Act 

Section 14,120 and therefore FPIs are not 


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121 15 U.S.C. 78l(b). 

122BDCs are a category of closed-end investment 

company that are not registered under the 

Investment Company Act [15 U.S.C. 80a–2(a)(48) 

and 80a–53–64]. As proposed, BDCs would be 

treated in the same manner as non-investment 

company issuers. 

123ETFs are organized either as open-end funds 

or unit investment trusts (‘‘UITs’’). A UIT does not 

have a board of directors, corporate officers, or an 

investment adviser to render advice during the life 

of the trust, and does not actively trade its 

investment portfolio. 

124See letters from CFA Institute, CII, Florida 

State Board of Administration and Public Citizen. 

125See letter from Florida State Board of 

Administration. 

126See letters from CII and Florida State Board of 

Administration. 

127See letters from CFA Institute, CII and Public 

Citizen. 

128See letters from ABA and SCSGP. 

129See letters from ABA and SCSGP. 

130See letter from SCSGP. 

131See letters from ABA and Davis Polk. 

132See letters from ABA, ICI and MFDF. 

133 Id. 

134See Letters from ABA and MFDF. 

135See Letter from ICI. 

136See Letters from ICI and MFDF. 

137See Letter from ICI. 

138Section 36(a) of the Exchange Act permits the 

Commission, by rule, regulation, or order, to 

conditionally or unconditionally exempt any 

person security, or transaction, or any class or 

classes of persons, securities, or transactions, from 

any provision or provisions of this title or of any 

rule or regulation thereunder, to the extent that 

such exemption is necessary or appropriate in the 

public interest, and is consistent with the 

protection of investors. 

139See 2006 Executive Compensation Disclosure 

Release, at Section II.D.3. 

subject to Section 14(j) and hence would 

not be required to provide Item 407(i) 

disclosure. 

The Commission proposed to apply 

the disclosure requirements to closedend investment companies with shares 

listed on a national securities exchange 

and registered under Exchange Act 

Section 12(b) 121 (‘‘listed closed-end 

funds’’) as well as business 

development companies (‘‘BDCs’’).122

The Commission also requested 

comment on whether to require the 

proposed disclosure for other 

investment companies registered under 

the Investment Company Act (‘‘funds’’ 

or ‘‘registered investment companies’’) 

that do not hold annual meetings, 

including exchange-traded funds 

(‘‘ETFs’’) 123 and other open-end funds. 

b. Comments on Proposed Amendments 

Comments on whether EGCs or SRCs 

should be subject to the proposed 

disclosure requirement were mixed. 

Four commenters supported requiring 

the new Item 407(i) disclosure for EGCs 

and SRCs.124 One commenter opposed 

an ‘‘early stage exemption’’ for EGCs or 

SRCs, stating that it could allow for poor 

hedging policies at early growth stages 

that would eventually need to be 

corrected.125 Two commenters indicated 

that the Item 407(i) disclosure would be 

useful, and might be of greater value, to 

investors in these companies than to 

investors in other public companies 

because: (1) EGCs and SRCs are not 

subject to the CD&A requirement to 

disclose policies about hedging by 

named executive officers; (2) EGCs and 

SRCs are generally subject to greater 

market risk than other public 

companies; and (3) the breadth of usage 

of hedging transactions at those 

companies supports requiring 

disclosure.126 Three commenters 

indicated that they did not expect the 

new disclosure requirement to impose a 

significant compliance burden on EGCs 

and SRCs.127

In contrast, two commenters 

recommended exempting EGCs and 

SRCs from the new disclosure 

requirement,128 stating that requiring 

the new Item 407(i) disclosure for these 

companies could lead to misalignment 

of the interests of employees and 

directors with their shareholders. These 

commenters indicated that, since EGCs 

and SRCs are not required to provide 

CD&A disclosure, they are less likely to 

have hedging policies in place, and that 

rather than disclosing they do not have 

such a policy, these companies may feel 

compelled to adopt one. In their view, 

such an action may not be in the best 

interests of shareholders if it results in 

company executives, who are more 

likely than those of larger companies to 

be heavily invested in the company: (1) 

Refraining from undertaking risks that 

could be in the best interests of the 

company’s shareholders; 129 or (2) 

reducing their company stock holdings 

so their interests are less aligned with 

shareholders.130 In addition, these 

commenters believed that applying the 

new disclosure requirement to EGCs 

and SRCs would impose costs that are 

disproportionate to the benefits to be 

obtained. 

Two commenters agreed with the 

proposed treatment of FPIs.131 Both 

noted that securities registered by FPIs 

are not subject to the proxy statement 

requirements of Exchange Act Section 

14 and do not need to make other 

governance disclosures under existing 

Item 407. 

A few commenters addressed 

registered investment companies and 

none specifically addressed BDCs. 

Three commenters agreed with the 

Commission’s approach in the 

Proposing Release not to subject openend investment companies and ETFs to 

the proposed disclosure requirement.132

No commenter explicitly supported the 

application of the proposed disclosure 

requirement to listed closed-end funds 

and three commenters opposed making 

listed closed-end funds subject to the 

proposed requirement.133 Two 

commenters asserted that it is difficult 

to hedge shares of closed-end funds, 

either by selling short or entering into 

derivative positions.134 One commenter 

agreed with the Commission’s 

observation that closed-end funds 

typically are externally managed and do 

not employ executives or have 

employees like operating companies.135

Two commenters suggested that since 

closed-end funds share many similar 

characteristics regarding corporate 

governance with open-end funds, they 

should be treated similarly for purposes 

of the proposed disclosure.136 Finally, 

one commenter stated that the 

Commission had not demonstrated that 

closed-end fund executives had engaged 

in problematic hedging practices similar 

to those used by operating company 

executives and that because most 

closed-end funds did not have specific 

hedging policies already in place, they 

would need to develop, revise, and 

maintain such policies.137

c. Final Amendments 

The amendments will apply to the 

categories of issuers proposed, except 

with respect to listed closed-end funds, 

which we are exempting from the Item 

407(i) disclosure requirement. In 

making these determinations, we have 

been guided by what we understand to 

be the statutory purpose behind Section 

14(j), namely, to provide transparency to 

shareholders, if action is to be taken 

with respect to the election of directors, 

about whether a company’s employees 

or directors may engage in transactions 

that mitigate or avoid the incentive 

alignment associated with equity 

ownership. 

i. Investment Companies 

In a change from the proposal, after 

considering the comments received, we 

have determined not to apply the new 

Item 407(i) disclosure requirement to 

listed closed-end funds,138 but it will 

apply to BDCs. We believe that this 

approach is consistent with the 

Commission’s treatment of BDCs 

regarding executive compensation 

disclosure requirements,139 and no 

commenter suggested that BDCs should 

be excluded. 

Registered investment companies 

have a management structure, regulatory 

regime, and disclosure obligations that 


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140 In 2017, staff identified 5 (1%) internally 

managed listed closed-end funds based on a review 

of filings with the Commission. Funds also 

typically will contract with other service providers 

in addition to the investment adviser. 

141See Saitz, Greg, ‘‘Here Are Two Choices: Buy 

Fund Shares or Buy Fund Shares,’’ July 30, 2013, 

available at http://www.boardiq.com/c/556021/ 

60971/here_choices_fund_shares_fund_shares. 

142Registered investment companies are generally 

prohibited from issuing their securities for services. 

See Sections 22(g) (open-end funds) and 23(a) 

(closed-end funds) of the Investment Company Act. 

Recognizing that ‘‘effective fund governance can be 

enhanced when funds align the interests of their 

directors with the interests of their shareholders,’’ 

the Commission staff has suggested circumstances 

under which funds may compensate fund directors 

with fund shares consistent with sections 22(g) and 

23(a). See Interpretive Matters Concerning 

Independent Directors of Investment Companies, 

Investment Company Act Release No. 24083 (Oct. 

14, 1999) (discussing, among other matters, the 

staff’s views on application of Section 23(a) to the 

compensation of directors in closed-end funds 

using fund shares). 

143See note 132 above and accompanying text. 

144See note 5 above and accompanying text. 

145The requirement to hold an annual meeting of 

shareholders at which directors are to be elected is 

imposed by a source of authority other than the 

federal securities laws. See note 94 above. Funds 

are typically organized under state law as a form 

of trust or corporation that is not required to hold 

an annual meeting. See Robert A. Robertson, Fund 

Governance: Legal Duties of Investment Company 

Directors § 2.–6[5]. Funds may, however, hold 

shareholder meetings from time to time under 

certain circumstances, including where less than a 

majority of the directors of the fund were elected 

by the holders of the fund’s outstanding voting 

securities. See Section 16(a) of the Investment 

Company Act. 

146See, e.g., Section 302.00 of the New York 

Stock Exchange’s Corporate Governance Standards. 

147Proposing Release at 8494. 

148See notes 134–137 above and accompanying 

text. 

149Section 102 of the JOBS Act exempts EGCs 

from: The say-on-pay, say-on-frequency, and sayon-golden parachutes advisory votes required by 

Exchange Act Sections 14A(a) and (b), enacted in 

Section 951 of the Act; the ‘‘pay versus 

performance’’ proxy disclosure requirements of 

Exchange Act Section 14(i), enacted in Section 

953(a) of the Act; and the pay ratio disclosure 

requirements of Section 953(b) of the Act. 

150See Section 102(c) of the JOBS Act and Item 

402(l) of Regulation S–K. 

151See Item 407(a), (b), (c), (d), (e)(1)–(3), (f) and 

(h) of Regulation S–K; but see Item 407(g) of 

Regulation S–K, which provides a phase-in period 

for SRCs from the disclosure required by Item 

407(d)(5) of Regulation S–K and does not require 

SRCs to provide the disclosures required by Item 

407(e)(4) and (5) of Regulation S–K. In addition, as 

noted above, officers and directors at EGCs and 

SRCs are subject to the obligation under Exchange 

Act Section 16(a) to report transactions involving 

derivative securities. 

differ in various respects from operating 

companies, which we believe makes the 

proposed disclosure less useful for 

investors in funds. Nearly all funds, 

unlike other issuers, are externally 

managed and have few, if any, 

employees who are compensated by the 

fund. Rather, personnel who operate the 

fund and manage its portfolio generally 

are employed and compensated by the 

fund’s investment adviser.140

Although fund directors, including 

directors of listed closed-end funds, 

may hold shares of the funds they serve, 

fund compensation practices can be 

distinguished from those of operating 

companies.141 We believe that the 

granting of shares as a component of 

incentive-based compensation is 

uncommon, and in some cases is 

prohibited, for both open-end and 

closed-end funds.142 From a practical 

standpoint, even if fund directors were 

to acquire shares of listed closed-end 

funds, commenters indicated that it is 

difficult to hedge such shares by selling 

short or trading in derivatives.143

Concerns about avoiding restrictions on 

long-term compensation, which we 

understand to be one of the reasons 

Congress mandated this disclosure, may 

therefore be less likely to be raised with 

respect to open-end and closed-end 

funds.144

Section 14(j) of the Exchange Act 

directs the Commission to require 

certain disclosures in connection with 

any proxy or consent solicitation 

material for an annual meeting of 

shareholders. Most funds, other than 

listed closed-end funds, are not required 

to hold annual meetings of 

shareholders.145 ETFs, although traded 

on an exchange, do not generally hold 

annual meetings of shareholders, and 

ETFs organized as UITs do not have 

boards of directors. Listed closed-end 

funds, on the other hand, generally are 

required to hold annual meetings of 

shareholders.146

The Commission has considered, in 

the context of compensation and 

corporate governance, whether listed 

closed-end funds are more like 

operating companies or more like ETFs 

and open-end funds. As recognized in 

the Proposing Release, shares of listed 

closed-end funds trade at negotiated 

market prices on a national securities 

exchange and often trade at a 

‘‘discount’’ to the fund’s net asset value 

per share.147 While the Commission 

suggested in the Proposing Release that 

information as to whether a listed 

closed-end fund’s directors and 

employees, if any, would receive the 

discounted price upon a sale of the 

shares without an offset from a hedging 

transaction may be important to the 

voting decision of an investor, we 

received no public comment in support 

of this premise. On the contrary, a 

number of commenters opposed the 

inclusion of listed closed-end funds for 

a variety of reasons.148

We are persuaded by commenters that 

listed closed-end funds are more similar 

to open-end funds in this context and it 

is not necessary to apply the hedging 

disclosure requirements to listed closedend funds. Accordingly, we find it is in 

the public interest and consistent with 

the protection of investors to exclude 

listed closed-end funds from the Item 

407(i) disclosure requirements. 

ii. Emerging Growth Companies and 

Smaller Reporting Companies 

As adopted, the amendments do not 

exempt EGCs or SRCs from the new 

disclosure requirement. We believe that 

information about potential alignment 

of shareholder interests with those of 

employees and directors would be 

relevant to shareholders of an EGC or an 

SRC. Moreover, given the change in the 

disclosure requirement to focus on a 

company’s existing practices or policies, 

we do not expect the new disclosure to 

impose a significant compliance burden 

on companies. 

We are mindful that that the JOBS Act 

excludes EGCs from some, but not all, 

of the provisions of Title IX of the Act, 

of which Section 955 is a part,149 and 

that EGCs and SRCs are in many 

instances subject to scaled disclosure 

requirements, including with respect to 

executive compensation.150 We believe 

that it would be more consistent with 

our historical approach to corporate 

governance related disclosures,151 as 

well as the statutory objectives of 

Section 14(j), not to exempt these 

companies from the new disclosure 

requirement. EGCs and SRCs are not 

required to provide CD&A disclosure 

required by Item 402(b) and therefore 

may be less likely to have hedging 

practices or policies. Item 407(i) as 

adopted, however, does not direct them 

to adopt such practices or policies, or 

dictate the content of any such practices 

or policies. We believe the amendments 

would not impose a substantial direct 

cost on companies as they would simply 

require the company to disclose what, if 

any, practices or policies it has adopted 

and to whom they apply, or in the 

absence of any such practices or 

policies, disclose that none exists or 

state that hedging transactions are 

generally permitted. Accordingly, a 

company that does not believe a 

hedging policy would be in the best 

interests of its shareholders would be 

able to comply with the disclosure 

requirement without creating a practice 

or policy. As with any company, the 

complexity of the disclosure would 

reflect mainly the level of complexity of 

the hedging practices or policies of the 

individual company. 

As discussed in Section VI below, in 

addition to direct costs, companies 

subject to the disclosure requirement 


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152See Section V, below. 

153Exchange Act Rule 3a12–3(b) [17 CFR 

240.3a12–3(b)] specifically exempts securities 

registered by a FPI from Exchange Act Sections 

14(a) and 14(c). 

154See Section I, above. 

155 15 U.S.C. 78c(f). 

156 15 U.S.C. 78w(a)(2). 

157Based on data from Morningstar, we identify 

approximately 512 closed-end funds that were 

listed on an exchange as of December 31, 2017. 

158We estimate the number of unique operating 

companies subject to the final amendments by 

analyzing companies that filed annual reports on 

Form 10–K in calendar year 2017 with the 

Commission. This estimate excludes ABS issuers 

(identified based on prior ABS-related filings), 

registered investment companies, issuers that have 

not filed Form 10–K, and foreign issuers filing 

Forms 20–F and 40–F. We identify companies that 

have securities registered under Section 12(b) or 

Section 12(g) from Form 10–K. Companies not 

identified as having a class registered either under 

Section 12(b) or Section 12(g) are excluded. We 

determine whether a company identifies itself as a 

SRC from Form 10–K. We determine whether a 

company identifies itself as an EGC based on Ives 

Group’s AuditAnalytics data. This estimate is an 

upper bound on the number of affected filers to the 

extent that not all of these filers file a proxy 

statement or an information statement in a given 

year (for example, some filers may not hold a 

director election). 

159See note 9, above. These estimates are based 

on calendar year 2017 data, the last full year of data 

available to us. Following the amendments to the 

SRC definition, which expanded the range of 

companies that qualify for SRC status, effective 

September 10, 2018, we expect the proportion of 

SRCs among companies subject to the final 

amendments to be higher than estimated based on 

2017 data. Among companies subject to the final 

amendments based on 2017 data, approximately 

814 additional companies, including 567 

companies that are not EGCs, would have qualified 

as SRCs under the expanded definition. 

Those non-EGCs that were in existence prior to 

the recent expansion of the SRC definition and that 

newly qualify for SRC status under the expanded 

definition would have been subject to Item 402(b) 

in prior years. 

may also incur indirect costs associated 

with the disclosure, which may be 

larger for companies without practices 

or policies regarding hedging in place. 

We thus recognize that EGCs and SRCs 

may incur greater costs as a result of the 

disclosure requirement. Accordingly, 

we are adopting a delayed compliance 

date for EGCs and SRCs. 

As noted below,152 in order to give 

companies adequate time to implement 

the new disclosures, we are providing a 

transition period. Companies that are 

not SRCs or EGCs are required to 

comply with Item 407(i) in proxy and 

information statements with respect to 

the election of directors during fiscal 

years beginning on or after July 1, 2019. 

We believe that providing a delayed 

compliance date for SRCs and EGCs will 

benefit those companies by allowing 

them to observe how other larger and 

more established companies implement 

Item 407(i). Accordingly, to assist SRCs 

and EGCs in preparing to implement 

Item 407(i), we are requiring them to 

comply with Item 407(i) in proxy and 

information statements with respect to 

the election of directors during fiscal 

years beginning on or after July 1, 2020. 

iii. Foreign Private Issuers 

As noted above, Section 14(j) calls for 

disclosure in any proxy or consent 

solicitation material for an annual 

meeting of the shareholders of the 

issuer. Because securities registered by 

a FPI are not subject to the proxy 

statement requirements of Exchange Act 

Section 14,153 under the amendments, 

FPIs are not required to provide the new 

Item 407(i) disclosure. 

IV. Other Matters 

If any of the provisions of these rules, 

or the application thereof to any person 

or circumstance, is held to be invalid, 

such invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

V. Compliance Dates 

In order to give companies adequate 

time to implement these disclosures, we 

are requiring companies that are not 

SRCs or EGCs to begin complying with 

Item 407(i) in proxy and information 

statements with respect to the election 

of directors during fiscal years 

beginning on or after July 1, 2019. We 

are delaying the required compliance for 

SRCs and EGCs until fiscal years 

beginning on or after July 1, 2020. 

VI. Economic Analysis 

A. Background 

We are adopting amendments to 

implement Section 955 of the Act, 

which added Section 14(j) to the 

Exchange Act concerning disclosure 

about a company’s hedging policies in 

proxy or consent solicitation 

materials.154 We are mindful of the costs 

imposed by and the benefits obtained 

from our rules. Exchange Act Section 

3(f) 155 requires us, when engaging in 

rulemaking that requires us to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, to also consider, in addition to 

the protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation. 

Additionally, Exchange Act Section 

23(a)(2) 156 requires us, when adopting 

rules under the Exchange Act, to 

consider the impact that any new rule 

will have on competition and not to 

adopt any rule that will impose a 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act. 

The discussion below addresses the 

expected economic effects of the final 

amendments, including the likely 

benefits and costs, as well as the likely 

effects of the final amendments on 

efficiency, competition, and capital 

formation. The Commission has, where 

possible, quantified the economic 

effects expected to result from the final 

amendments in the analysis below. 

However, we are unable to quantify 

some of the potential effects discussed 

below. Notably, the benefits of the final 

amendments are difficult to quantify 

because we lack data on the extent to 

which shareholders currently factor 

information on hedging practices or 

policies into their decisions and the 

extent to which the availability of the 

new disclosure under the final 

amendments will inform shareholder 

decisions. Further, we are unable to 

quantify the indirect costs of the final 

amendments because we lack 

information to predict the extent of 

changes to hedging policies that 

companies may undertake following the 

amendments and the incremental costs 

companies may incur as a result of 

implementing such changes, including 

costs to develop and administer new or 

revised hedging policies and costs 

associated with potential changes to 

incentives of directors and employees. 

Therefore, much of the discussion 

below is qualitative in nature, although 

the Commission describes, where 

possible, the direction of these effects. 

Finally, for purposes of this economic 

analysis, we address the benefits and 

costs resulting from the statutory 

mandate and our exercise of discretion 

together because the two types of 

benefits and costs are not readily 

separable. 

B. Baseline and Affected Parties 

The final amendments will affect all 

companies with a class of securities 

registered under Section 12 of the 

Exchange Act, including SRCs, EGCs, 

and BDCs. The final amendments do not 

apply to FPIs and investment companies 

registered under the Investment 

Company Act. In a change from the 

proposal, listed closed-end funds will 

not be subject to the final 

amendments.157 We estimate that 

approximately 5,795 companies will be 

subject to the final amendments.158

Among the companies subject to the 

final amendments, we estimate 

approximately 2,086 to be SRCs; 159


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160The estimate is based on Ives Group’s 

AuditAnalytics data on filers that identified 

themselves as EGCs during 2017. 

161The EGC, SRC, and BDC filer categories partly 

overlap. The estimate of the number of BDCs is 

based on September 2017 data at https://

www.sec.gov/open/datasets-bdc.html. 

162Listed closed-end funds, which are not subject 

to the final amendments, are not subject to the 

CD&A disclosure requirement. 

163Section 30(h) of the Investment Company Act 

subjects officers and directors of listed closed-end 

funds to the same duties and liabilities as those 

imposed by Section 16(a) of the Exchange Act. 

164See notes 171–175, below. 

165We did not receive comment on the 

methodological approach used in this baseline 

analysis in the Proposing Release. Our baseline 

analysis in this release is generally consistent with 

the baseline analysis in the Proposing Release; 

however, we are considering data from proxy 

statements filed in 2017, which is the most recent 

full calendar year of filings available to us. We also 

are making some modifications in light of the 

availability of information in other sources about 

the prevalence of hedging policy disclosure among 

large companies. Specifically, we are considering a 

random sample of 100, rather than the set of all, 

S&P 500 companies, in light of other information 

on hedging policies of large companies that has 

become available from commenters and industry 

surveys. See notes 171–175, below. In light of 

comments regarding the potentially greater effects 

of the disclosure requirement on SRCs and EGCs, 

in a change from the baseline analysis in the 

Proposing Release, we are adding an analysis of 

samples of 100 SRCs and 100 non-SRC EGCs. 

Similar to the analysis in the Proposing Release, we 

also examine a sample of 100 S&P SmallCap 600 

companies. 

We note that the estimated rate of hedging policy 

disclosure obtained based on a sample of 

companies, rather than the entire set of companies, 

can differ from the actual rate of hedging policy 

disclosure for the full set of companies. However, 

such differences should not be systematic in light 

of our use of random sampling. 

166A total of 489 S&P 500 companies filed proxy 

statements during the calendar year 2017. 

167A total of 586 S&P SmallCap 600 companies 

filed proxy statements during the calendar year 

2017. 

168See note 159, above. SRC status is based on 

status reported in filings in calendar year 2017. 

Twenty-one EGCs were included in the S&P 

SmallCap 600 index during the calendar year 2017. 

169See note 159, above. SRC status is based on 

status reported in filings in calendar year 2017. The 

SRC sample therefore does not include companies 

that would become newly eligible for SRC status 

under the expanded SRC definition following the 

2018 amendments, while the non-SRC EGC sample 

may include such companies. Because companies 

newly eligible for SRC status under the 2018 

amendments would tend to be larger than the 

companies eligible for SRC status prior to the 2018 

amendments, to the extent that larger companies are 

more likely to disclose hedging, the prevalence of 

hedging disclosure in the analyzed sample of SRCs 

from 2017 may be lower than the prevalence of 

hedging disclosure among SRCs under the amended 

definition. 

1,224 to be EGCs; 160 and 80 to be 

BDCs.161 Besides companies, affected 

parties include employees (including 

officers) and directors of the affected 

companies, as well as investors in these 

companies. Equity securities covered by 

the final amendments include equity 

securities issued by the company and its 

parents, subsidiaries or subsidiaries of 

the company’s parents. 

We assess the economic effects of the 

final amendments relative to the 

baseline, which includes the existing 

state of disclosure requirements and 

practices. As discussed in Section II 

above, among the registrants subject to 

the final amendments, Section 12 

registrants other than SRCs and EGCs 

are currently subject to the CD&A 

disclosure requirement in Item 402(b) of 

Regulation S–K. Under Item 

402(b)(2)(xiii), an example of the kind of 

information that should be provided, if 

material, includes a description of the 

company’s equity or other security 

ownership requirements or guidelines 

(specifying applicable amounts and 

forms of ownership) and any company 

policies regarding hedging the economic 

risk of such ownership. Although Item 

402(b)(2)(xiii) addresses only hedging 

by the named executive officers, some 

companies describe policies that 

address hedging by employees and 

directors, as well as named executive 

officers, in providing their CD&A 

disclosure.162

Additionally, Section 16(a) of the 

Exchange Act requires officers and 

directors of Section 12 registrants, 

including SRCs and EGCs, to report 

their hedging transactions involving the 

company’s equity securities.163

However, unless a company discloses a 

policy regarding hedging by officers and 

directors, it is not possible for investors 

to obtain full information about whether 

a company has a hedging policy or how 

one may apply. For example, investors 

may not be able to discern from current 

disclosure whether the disclosure of 

hedging transactions by officers and 

directors indicates that the company 

does not have a hedging policy; the 

company has a policy regarding 

hedging, but that the particular types of 

transactions are not restricted by the 

policy; or a company’s hedging policy 

was violated, but the transaction was 

reported in accordance with Section 

16(a). Similarly, it is not possible to 

discern from current disclosure whether 

the absence of reported hedging 

transactions indicates that the company 

prohibits hedging; the company does 

not prohibit hedging, but that officers 

and directors did not engage in hedging 

transactions; or officers and directors 

engaged in hedging transactions but did 

not comply with Section 16(a). 

The extent to which there will be a 

change in the hedging policy 

disclosures under the final amendments 

will vary for different categories of 

registrants subject to the amendments. 

While a number of reporting companies 

already make hedging policy 

disclosures, others will need to do so for 

the first time. To establish the baseline 

of existing practices related to 

disclosure of hedging policies, we 

analyzed information from comment 

letters and industry surveys of large 

companies’ hedging policy disclosure 

practices 164 and reviewed proxy 

statements for information on 

disclosures of hedging policies for four 

samples of companies.165 The first 

sample includes a randomly chosen 

subset of 100 S&P 500 companies that 

filed proxy statements during the 

calendar year 2017.166 The second 

sample includes 100 randomly selected 

companies from the S&P SmallCap 600 

that filed proxy statements during the 

calendar year 2017.167 These companies 

are smaller than S&P 500 companies; 

however, all of them are exchangelisted, and none are SRCs (based on the 

pre-2018 definition).168 In addition, we 

have examined hedging policy 

disclosure practices for random samples 

of 100 SRCs and 100 non-SRC EGCs 

(using the pre-2018 SRC definition).169

In general, the sampled S&P 500 

companies disclosed hedging policies 

more frequently than the other 

categories of sampled companies. 

TABLE 1—CURRENT HEDGING POLICY DISCLOSURE PRACTICES

Covered companies 

Size of the 

examined 

sample 

Covered persons 

Disclosed 

hedging 

policy 

No disclosed 

policy 

Companies in the S&P 500 index ........................................... 100 NEOs ..................................... 97 (97%) 3 (3%) 

........................ Directors ................................. 77 (77%) 23 (23%) 

........................ Employees ............................. 51 (51%) 49 (49%) 

Companies in the S&P SmallCap 600 index .......................... 100 NEOs ..................................... 71 (71%) 29 (29%)

........................ Directors ................................. 60 (60%) 40 (40%) 


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170 Id. 

171See letter from Davis Polk. 

172See letter from CII. 

173See letter from Public Citizen. 174See letter from Business Roundtable. 175A 2015 report found that among the 250 

largest market capitalization S&P 500 companies, 

the prevalence of policies prohibiting hedging by 

executives is 92%. See Frederic W. Cook & Co., Inc., 

Corporate Governance Study 1 (December 2015), 

available at https://www.fwcook.com/content/ 

Documents/Publications/FWC_2015_Corp_Gov_

Study_Final.pdf. 

Another recent report found hedging policies to 

be present in 96% of large publicly traded 

companies and attributed that percentage to the 

influence of legislation, proxy advisory firms, and 

shareholder scrutiny. The report considered ‘‘110 

companies from 10 industries, selected to provide 

a broad representation of market practice among 

large U.S. public companies.’’ See Compensation 

Advisory Partnerts (CAP), CAP 100 Company 

Research Industry Report 2017–2018 13, https://

www.capartners.com/cap-thinking/cap-100- 

company-research-17-18/. 

In another report, 93 of the largest 100 companies 

(93%) that have equity securities listed on the 

NYSE or Nasdaq were found to prohibit hedging. 

See 2018 Shearman & Sterling LLP Corporate 

Governance survey, at 103. 

An analysis of 2017 data indicated that 98% of 

a random subset of S&P 500 companies and 71% 

of a random subset of S&P SmallCap 600 companies 

disclosed hedging policies for named executive 

officers. In the Proposing Release, an analysis of 

2012 data indicated that 67% of S&P 500 companies 

and 29% of a random subset of S&P SmallCap 600 

companies disclosed hedging policies for named 

executive officers. See Proposing Release, at 8498. 

We cannot identify the causes of increased 

incidence of hedging policy disclosure among large 

companies with certainty and note that estimates 

based on samples of companies may contain noise, 

although differences in estimates are not likely to 

be biased because samples are drawn randomly. 

The increase in the rate of hedging policy 

disclosure over this time period may be partly due 

to the anticipation of a future requirement to 

provide hedging disclosures as a result of the DoddFrank Act and the Proposing Release, as well as due 

to demand from shareholders and other market 

participants. See also Section VI.B below, analyzing 

the prevalence of disclosure of hedging practices 

and policies in a randomly drawn sample of 

companies. 

176See Proposing Release, at 8498, n. 86. See, e.g., 

Michael C. Jensen & William H. Meckling, Theory 

of The Firm: Managerial Behavior, Agency Costs 

and Ownership Structure, 3 J. Fin. Econ. 305–360 

(1976); Bengt Holmstrom, Moral Hazard and 

Observability, 10 Bell J. Econ. 324–340 (1979); 

Bengt Holmstrom & Joan Ricart I. Costa, Managerial 

Incentives and Capital Management, 101 Q. J. Econ. 

835–860 (1986). Terms of employee and director 

compensation contracts, including holding and 

vesting periods, may also affect the alignment of 

incentives with shareholder value over time. 

TABLE 1—CURRENT HEDGING POLICY DISCLOSURE PRACTICES—Continued 

Covered companies 

Size of the 

examined 

sample 

Covered persons 

Disclosed 

hedging 

policy 

No disclosed 

policy 

........................ Employees ............................. 33 (33%) 67 (67%) 

SRCs (pre-2018 definition) ...................................................... 100 NEOs ..................................... 7 (7%) 93 (93%) 

........................ Directors ................................. 6 (6%) 94 (94%) 

........................ Employees ............................. 1 (1%) 99 (99%) 

EGCs that are not SRCs (pre-2018 definition) ....................... 100 NEOs ..................................... 15 (15%) 85 (85%) 

........................ Directors ................................. 13 (13%) 87 (87%) 

........................ Employees ............................. 11 (11%) 89 (89%) 

Table 1 shows that disclosures and 

hedging policies are not uniform across 

covered categories of companies. 

Almost all of the S&P 500 companies 

sampled (97%) disclosed policies 

regarding hedging by named executive 

officers. A large majority of the S&P 500 

companies sampled (77%) also 

disclosed their policy about hedging by 

directors, but only 51% disclosed 

hedging policies for non-executive 

employees. These percentages are 

smaller for smaller companies. Of the 

100 S&P SmallCap 600 companies 

sampled, only 71% disclosed hedging 

policies for named executive officers, 

60% disclosed such policies for 

directors, and 33% disclosed hedging 

policies for non-executive employees. 

An even smaller proportion of the 

sampled SRCs and non-SRC EGCs 

(based on the pre-2018 definition) 170

disclosed hedging policies: 7% of SRCs 

and 15% of non-SRC EGCs disclosed 

policies regarding hedging by named 

executive officers; 6% of SRCs and 13% 

of non-SRC EGCs disclosed policies 

regarding hedging by directors; and 1% 

of SRCs and 11% of non-SRC EGCs 

disclosed policies regarding hedging by 

non-executive employees. Among the 

different categories of the sampled 

companies that disclosed hedging 

policies, all or almost all such 

companies disclosed policies that either 

prohibited or restricted hedging. 

These results are broadly in line with 

those reported by commenters and 

industry reports. One commenter stated 

that 49% of Russell 3000 companies and 

84% of S&P 500 companies have 

hedging policies governing their officers 

and directors.171 Another commenter 

indicated that approximately 54% of 

Russell 3000 Companies and 84% of 

S&P 500 companies have prohibited 

employees from hedging company 

shares.172 A different commenter 

indicated that a survey of 100 

companies among the Fortune 500 

found that 95% of companies disclosed 

hedging policies during the 2014 proxy 

season, and the vast majority of these 

policies involved a ban.173 Another 

commenter reviewed company 

disclosures in Commission filings and 

corporate governance documents 

available on company websites, and 

found that: (1) 95% of a cross-section of 

60 publicly traded companies whose 

CEOs are members of Business 

Roundtable prohibit hedging of 

company securities by executive 

officers, and (2) 85% prohibit hedging 

by directors.174 More recent industry 

studies of large companies have 

reported that the majority of the 

surveyed companies disallow executive 

hedging.175

Discussion of Economic Effects 

To help inform our analysis of the 

potential benefits and costs of 

disclosure of practices or policies 

regarding hedging to shareholders, we 

consider the potential ways in which 

hedging by employees and directors 

may affect shareholder value. However, 

as discussed in Section III above, these 

amendments relate only to disclosure of 

hedging practices or policies and should 

not be construed as suggesting that 

companies should have a practice or 

policy regarding hedging, or a particular 

type of practice or policy. 

Generally, by linking employees’ and 

directors’ wealth to shareholder wealth, 

an ownership stake in the company can 

provide employees and directors with 

an incentive to improve shareholder 

value.176 Permitting employees and 

directors to hedge their exposure to the 

company’s stock price can reduce the 

alignment of their incentives with the 

interests of shareholders, potentially 

resulting in less optimal corporate 

investment decisions and lower 

shareholder value. Alternatively, 

permitting hedging could, in some 

circumstances, more closely align the 

risk preferences of employees and 

directors with those of shareholders, 

potentially resulting in more efficient 

corporate investment decisions and 

higher shareholder value. Compared to 

shareholders, employees and directors 

are more likely to have undiversified 


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177See Proposing Release, at 8498–99, nn. 88–89. 

See, e.g., Lisa Meulbroek, Company Stock in 

Pension Plans: How Costly Is It?, 48 J. L. & Econ. 

443, (2005); Brian J. Hall &Kevin J. Murphy, Stock 

Options for Undiversified Executives 33 J. Acct. & 

Econ.no. 1, 3–42 (2002) (stating that a large 

literature has studied the resulting underinvestment 

concern). 

See, e.g., Alfred Rappaport, Executive Incentives 

vs. Corporate Growth, 57 Harv. Bus. Rev. 81–88 

(1978); Clifford Smith & Rene Stulz, The 

Determinants of Firms’ Hedging Policies, 20 J. Fin. 

and Quantitative Analysis 391–405 (1985); Robert 

Kaplan, Advanced Management Accounting, 

(Prentice-Hall, 1982); and Richard Lambert, 

Executive Effort and the Selection of Risky Projects, 

17 RAND J. Econ. 77–88 (1986). 

178Besides concentrated financial wealth 

exposure, employees and directors have human 

capital exposure to the company. Hedging by 

employees and directors affects the former. 

179For example, corporate hedging of cash flow 

risk, or a requirement that executive officers hold 

stock options, also can strengthen executives’ 

incentives to take on risky but value-enhancing 

investment projects; however, both can involve 

costs. See Proposing Release, at 8499, n. 91. 

180See J. Carr Bettis, John Bizjak & Swaminathan 

Kalpathy, Why Do Insiders Hedge Their Ownership? 

An Empirical Examination, 44 Financial 

Management, 655 (2015). The study also finds that 

insider derivative transactions are more likely 

among companies with overvalued equity, higher 

CEO pay-for-performance sensitivity, and higher 

insider equity ownership. Given the sample period 

used in the study (1996–2006), it is not clear if their 

findings reflect the current situation. 

181 Id. We also note that the likelihood of 

employees and directors using hedging at a 

particular firm may also be affected by other factors, 

including firm characteristics, risk preferences and 

tax circumstances of individual employees and 

directors, and the specific features of a firm’s 

hedging policy. 

182See Section III, above. 

183SRCs and EGCs are not subject to Item 402(b). 

The incremental effects of the final amendments on 

BDCs depend on whether the BDC currently 

qualifies as an SRC or EGC and thus whether it is 

subject to Item 402(b)(2)(xiii). Further, the 

incremental effects of the amendments are expected 

to be greater for internally managed BDCs than for 

BDCs that are externally managed by an investment 

adviser’s portfolio manager because employees of 

the investment adviser are outside the scope of Item 

407(i). Based on staff estimates, among BDCs with 

a class of securities registered under Section 12, 

approximately 87.5% are externally managed. 

However, directors of externally managed BDCs 

play a role in overseeing the BDC’s investment 

adviser, and policies regarding director hedging are 

within the scope of Item 407(i). 

exposure to their company, which could 

lead them to avoid making risky 

corporate investments, even if such 

actions would enhance shareholder 

value.177 Allowing employees and 

directors to hedge equity holdings could 

in some circumstances partly ameliorate 

the imperfect alignment of risk-taking 

incentives created by undiversified 

exposure.178 The net effect of hedging 

by employees on the efficiency of 

corporate investment decisions would 

depend on the relative impact of these 

tradeoffs; the availability and costeffectiveness of other tools to address 

these concerns;179 and the extent and 

types of hedging used by employees and 

directors. In particular, the impact of 

hedging on the incentives of employees 

and directors may depend on the 

amount of hedging as well as on the 

type of hedging transactions used and 

payoffs provided by the particular 

instrument. 

There is limited research on hedging 

transactions by corporate insiders. In an 

effort to understand these incentives, 

one academic study concludes that 

there is significant variation in the 

motivations for the use of derivative 

transactions for hedging by corporate 

insiders.180 However, the study does not 

find evidence that the use of hedging 

instruments is associated with 

significant changes in earnings 

management, investment policy, 

including R&D, or company risk, and 

concludes that the evidence is mixed as 

to whether these instruments are a 

contractual response to agency 

problems, or suboptimal contracts.181

1. Effects of the Item 407(i) Disclosure 

Requirements 

Item 407(i) is being adopted to require 

a company to describe any practices or 

policies it has adopted regarding the 

ability of employees or directors of the 

company 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 

company equity securities granted to the 

employee or director by the company as 

part of the compensation of the 

employee or director, or held, directly 

or indirectly, by the employee or 

director.182 If the company does not 

have any such practices or policies, the 

company must disclose that fact or state 

that hedging transactions are generally 

permitted. The rule does not direct 

companies to have such practices or 

policies, or dictate the content of any 

such practices or policies. 

Similar to the proposal, and similar to 

the existing Item 402(b)(2)(xiii), the final 

amendments do not define the term 

‘‘hedge.’’ Instead, the final amendments 

use the term as a broad principle for 

transactions that hedge or offset, or are 

designed to hedge or offset, any 

decrease in the market value of 

registrant equity securities. Not limiting 

the disclosure requirement to specific 

transaction types will enable it to 

comprehensively capture policies 

related to those hedging transactions 

that companies view as relevant in light 

of their specific circumstances and 

incentive structures. The final 

amendments allow for flexibility to 

address new downside price protection 

techniques as they develop, providing 

relevant information to investors, and 

avoid adopting a definition that could 

prove either over- or under-inclusive. 

However, we acknowledge that the 

principles-based approach could lead to 

less comparability in the required 

disclosures across companies. 

Generally, information about hedging 

practices or policies may be relevant for 

shareholders seeking to assess the 

equity incentives of employees and 

directors and the extent of alignment of 

those incentives with shareholder 

interests. As is shown in Table 1, such 

information is not always available to 

shareholders, particularly for companies 

not presently subject to Item 

402(b)(2)(xiii). Providing this 

information could help mitigate the 

information asymmetry between 

companies and shareholders about the 

strength of employees’ and directors’ 

equity incentives, thus potentially 

enhancing the ability of shareholders to 

make fully informed voting and, 

potentially, investment decisions. 

As discussed below, the potential 

economic effects of the final 

amendments are expected to vary across 

companies, depending on the nature 

and amount of new information 

contained in the disclosures, whether a 

company decides to implement or revise 

hedging policies, the nature of 

investment opportunities available to 

the company, and whether employees 

and directors currently engage in 

hedging. 

The economic effects of the final 

amendments will likely be smaller for 

companies that are subject to Item 

402(b)(2)(xiii), which requires 

disclosure of policies regarding hedging 

by named executive officers, if 

material.183 If such companies currently 

disclose practices or policies regarding 

hedging by named executive officers, 

their existing disclosure may satisfy 

Item 407(i) requirements as to those 

officers. Companies subject to Item 

402(b)(2)(xiii) that do not currently 

disclose practices or policies regarding 

hedging by named executive officers 

(either because they do not have such 

policies or because their disclosure 

would not be material), will need to 

provide new disclosure under Item 

407(i). Because investors may already 

draw inferences about a company’s 

hedging practices or policies regarding 

named executive officers from the 

absence of an Item 402(b)(2)(xiii) 

disclosure, the incremental effects of the 

Item 407(i) disclosure for investor 

understanding of hedging practices or 

policies of such companies as to those 


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184See, e.g., letters from Chris Barnard, CII and 

Taylor Dove. 

185See, e.g., letter from Chris Barnard, who also 

stated that hedged equity exposures do not reflect 

the economic exposure to actual equity 

performance. 

186See letter from CII. 

187For S&P 1500 companies, median total 

compensation per outside director rose from 

$57,514 in 1998 to $112,745 in 2004 (a 51% 

increase), far greater than the rate of increase of 

24% in CEO compensation over the same period. 

The proportion of director pay provided by equity 

increased from around 45% in 1998 to over 60% 

in 2004. However, director incentives are typically 

smaller than incentives for CEOs. See David 

Yermack, Remuneration, Retention, and Reputation 

Incentives for Outside Directors, 59 J. Fin. 2281– 

2308(2004); Kathleen Farrell, Geoffrey Friesen & 

Philip Hersch, How Do Firms Adjust Director 

Compensation?, 14 J. Corp. Fin. 153 (2008); James 

Linck, Jeffry Netter & Tina Yang, The Effects and 

Unintended Consequences of the Sarbanes-Oxley 

Act on the Supply and Demand for Directors, 

Review of Financial Studies 22(8): 3287–3328 

(2009); and Viktar Fedaseyeu, James Linck, & 

Hannes Wagner, The Determinants of Director 

Compensation (J. Corp. Fin. 2014) working paper 

available at http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2335584. 

Although these studies used samples prior to 

2011, we have no reason to believe that director 

incentives and compensation have declined 

significantly in more recent years. For example, 

according to a 2017 industry study of ‘‘nonemployee director compensation at 300 companies 

of various sizes and industries,’’ equity represented 

58% of total director pay across all companies. The 

share of equity in director compensation was higher 

at large-cap companies (market cap above $5 

billion) (62%) than at mid-cap (market cap of $1– 

5 billion) (58%) or small-cap (market cap below $1 

billion) (54%). Median total director pay in the 

survey was $150,000 for small-cap, $201,667 for 

mid-cap, and $274,000 for large-cap companies. See 

Frederic W. Cook & Co., Inc., Director 

Compensation Report, 1, 6 (November 2017) 

available at https://www.fwcook.com/content/ 

documents/publications/11-21-17_FWC_2017_

Director_Comp_Final.pdf. 

However, directors of listed closed-end funds 

generally do not receive equity-based 

compensation. See notes 141–142, above. 

188Average levels of equity pay awarded to nonofficer directors are lower than for executives. Id. 

In addition, most non-officer directors have other 

sources of income and wealth (e.g., seats on other 

boards or an officer position at a different company) 

not tied to the company on whose board they sit. 

See, e.g., Ronald Masulis & Shawn Mobbs, 

Independent Director Incentives: Where Do 

Talented Directors Spend their Limited Time and 

Energy? 111 J. Fin. Econ. 406, 410, Table 1 (2013). 

officers may be small. Further, 

irrespective of whether companies 

subject to Item 402(b)(2)(xiii) currently 

disclose practices or policies regarding 

hedging by named executive officers, if 

such companies have practices or 

policies regarding hedging by other 

employees or directors, they will be 

required to disclose such practices or 

policies under Item 407(i), which will 

provide additional information to 

investors. Companies without any 

practices or policies regarding hedging 

will be required to disclose that fact or 

state that hedging transactions are 

generally permitted. 

On the other hand, the incremental 

economic effects of the final 

amendments are expected to be larger 

for Section 12 registrants that have been 

reporting as SRCs or EGCs. As discussed 

in Section VI.B above, a relatively 

smaller proportion of companies that 

are not subject to Item 402(b)(2)(xiii) 

presently discloses information about 

hedging practices or policies. Under the 

final amendments, such registrants will 

be required to provide new disclosure 

about whether they have practices or 

policies regarding hedging by 

employees (including officers) and 

directors. 

a. Benefits 

Investors may benefit from the 

disclosures required by the final 

amendments in several ways. 

First, new disclosures provide more 

clarity and transparency about 

incentives of employees and directors, 

thereby potentially reducing the 

information asymmetry between 

corporate insiders and shareholders 

regarding such incentives and 

promoting more informed voting and, 

potentially, investment decisions. 

Although shareholders currently have 

access to officers’ and directors’ 

historical hedging transactions through 

Section 16(a) reports, those shareholders 

may not have information about 

whether officers and directors can 

engage in hedging in the future. 

Several commenters agreed that the 

required disclosure will enhance 

transparency and investor 

understanding of hedging practices.184

For example, one commenter indicated 

that the new disclosures will help 

investors to better understand the 

incentives of employees (including 

officers) and directors to improve 

shareholder value.185 Another 

commenter stated that the disclosure of 

a company’s hedging policy may be 

considered by investors in the course of 

voting on proposals prohibiting 

hedging, advisory votes on executive 

compensation, and director elections.186

Second, the final amendments may 

reduce the costs for investors of 

researching and analyzing equity-based 

incentives. While Section 16(a) reports 

provide transaction-specific information 

about officer and director hedging, 

investors may incur costs to search and 

aggregate information from Forms 3, 4, 

and 5 and to determine whether a 

reported transaction constitutes 

hedging. Information about whether 

employees and directors are subject to a 

practice or policy regarding hedging 

could confirm for investors whether the 

reported equity holdings of officers and 

directors represent their actual 

incentives. 

Third, the final amendments may 

potentially yield indirect benefits for 

investors if the public nature of the 

required disclosures leads companies 

subject to Item 407(i) to adopt changes 

in hedging practices or policies. If such 

changes better align the incentives of 

employees and directors with those of 

shareholders, such companies may 

experience an increase in shareholder 

value. Alternatively, as discussed in 

Section VI.C.1.b below, if the change in 

hedging practices or policies reduces 

incentive alignment, such changes 

could reduce shareholder wealth. We do 

not have data by which to be able to 

assess whether companies will adopt 

changes in hedging practices or policies, 

and if so, whether such changes will 

result in net benefits or costs. 

The three types of benefits described 

above are likely to be most significant 

with respect to the disclosure practices 

or policies for executive officers. Some 

of these types of benefits may also apply 

to disclosure about practices or policies 

for directors and non-executive 

employees, although as discussed 

below, the benefits may be less 

pronounced. 

Directors may receive equity-based 

compensation to better align their 

interests with those of the shareholders 

they represent.187 The benefits of 

disclosure about hedging policies for 

non-officer directors may be smaller 

than for officers because non-officer 

directors generally are less involved in 

corporate investment decisions than 

officers. Also, because their exposure to 

the company as a proportion to their 

overall wealth is likely to be lower, nonofficer directors may be less likely to 

engage in hedging than officers.188

Disclosure of hedging policies 

regarding employees generally may also 

benefit investors to the extent that they 

contribute, individually or as a group, to 

shareholder value. This potential benefit 

can be greater in the case of critical nonexecutive employees (e.g., key research 

scientists and founding employees), 

who may have equity stakes or option 

holdings and whose actions and 

decisions can also affect the company’s 

stock price, than in the case of those 

employees who do not participate in 

making and shaping key operating or 

strategic decisions to the same extent. 

While some non-executive employees 

may receive equity grants as part of the 

companies’ broad-based equity plans, 

their equity ownership and 

compensation levels on average are 

much lower compared to executive 


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189See, e.g., Paul Oyer & Scott Schaefer, Why Do 

Some Firms Give Stock Options to All Employees? 

An Empirical Examination of Alternative Theories, 

76 J. Fin. Econ. 99–133 (2005); Serdar Aldatmaz, 

Paige Ouimet, & Edward D. Van Wesep, The Option 

to Quit: The Effect of Employee Stock Options on 

Turnover, 127 J. Fin. Econ. 136–151 (2018); Ehan 

Kim & Paige Ouimet, Broad-Based Employee Stock 

Ownership: Motives and Outcomes, 69 J. Fin. Econ. 

1273–1319 (2014). 

190See, e.g., Kim and Ouimet (showing that small 

employee stock ownership plans, comprising less 

than 5% of shares, granted by companies with 

moderate employee size, increase productivity and 

benefit both employees and shareholders but that 

the effects are weaker when there are too many 

employees to mitigate free-riding or for large 

employee stock ownership plans); Xin Chang., 

Kangkang Fu, Angie Low & Wenrui Zhang, NonExecutive Employee Stock Options and Corporate 

Innovation, 115 J. Fin. Econ. 168 (2015) (showing 

a positive effect of non-executive employee stock 

options on corporate innovation, mainly through 

the risk-taking incentive, rather than the 

performance-based incentive); Francesco Bova, 

Kalin Kolev, Jacob Thomas & X. Frank Zhang, NonExecutive Employee Ownership and Corporate Risk, 

90 Acct. Rev. 115 (2015) (showing a positive effect 

of non-executive stock options and a negative effect 

of stock holdings on corporate risk taking). 

191See letters from CII, Florida State Board of 

Administration and Public Citizen. 

192See letters from ABA, Business Roundtable, 

Cleary Gottlieb and McDermott. 

193For example, Bettis, Bizjak, and Kalpathy, find 

in two out of three specifications in Table 4 of their 

study a significant positive effect of volatility on the 

probability of executives using derivatives in the 

1996–2006 sample. 

194See, e.g., Nishad Kapadia, Tracking Down 

Distress Risk, 102 J. Fin. Econ. 167 (2011). 

195See, e.g., Sarah Lane & Martha Schary, 

Understanding the Business Failure Rate, 9 

Contemp. Econ. Pol’y 93 (1991); See id. 

196While EGCs may have higher companyspecific risk, be smaller on average, and have more 

exposure to market risk, as Kapadia notes, growth 

companies have less exposure to aggregate distress 

risk than more mature companies, holding constant 

the effects of size and exposure to market risk. 

197See letters from CII and Florida State Board of 

Administration. 

198Officers and directors can hedge by, for 

example, entering into exchange-traded or over-thecounter derivative contracts. When the underlying 

stock is illiquid, the price of the derivative contract 

likely reflects the higher risk and cost that would 

be required to dynamically replicate the exposure 

of the derivatives contracts by trading in the 

underlying stock. 

199To our knowledge, studies have not 

conclusively determined whether insiders of 

smaller companies tend to hedge more often. For 

example, Bettis, Bizjak, and Lemmon (2001) find a 

total of 87 zero-cost collar transactions, one method 

of executive hedging, by searching Forms 3, 4 and 

5 filed between January 1996 and December 1998. 

Companies in this sample have total assets with a 

mean (median) value of $3.4 billion ($401 million). 

These companies are much smaller than S&P 500 

companies over the same time period, whose total 

assets have mean (median) of $16.15 billion ($3.84 

billion) based on our calculation. This comparison 

indicates that hedging by zero-cost collars is more 

frequent in smaller companies. See J. Carr Bettis, 

John Bizjak & Michael Lemmon, Managerial 

Ownership, Incentive Contracting, and the Use of 

Zero-Cost Collars and Equity Swaps by Corporate 

Insiders, 36 J. Fin. & Quantitative Analysis No. 3, 

345 (2001). At the same time, liquidity may also 

affect the ability to hedge. 

Bettis, Bizjak, and Kalpathy (2015) state that 

‘‘smaller firms may not have enough market 

liquidity for investment banks to either structure 

these instruments or hedge their own risk 

exposure.’’ Table 4 of their study reports a 

statistically significant positive relation between 

larger company size and the probability of 

executives using derivatives, but the effect becomes 

either statistically insignificant or only significant 

at the 10% level in specifications incorporating 

additional covariates. 

officers.189 Further, individual rankand-file employees are unlikely to have 

a notable impact on the company’s 

equity market value. 

Nevertheless, while a decision by a 

single non-executive employee is 

unlikely to affect the stock price, the 

combined actions of non-executive 

employees motivated by equity 

incentives may have a significant effect 

on the company.190 Several commenters 

stated that it is important to require 

disclosure of hedging policies for all 

employees, asserting that such 

information is useful, whether or not the 

employees are officers of the 

company.191 However, several other 

commenters stated that information 

about hedging below the executive level 

is not material to shareholders since 

non-executive employees do not make 

or shape key operating and strategic 

decisions that influence the company’s 

stock price.192 Importantly, the rule 

requires disclosure of a company’s 

hedging practices or policies but does 

not require the practices or policies to 

be the same for officers as for other 

employees or to cover any category of 

employees. 

While the potential benefits discussed 

above may apply to investors in all 

companies subject to the final 

amendments, the magnitude of the 

benefits may vary across companies. 

The potential benefits of the new 

disclosure could be higher for 

shareholders of EGCs and SRCs, which 

are not presently subject to Item 

402(b)(2)(xiii) with respect to named 

executive officer hedging policies and a 

relatively smaller proportion of such 

companies presently discloses hedging 

practices or policies. In turn, investors 

in companies that currently disclose 

hedging policies may be unlikely to 

realize significant additional benefits 

from the prescribed disclosure or 

changes in hedging policies as a result 

of the final amendments. 

The potential benefits to investors 

also will depend on the likelihood that 

officers and directors engage in hedging 

transactions. Information about hedging 

policies may be more relevant to 

investors in companies for which there 

are stronger incentives for employees 

and directors to hedge. The evidence on 

which types of companies are likely to 

have stronger incentives to hedge is 

inconclusive. For example, we expect 

the benefits of the new disclosure to be 

higher for shareholders of companies 

with volatile stock prices and a higher 

risk of stock price decline because such 

companies’ employees and directors 

may have relatively stronger incentives 

to hedge.193 This category of companies 

is likely to include EGCs and SRCs 

because smaller companies have 

generally been linked to greater distress 

risk.194 Additionally, since company age 

is among the most important predictors 

of failure, younger companies such as 

EGCs are more likely to have a higher 

risk of financial distress.195 EGCs also 

tend to have more growth 

opportunities,196 riskier cash flows, and 

fewer financial resources. Some 

commenters stated that SRCs and EGCs 

have greater exposure to market risk and 

that, as a result, officers and directors of 

these companies may use hedging 

transactions more often, and therefore 

the value of hedging policy disclosure to 

investors in these companies may be 

greater.197 However, because it is 

costlier to hedge the risk of illiquid 

stocks,198 officers and directors of these 

companies may instead be less likely to 

engage in hedging. Thus, the potential 

benefits of the new disclosure could 

instead be lower for investors in smaller 

companies or those companies not 

listed on a national securities exchange. 

Overall, the effects of greater risk and 

lower liquidity associated with small 

cap stocks on hedging practices may 

partly offset one another.199

b. Costs 

The costs of complying with the final 

amendments include direct costs of 

preparing the disclosures they require as 

well as potential indirect costs. 

The costs are expected to be lower for 

companies that already disclose some of 

the information that will be required by 

Item 407(i), most notably for companies 

subject to Item 402(b)(2)(xiii). As part of 

the final amendments, we are adding an 

instruction to Item 402(b) providing that 

a company may, in certain 

circumstances, satisfy its CD&A 

obligation to disclose any material 

policies on hedging by named executive 

officers by cross-referencing the 

information disclosed pursuant to Item 

407(i), if the disclosure would satisfy 

the Item 402(b) requirement. This 

approach could reduce potentially 

duplicative disclosure under the 

existing Item 402(b) requirements and 

the new Item 407(i) requirements, 

thereby reducing issuers’ cost of 

compliance with the final amendments. 

As discussed above, companies that 

do not currently provide any hedging 


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200Some SRCs would incur relatively lower costs 

of complying with the Item 407(i) disclosure. In 

particular, those non-EGCs that were subject to Item 

402(b) prior to the 2018 SRC amendments but that 

newly qualified for SRC status under the amended 

definition might already have incurred the cost of 

complying with named executive officer hedging 

disclosure, if material, in prior years and thus may 

have systems in place for making such disclosures 

as to named executive officers, resulting in lower 

ongoing costs of complying with Item 407(i). See 

also note 159, above. 

201See letters from ABA and SCSGP. 

202 Id. 

203See Section VII, below. 

204See Section VII, below. 

205See, e.g., letters from ABA, Cleary Gottlieb, 

Davis Polk, McDermott, and SCSGP. 

206See letter from Davis Polk. 

207See letters from ABA, Cleary Gottlieb, Davis 

Polk, and SCSGP. 

policy disclosure will incur relatively 

higher costs of complying with Item 

407(i). The costs are expected to be 

highest for EGCs and SRCs, which are 

not subject to Item 402(b)(2)(xiii).200

These companies will incur costs of 

disclosing the information required by 

Item 407(i) in proxy or information 

statements. Some commenters stated 

that, since EGCs and SRCs are not 

required to provide CD&A disclosure, 

they are less likely to have hedging 

policies in place, and implementation 

for these companies would impose costs 

that are disproportionate to the benefits 

to be obtained.201 These commenters 

also stated that the EGCs and SRCs may 

not have the resources to develop 

hedging policies or implement 

compliance programs, which may 

involve compensation for consultants 

and legal counsel.202 We recognize that 

direct, as well as indirect, costs of the 

disclosure requirement, which are 

discussed in detail below, are likely to 

be greater for EGCs and SRCs. We note, 

however, that under the final 

amendments, companies are not 

required to develop hedging practices or 

policies and can instead disclose the 

fact that they do not have practices or 

policies regarding hedging or state the 

hedging transactions are generally 

permitted, which may enable such 

companies to decrease some of these 

potential costs (although companies 

disclosing that they have no practices or 

policies regarding hedging may still 

incur some costs). 

On average, we expect the direct costs 

of the final amendments to be relatively 

modest, and potentially lower than the 

costs would have been under the 

proposed amendments, especially 

because it should be less burdensome to 

provide clarity as to the scope of the 

company’s practices or policies 

regarding hedging transactions. As 

discussed in Section III.A.3 above, in 

recognition of commenters’ concerns 

about implementation challenges, the 

final amendments require filers to 

disclose their practices or policies 

regarding hedging transactions. To 

satisfy this obligation, the company will 

be required either to provide a fair and 

accurate summary of the practices or 

policies that apply, including the 

categories of persons to which they 

apply and any categories of transactions 

that are specifically permitted or 

specifically disallowed, or to disclose 

the practices or policies in full. If the 

company does not have any such 

practices or policies, the company must 

disclose that fact or state that hedging 

transactions are generally permitted. By 

reducing the complexity of the 

disclosure, this change from the 

proposal is expected to potentially 

reduce filer costs of preparing 

disclosures and investor costs of 

interpreting these disclosures. 

While we cannot quantify these 

disclosure costs with precision, many of 

the direct costs reflect the burden 

associated with collection and reporting 

of information that we estimate for 

purposes of the Paperwork Reduction 

Act (‘‘PRA’’). For purposes of the PRA, 

the Commission estimated in the 

Proposing Release that the amendments 

would result in an average incremental 

paperwork burden of three hours per 

filing of a proxy or information 

statement in the first three years of the 

amendments.203 We did not receive 

comment on these estimates. However, 

because the final amendments focus on 

the disclosure of a company’s particular 

practices or policies regarding hedging, 

we anticipate that compliance with the 

final amendments will be easier and 

more straightforward, resulting in 

potentially lower compliance burdens. 

If the company does not have any such 

practices or policies, the company must 

disclose that fact or state that hedging 

transactions are generally permitted. 

Thus, for purposes of the PRA, the final 

amendments are expected to result in an 

average incremental paperwork burden 

of two hours per proxy or information 

statement filing in the first year that a 

filer is subject to the amendments and 

one hour per filing in subsequent years. 

This estimate is less than the estimated 

burdens of the approach in the 

Proposing Release, which we estimated 

would have been five hours per filing in 

the first year that a filer is subject to the 

amendments and two hours per filing in 

subsequent years that a filer is subject 

to the amendments.204

Indirect costs may also be incurred by 

some companies to the extent that 

companies adopt new, or revise 

existing, hedging policies in 

anticipation of complying with the 

amendments, given the public nature of 

the disclosure required by Item 407(i). 

As discussed above, these indirect costs 

may be greater for companies that do 

not presently disclose practices or 

policies regarding hedging. These 

indirect costs could include potential 

costs associated with retaining 

compensation consultants and legal 

counsel, administering a hedging policy, 

and changes to the incentive structure 

within the company that may result 

from changes to the hedging policy. 

Several commenters suggested that 

companies may feel compelled to adopt 

or modify hedging policies in light of 

the new disclosure requirement.205

Such costs will be affected by the scope 

of hedging policies that companies 

choose to adopt and by company 

characteristics. One commenter asserted 

that limiting the covered persons to 

executive officers would lower costs 

and that costs for compliance and 

enforcement mechanisms for policies 

that cover all employees would vary 

based on the size of a company’s 

employee base, the geographic 

dispersion of employees, and the nature 

of the company’s efforts toward 

ensuring compliance.206 Some 

commenters also indicated that 

excluding non-executive employees 

from the scope of the final amendments 

would lower the burden on 

companies.207

Indirect costs may also be incurred by 

companies that already have optimal 

compensation arrangements but that 

make changes to compensation policies 

that reduce incentive alignment 

between shareholders and officers or 

directors after the final amendments. If 

changes in hedging policies reduce 

incentive alignment between 

shareholders and officers or directors, 

resulting in underinvestment in 

potentially value-enhancing projects, 

they could lead to a reduction in 

shareholder wealth. 

The likelihood that adopting or 

changing hedging policies will distort 

the company’s investment decisions 

may depend on the company’s growth 

opportunities. The incentives of officers 

and directors to make efficient corporate 

investment decisions may be more 

important for shareholder value at 

companies with more growth 

opportunities, such as EGCs and 

potentially SRCs. However, the 

expected effect of hedging restrictions 

on shareholder value at such companies 

is unclear. On the one hand, the 

problem of underinvestment in risky, 

value-enhancing projects as a result of 


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208See letter from ABA. 

209See notes 193–199, above, and accompanying 

text. 

210See also Proposing Release, at 8501 (n. 103 

and accompanying text) and 8503 (n. 111 and 

accompanying text). 

211See letters from ABA, ICI and MFDF. 

212Similar to the proposal, other types of 

registered funds, including closed-end funds not 

listed on an exchange and open-end funds, will 

remain outside the scope of the Item 407(i) 

requirement. 

213See Proposing Release, at 8499. See also 

Youchang Wu, Russ Wermers & Josef Zechner, 

Managerial Rents vs. Shareholder Value in 

Delegated Portfolio Management: The Case of 

Closed-End Funds, 29 Rev. Fin. Stud. 3428–3470 

(2016). 

214See letters from ABA, ICI and MFDF. 

215See letter from ABA dated Oct. 13, 2015. 

216See letters from ABA and SCSGP. 

217Based on calendar year 2017 data, we estimate 

that approximately 5,795 companies will be subject 

to the amendments, of which 2,086 are SRCs under 

the pre-2018 definition (including 1,349 companies 

that were not EGCs), 814 additional companies are 

newly eligible as SRCs under the amended SRC 

definition (including 567 companies that were not 

EGCs), and 1,224 are EGCs. In the aggregate, EGCs 

and SRCs (including companies eligible under the 

amended definition) are estimated to comprise 54% 

of the companies subject to the amendments: (1,349 

SRCs that are not also EGCs + 567 companies 

estimated to be eligible as SRCs under the amended 

definition that are not also EGCs + 1,224 EGCs) = 

3,140. 3,140/5,795 = 54%. See notes 158–160, 

above. 

excess risk aversion of executives may 

have a relatively greater impact on firm 

value at such companies. For instance, 

one commenter argued that executives 

of many EGCs and SRCs have a large 

portion of their personal wealth exposed 

to their company and therefore will be 

more negatively affected if they are 

prohibited from mitigating the exposure 

of their holdings through hedging.208 On 

the other hand, restrictions on hedging 

could strengthen the alignment of 

managerial and shareholder incentives 

by tying executives’ wealth more closely 

to share price. The extent of the 

potential cost resulting from the 

distortion of corporate investment 

incentives also may depend on the 

likelihood that officers and directors 

engage in hedging transactions. As 

discussed above, evidence on executive 

hedging at small companies is mixed.209

These factors make it difficult to predict 

whether small and growth companies, 

such as SRCs and EGCs, will incur a 

larger or a smaller indirect cost, should 

such companies implement hedging 

policies after the final amendments. 

To the extent that the final 

amendments may lead some companies 

to implement or revise hedging policies, 

the rule also could impose costs on 

affected employees and directors by 

limiting their ability to achieve optimal 

portfolio allocations and potentially 

resulting in a lower risk-adjusted 

performance of their holdings. In turn, 

restrictive hedging practices and 

policies may affect employees’ and 

directors’ willingness to work for such 

companies, which may adversely affect 

the ability of some companies to attract 

and retain employees and directors, 

resulting in potential costs to such 

companies and their shareholders. The 

ability or inability to engage in hedging 

under a company’s policy may be taken 

into account as part of the negotiation 

of the total level of compensation 

between companies and employees or 

directors. It is difficult to determine the 

relative magnitude of these effects and 

whether companies will offer higher 

(lower) compensation in consideration 

of a restrictive (permissive) hedging 

policy.210 This might depend, for 

instance, on the distribution of the 

bargaining power between the company 

and current and prospective employees 

and directors, as well as on the nature 

of labor market conditions in a specific 

industry and with regard to specific 

occupations and types of employees. 

c. Exclusion of Listed Closed-End Funds 

In a change from the proposal, after 

consideration of public comments,211

the final amendments do not apply to 

listed closed-end funds.212 While this 

change reduces the overall costs of the 

rule, it may also reduce the overall 

benefits of the rule due to the potential 

relevance of information about the 

alignment of incentives of shareholders 

and those of employees and directors of 

closed-end funds.213 However, we 

expect that the Item 407(i) disclosure 

would be less useful for investors in 

such funds compared to investors in 

operating companies because closedend funds, like other registered 

investment companies, differ from 

operating companies with respect to 

management structure, regulatory 

regime, and disclosure obligations. In 

particular, almost all funds are 

externally managed, with portfolio 

managers generally employed and 

compensated by the fund’s investment 

adviser. This attenuates the relation 

between incentives of fund employees 

and fund performance and makes the 

disclosure of employee hedging policies 

less useful for investors. 

While the disclosure of hedging 

policies applicable to directors of listed 

closed-end funds might potentially be 

informative, since directors oversee the 

fund’s investment advisers and other 

service providers, based on evaluating 

input from commenters,214 we do not 

believe that such potential benefits are 

likely to be significant. 

d. Disclosure in Schedule 14C 

Similar to the proposal, the final 

amendments will require Item 407(i) 

disclosure in Schedule 14C, in addition 

to Schedule 14A. This was supported by 

a commenter.215 Requiring Item 407(i) 

disclosure in Schedule 14C will extend 

the economic effects of the amendments 

to Section 12 registrants that do not 

solicit proxies from any or all security 

holders but are otherwise authorized by 

security holders to take an action with 

respect to the election of directors. 

While this provision will increase the 

overall costs of the rule, it also will 

provide additional information to 

investors and promote consistency of 

disclosure requirements in the context 

of an action authorized by shareholders 

with respect to the election of directors. 

e. Compliance Dates 

As discussed above, SRCs and EGCs 

currently disclose less information 

about hedging practices or policies than 

other types of filers. Under the final 

amendments, registrants will be 

required to provide disclosure about 

whether they have practices or policies 

regarding hedging by employees 

(including officers) and directors. In a 

change from the proposal, after 

considering the concerns of some 

commenters about the burden of 

complying with the disclosure 

requirement for SRCs and EGCs,216 we 

are adopting a delayed compliance date 

for these companies. SRCs and EGCs 

will be required to comply with the rule 

for fiscal years beginning on or after July 

1, 2020, one year after the compliance 

date for the remaining filers subject to 

the final amendments.217 A delayed 

compliance date will defer the potential 

benefits of the final amendments for 

investors in SRCs and EGCs that choose 

to utilize the delayed compliance date. 

However, a delayed compliance date is 

also expected to defer the costs of the 

final amendments for such SRCs and 

EGCs. We expect that deferring the 

compliance date by one year will allow 

SRCs and EGCs to observe how Item 

407(i) operates in practice for other, 

larger and more established companies, 

which may incrementally reduce the 

costs associated with initially preparing 

the required disclosure. 

2. Efficiency, Competition, and Capital 

Formation 


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218See Section VII, below. 

219See Proposing Release, at 8504. 

220See note 179, above. 

221See Proposing Release, at 8504. 

222See letters from CII, Florida State Board of 

Administration and Public Citizen. 

223See letters from ABA and SCSGP. 

224See letters from CFA Institute, CII, Florida 

State Board of Administration and Public Citizen. 

225See Section III.D.3.c.i., above. 

As discussed above, the final 

amendments may make it easier for 

investors to obtain information about 

hedging practices and policies. To the 

extent that the Item 407(i) disclosure 

yields new information, or makes it 

easier for investors to obtain 

information that is relevant for gauging 

the extent of incentive alignment of 

employees and directors with the 

interests of shareholders, the final 

amendments may facilitate better 

informed voting decisions. To the extent 

the disclosure has the ancillary effect of 

enabling investors to make more 

informed investment decisions, it may 

also potentially incrementally improve 

the efficiency of capital allocation. 

The direct disclosure costs incurred 

by Section 12 registrants to comply with 

the final amendments are expected to be 

relatively modest.218 While such costs 

may vary across companies and may 

have a relatively greater impact on 

smaller companies, after considering 

public comment, we continue to believe 

that these costs are unlikely to put any 

category of companies at a significant 

competitive disadvantage, as the 

Commission stated in the Proposing 

Release.219 In recognition of the fact that 

SRCs and EGCs may benefit from 

observing how Item 407(i) operates in 

practice for other, larger and more 

established companies, in a change from 

the proposal we are adopting a delayed 

compliance date that provides SRCs and 

EGCs with an additional year to comply. 

We expect this accommodation to 

facilitate compliance with the final 

amendments for EGCs and SRCs, which 

would include smaller filers. 

However, as discussed above, the 

effects of the final amendments may 

vary from company to company. We 

further recognize that some companies 

may incur indirect costs if, as a result 

of the final rule, they choose to 

implement new, or revise existing, 

practices or policies regarding hedging 

by employees and directors, as 

discussed above. To the extent that any 

such new or revised practice or policy 

would restrict corporate insiders from 

hedging, those insiders could engage in 

less efficient corporate investment 

decisions resulting in lower shareholder 

value, and such changes could 

potentially lead to additional costs for 

some companies. However, these 

potential indirect costs may be limited 

for some companies that find other 

means of promoting investment in risky 

but value-enhancing projects to be costeffective.220 After considering 

commenter input, although we 

acknowledge that smaller companies 

may be incrementally more affected by 

the costs of the new disclosure 

requirement, we continue to believe, 

consistent with what the Commission 

stated in the Proposing Release,221 that 

the amendments should not have 

significant adverse effects on the overall 

competitiveness of the labor market for 

employees and directors, competition 

among U.S. companies or between U.S. 

companies and FPIs, or the ability of 

private companies to go public. 

3. Reasonable Alternatives 

Consistent with the statutory mandate 

of Section 14(j), and as proposed, the 

final amendments will require 

disclosure of hedging practices and 

policies pertaining to ‘‘any employees 

(including officers) or directors of the 

registrant, or any of their designees.’’ As 

an alternative, we considered limiting 

the required disclosure to hedging 

practices and policies pertaining to 

executive officers and directors only. 

Compared to the final amendments, this 

alternative could reduce costs for 

registrants that do not presently disclose 

practices or policies regarding hedging 

by non-executive employees. Compared 

to the final amendments, this alternative 

could also reduce the amount of 

information available to shareholders 

about the incentives of non-executive 

employees, which may be valuable to 

some shareholders in gauging the extent 

of incentive alignment, as supported by 

several commenters.222

As an alternative to requiring Item 

407(i) disclosure on Schedule 14C 

information statements as well as 

Schedule 14A proxy statements, we 

considered requiring it only in proxy 

statements. This would reduce the 

disclosure burden on companies that do 

not solicit proxies from any or all 

security holders but are otherwise 

authorized by security holders to take 

an action with respect to the election of 

directors. However, requiring Item 

407(i) disclosure in information 

statements provides consistency in 

hedging disclosures between proxy 

statements and information statements, 

so that the disclosure could be made to 

all shareholders when a company does 

not solicit proxies from any or all 

security holders but is otherwise 

authorized by security holders to take a 

corporate action with respect to the 

election of directors. Excluding the Item 

407(i) disclosure from information 

statements under this alternative would 

reduce the benefit of availability of 

information about hedging policies to 

shareholders in those cases. 

We also considered extending the 

disclosure requirement to all Form 10– 

K filings in order to impose consistent 

disclosure obligations upon all 

registrants, irrespective of whether they 

file proxy or information statements. 

While extending the Item 407(i) 

requirement to companies that do not 

solicit proxies or information statements 

would not result in a more informed 

evaluation of corporate governance in 

the context of director elections, this 

alternative could result in potentially 

more informed investment decisions. 

However, this alternative also would 

increase the disclosure obligations for 

companies that do not solicit proxies or 

file information statements. 

As another alternative, we considered 

exempting EGCs and SRCs. As 

discussed in Section VI.B above, EGCs 

and SRCs currently are not subject to 

Item 402(b)(2)(xiii) and a relatively 

smaller proportion of such companies 

presently discloses hedging policies. 

Thus, EGCs and SRCs may incur higher 

costs of complying with Item 407(i). 

Providing such companies with an 

exemption from Item 407(i), as 

suggested by some commenters,223 may 

reduce or defer costs for these entities. 

However, this alternative would also 

eliminate the potential benefits to 

investors in such companies, as 

suggested by several commenters that 

did not support an exemption from the 

proposed requirement for EGCs and 

SRCs.224 Because currently a relatively 

smaller proportion of such companies 

discloses hedging policies, the potential 

incremental informational benefits from 

Item 407(i) are expected to be greater for 

shareholders of EGCs and SRCs than for 

shareholders of companies presently 

subject to Item 402(b). 

We have discussed above the tradeoffs 

associated with excluding listed closedend funds from the scope of the final 

amendments, in a change from the 

proposal.225 As another alternative, we 

considered extending the Item 407(i) 

requirement to open-end registered 

investment companies. This alternative 

poses similar tradeoffs. Compared to the 

final amendments, it would impose 

costs on these companies. The 

disclosure also would yield minimal 

benefits to investors given the distinct 

regulatory and management structure of 

such funds. As discussed in the 

Proposing Release, the benefits are 


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226See Proposing Release, at 8504. See also letters 

from ABA, ICI and MFDF. 

227 44 U.S.C. 3501 et seq. 

228 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

229The paperwork burden from Regulation S–K is 

imposed through the forms that are subject to the 

disclosure requirements in Regulation S–K and is 

reflected in the analysis of these forms. To avoid a 

Paperwork Reduction Act inventory reflecting 

duplicative burdens, for administrative 

convenience we estimate the burden imposed by 

Regulation S–K to be a total of one hour. 230 Instruction 6 to Item 402(b). 

231Our estimates represented the average burden 

for all companies, both large and small. 

232See the 2006 Executive Compensation 

Disclosure Release. 

expected to be attenuated in cases of 

mutual funds whose shares do not have 

a trading market and are redeemed at 

the NAV; ETFs that trade on the 

secondary market at prices closest to the 

NAV; or any open-end fund shares that 

have a secondary trading market with 

low liquidity, which increases hedging 

costs, deterring hedging by employees 

and directors.226

VII. Paperwork Reduction Act 

A. Background 

Certain provisions of the final 

amendments contain ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995 (the ‘‘PRA’’).227 We 

published a notice requesting comment 

on the collection of information 

requirements in the Proposing Release 

for the rule amendments, and we 

submitted these collections of 

information requirements to the Office 

of Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA.228

The titles for the collections of 

information are: 

(1) ‘‘Regulation 14A and Schedule 

14A’’ (OMB Control No. 3235–0059); 

(2) ‘‘Regulation 14C and Schedule 

14C’’ (OMB Control No. 3235–0057); 

and 

(3) ‘‘Regulation S–K’’ (OMB Control 

No. 3235–0071).229

Regulation S–K was adopted under 

the Securities Act and Exchange Act; 

Regulations 14A and 14C and the 

related schedules were adopted under 

the Exchange Act. The regulations and 

schedules set forth the disclosure 

requirements for proxy and information 

statements filed by companies to help 

investors make informed investment 

and voting decisions. The hours and 

costs associated with preparing, filing 

and sending the schedule constitute 

reporting and cost burdens imposed by 

each collection of information. An 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid OMB control 

number. Compliance with the final rule 

will be mandatory for affected 

companies. Responses to the 

information collection will not be kept 

confidential, and there will be no 

mandatory retention period for the 

information disclosed. 

B. Summary of Information Collections 

We are adopting new paragraph (i) to 

Item 407 of Regulation S–K to 

implement Section 14(j) of the Exchange 

Act, as added by Section 955 of the Act. 

As discussed in more detail above, Item 

407(i), as adopted, requires disclosure of 

the company’s practices or policies 

regarding the ability of employees 

(including officers) or directors of the 

company, or 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 

company equity securities that are 

granted to them as compensation, or 

that are held, directly or indirectly, by 

them. The company will be required 

either to provide a fair and accurate 

summary of the practices or policies 

that apply or to disclose the practices or 

policies in full. If the company does not 

have any such practices or policies, it 

must disclose that fact or state that 

hedging transactions are generally 

permitted. Pursuant to the amendments 

to Item 7 of Schedule 14A, this new 

disclosure is required in proxy or 

consent solicitation materials with 

respect to the election of directors, or 

information statements in the case of 

such corporate action authorized by the 

written consent of security holders. 

In addition, to reduce potentially 

duplicative disclosure between new 

Item 407(i) and the existing requirement 

for CD&A under Item 402(b) of 

Regulation S–K, we are amending Item 

402(b) to add an instruction providing 

that a company may satisfy its 

obligation to disclose material policies 

on hedging by named executive officers 

in the CD&A by cross-referencing the 

information disclosed pursuant to new 

Item 407(i) to the extent that the 

information disclosed there satisfies this 

CD&A disclosure requirement.230 This 

new instruction, like the new Item 

407(i) disclosure requirement, applies to 

the company’s proxy or information 

statement with respect to the election of 

directors. 

C. Burden and Cost Estimates Related to 

the Amendments 

New Item 407(i) requires additional 

disclosure in proxy statements filed on 

Schedule 14A with respect to the 

election of directors and information 

statements filed on Schedule 14C where 

such corporate action is taken by the 

written consents or authorizations of 

security holders, and thus increases the 

burden hour and cost estimates for each 

of those forms. For some filers, this may 

be mitigated to some extent by a 

minimal reduction in the burden to 

prepare their CD&A, as they would be 

permitted to instead cross reference the 

disclosure in Item 407(i). The 

amendment to the CD&A requirement 

under Item 402(b) would not be 

applicable to SRCs or EGCs because 

under current CD&A reporting 

requirements these companies are not 

required to provide CD&A in their 

Commission filings. For all other 

issuers, we do not expect this 

amendment would materially affect the 

disclosure burden associated with their 

Commission filings. We have taken this 

amendment into account in our 

estimates below. 

In the Proposing Release, for purposes 

of the PRA, we estimated the total 

annual increase in the paperwork 

burden for all affected issuers to comply 

with our proposed collection of 

information requirements, averaged over 

the first three years, to be approximately 

19,238 hours of in-house personnel time 

and approximately $2,565,200 for the 

services of outside professionals.231 We 

did not receive substantive comments 

on the PRA that would affect this 

analysis. These estimates include the 

time and cost of collecting and 

analyzing the information, preparing 

and reviewing disclosure, and filing the 

documents. 

In deriving our estimates, we assumed 

that the information that new Item 

407(i) requires to be disclosed would be 

readily available to the management of 

a company because it only requires 

disclosure of practices or policies they 

already have but does not direct them to 

have a practice or policy or dictate the 

content of such a practice or policy. 

Nevertheless, we used burden estimates 

similar to those used in the 2006 

Executive Compensation Disclosure 

Release for updating Schedules 14A and 

14C, which we believe were more 

extensive.232 Since the first year of 

compliance with the amendment is 

likely to be the most burdensome 

because companies are not likely to 

have compiled this information in this 

manner previously, we assumed it 

would take five total hours per form the 

first year and two total hours per form 

in all subsequent years. 


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233 (0 + 2 + 1)/3 = 1.0. 

234 (2 + 1 + 1)/3 = 1.3. 

235Rounding affects totals. 

236For Schedules 14A and 14C, the number of 

responses reflected in the table equals the threeyear average of the number of schedules filed with 

the Commission and currently reported by the 

Commission to OMB. 

237We estimate that 54% of the filers subject to 

the amendments will have an additional year to 

comply. See note 217 above. We therefore assume 

that approximately 46% (100%¥54%) of the filings 

will be subject to the amendments in the first year. 

We recognize that filers that receive an additional 

year to comply may account for a lower or higher 

proportion of filings than estimated, thus these 

estimates are approximate. 

Accordingly, we estimated that the 

proposed amendments would increase 

the burden hour and cost estimates per 

company by an average of three total 

hours per year over the first three years 

the amendments are in effect for each 

Schedule 14A or Schedule 14C with 

respect to the election of directors. 

The final amendments incorporate 

some changes from the proposal. In 

particular, the proposal would have 

required every company to disclose the 

categories of hedging transactions it 

permits and those it prohibits, and to 

specify those categories of persons who 

are permitted to engage in hedging 

transactions and those who are not. In 

contrast, the final amendments require 

disclosure of a company’s practices or 

policies regarding hedging transactions, 

including the categories of persons 

covered and any categories of hedging 

transactions that are specifically 

permitted or specifically disallowed. A 

company will be required either to 

provide a fair and accurate summary, or 

to disclose the practices or policies in 

full. Because we anticipate that this 

change in emphasis may make 

compliance easier and more 

straightforward, we expect it to affect 

the burden hour and cost estimates per 

company. Accordingly, we estimate that 

the amendments will instead increase 

the burden hour and cost estimates per 

company by two hours per form in the 

first year and one hour per form in all 

subsequent years. As discussed in 

Section III.D.4.c.ii above, in a change 

from the proposal, we are providing 

SRCs and EGCs with an additional year 

to comply with the amendments. 

Therefore, we adjust the aggregate 

annual average burden during the first 

three years of the amendments to 

account for the phase-in. Companies 

eligible for an extended compliance date 

will incur no burden in the first year of 

the amendments, two burden hours to 

prepare each Schedule 14A or Schedule 

14C filing in the second year, and one 

burden hour per filing in the third year, 

for an average of 1.0 total hour per year 

over the first three years of the 

amendments for each Schedule 14A or 

14C with respect to the election of 

directors.233 Companies that are not 

eligible for the extended compliance 

date will incur an average of 1.3 total 

hours per year over the first three years 

of the amendments for each Schedule 

14A or 14C with respect to the election 

of directors.234

In another change from the proposal, 

the final rules exclude listed closed-end 

funds. We anticipate that this change 

will reduce the number of affected 

companies from the proposal, and the 

numbers in the table below reflect that 

reduction, as well as more recent 

numbers of affected companies 

compared with the numbers in the 

Proposing Release. 

We recognize that the burdens may 

vary among individual companies based 

on a number of factors, including the 

size and complexity of their 

organizations, whether they have 

adopted practices or policies regarding 

hedging, and complexity of those 

practices or policies. 

The table below shows the average 

aggregate compliance burden, in hours 

and in costs, of the collection of 

information pursuant to new Item 407(i) 

of Regulation S–K, in the first three 

years of compliance with the 

amendments. The burden estimates 

were calculated by multiplying the 

estimated number of responses by the 

estimated average amount of time it 

would take a company to prepare and 

review the new disclosure requirements. 

The portion of the burden carried by 

outside professionals is reflected as a 

cost, while the portion of the burden 

carried by the company internally is 

reflected in hours. For purposes of the 

PRA, we estimate that 75% of the 

burden of preparation of Schedules 14A 

and 14C is carried by the company 

internally and that 25% of the burden 

of preparation is carried by outside 

professionals retained by the company 

at an average cost of $400 per hour. 

There is no change to the estimated 

burden of the collections of information 

under Regulation S–K because the 

burdens that this regulation imposes are 

reflected in our burden estimates for 

Schedule 14A and 14C. 

TABLE 2—INCREMENTAL PAPERWORK BURDEN UNDER THE AMENDMENTS AFFECTING SCHEDULES 14A AND 14C—THREEYEAR AVERAGE COSTS 235

Number of responses 

Incremental 

burden hours/ 

form 

Total 

incremental 

burden hours 

Internal 

company 

time 

External 

professional 

time 

External 

professional 

costs 

(A) 236 (B) (C) = (A) * (B) (D) = (C) * 

0.75 

(E) = (C) * 

0.25 

(F) = (E) * 

$400 

Sch. 14A .............................................. 5,586 ................................................... ........................ ........................ ........................ ........................ ........................

Filers eligible for an extended compliance date 237.

5,586 * 0.54 = 3,016 ........................... 1.0 3,016 2,262 754 $301,600 

Filers not eligible for an extended 

compliance date.

5,586 * 0.46 = 2,570 ........................... 1.3 3,341 2,505.75 835.25 334,100 

Sch. 14A total ............................... 5,586 ................................................... ........................ 6,357 4,767.75 1,589.25 635,700 

Sch. 14C .............................................. 569 ...................................................... ........................ ........................ ........................ ........................ ........................

Filers eligible for an extended compliance date.569 * 0.54 = 307 ................................. 1.0 307.0 230.25 76.75 30,700 

Filers not eligible for an extended 

compliance date.

569 * 0.46 = 262 ................................. 1.3 340.6 255.45 85.15 34,060 

Sch. 14C total ............................... 569 ...................................................... ........................ 647.6 485.7 161.9 64,760 

Sch. 14A and Sch. 14C Total 6,155 ................................................... ........................ 7,004.6 5,253.45 1,751.15 700,460 


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238 5 U.S.C. 603. 

239See Senate Report 111–176. 

240See letters from CFA Institute, CII, Florida 

State Board of Administration and Public Citizen. 

241See letters from ABA and SCSGP. 

242See letters from CFA Institute, CII and Public 

Citizen. 

243 5 U.S.C. 601(6). 

244 17 CFR 240.0–10(a). 

245This estimate is based on staff analysis of 

XBRL data submitted by filers, excluding coregistrants, with EDGAR filings of Forms 10–K filed 

during the calendar year of January 1, 2017 to 

December 31, 2017. 

246 17 CFR 270.0–10(a). 

247This estimate is based on staff analysis of 

Morningstar data and data submitted by filers on 

EDGAR that covered the period between April 1, 

2018 and June 30, 2018. 

VIII. Final Regulatory Flexibility Act 

Analysis 

The Commission has prepared the 

following Final Regulatory Flexibility 

Analysis in accordance with the 

Regulatory Flexibility Act.238 This 

analysis relates to the adoption of new 

Item 407(i) of Regulation S–K and 

related amendments. An Initial 

Regulatory Flexibility Analysis 

(‘‘IRFA’’) was prepared in accordance 

with the Regulatory Flexibility Act and 

included in the Proposing Release. 

A. Need for, and Objectives of, the 

Amendments 

The amendments are designed to 

implement Section 14(j), which was 

added to the Exchange Act by Section 

955 of the Act. A report issued by the 

Senate Committee on Banking, Housing, 

and Urban Affairs stated that Section 

14(j) is intended to ‘‘allow shareholders 

to know if executives are allowed to 

purchase financial instruments to 

effectively avoid compensation 

restrictions that they hold stock longterm, so that they will receive their 

compensation even in the case that their 

firm does not perform.’’ 239 Consistent 

with the mandate in Section 14(j), the 

amendments will provide transparency 

to shareholders at the time of an annual 

meeting, which is when directors are 

elected, about whether employees or 

directors may engage in transactions 

that mitigate or avoid the incentive 

alignment associated with equity 

ownership. The need for, and objectives 

of, the final amendments are discussed 

in more detail in Sections I through III 

above. 

B. Significant Issues Raised by Public 

Comments 

In the Proposing Release, we 

requested comments on every aspect of 

the IRFA, including the number of small 

entities that would be affected by the 

proposed amendments, the existence or 

nature of the potential impact of the 

proposals on small entities discussed in 

the analysis, and how to quantify the 

impact of the proposed amendments. 

We did not receive any comments 

explicitly addressing the IRFA. As 

discussed more fully above in Section 

III.D.4.b., comments on whether EGCs or 

SRCs should be subject to the proposed 

amendments were mixed, with four 

commenters opposing an exemption 

from the disclosure obligation for EGCs 

and SRCs 240 and two commenters 

recommending exempting them from 

the new disclosure requirement.241

While the latter commenters believed 

that applying the new disclosure 

requirement to EGCs and SRCs would 

impose costs that are disproportionate 

to the benefits to be obtained, other 

commenters did not expect the new 

disclosure requirement to impose a 

significant compliance burden on EGCs 

and SRCs.242

C. Small Entities Subject to the 

Amendments 

The amendments affect some 

companies that are small entities. The 

Regulatory Flexibility Act defines 

‘‘small entity’’ to mean ‘‘small 

business,’’ ‘‘small organization,’’ or 

‘‘small governmental jurisdiction.’’ 243

The Commission’s rules define ‘‘small 

business’’ and ‘‘small organization’’ for 

purposes of the Regulatory Flexibility 

Act for each of the types of entities 

regulated by the Commission. Exchange 

Act Rule 0–10(a) 244 defines a company, 

other than an investment company, to 

be a ‘‘small business’’ or ‘‘small 

organization’’ if it had total assets of $5 

million or less on the last day of its most 

recent fiscal year. We estimate that there 

are currently 1,144 companies that 

qualify as ‘‘small entities’’ under the 

definitions set forth above.245 We 

estimate that 876 of these small entities 

have a class of securities registered 

under Section 12(b) or 12(g) and 

therefore will be subject to the 

amendments. An investment company, 

including a business development 

company, is considered to be a ‘‘small 

business’’ if it, together with other 

investment companies in the same 

group of related investment companies, 

has net assets of $50 million or less as 

of the end of its most recent fiscal 

year.246 We estimate that there are 

approximately 26 BDCs that will be 

subject to the amendments that may be 

considered small entities.247 We 

solicited comment in the Proposing 

Release on our estimates of the number 

of small entities affected by the 

proposed amendments and did not 

receive any comments on them. 

However, we have adjusted our 

estimates to reflect that, unlike the 

proposed amendments, the final 

amendments will not apply to listed 

closed-end funds. 

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

The amendments add to the proxy 

disclosure requirements of companies, 

including small entities, that file proxy 

or information statements with respect 

to the election of directors, by requiring 

them to provide the disclosure called for 

by the amendments. Specifically, new 

Item 407(i) requires disclosure of 

whether the company has adopted any 

practices or policies regarding the 

ability of any employee or director of 

the company or any designee of such 

employee or director, to purchase 

financial instruments (including 

prepaid variable forward contracts, 

equity swaps, collars, and exchange 

funds) or otherwise engage in 

transactions hedge or offset, or are 

designed to hedge or offset, any 

decrease in the market value of equity 

securities, that are granted to the 

employee or director by the company as 

compensation, or held, directly or 

indirectly, by the employee or director. 

The company will be required either to 

provide a fair and accurate summary of 

the practices or policies that apply, or 

to disclose the practices or policies in 

full. If the company does not have any 

such practices or policies, the company 

must disclose that fact or state that 

hedging transactions are generally 

permitted. The amendments do not 

impose any additional recordkeeping 

requirements on a company. 

The amendments will incrementally 

increase compliance costs for 

registrants, although we do not expect 

these additional costs to be significant. 

In addition, compliance with the 

amendments may require the use of 

professional skills, including legal 

skills. The amendments are discussed in 

detail in Section III above. We discuss 

the economic impact, including the 

estimated compliance costs and 

burdens, of the amendments in Sections 

VI and VII above. 

E. Agency Action To Minimize Effect on 

Small Entities 

The Regulatory Flexibility Act directs 

us to consider alternatives that would 

accomplish our stated objectives, while 

minimizing any significant adverse 

impact on small entities. In connection 

with the amendments, we considered 

the following alternatives: 

• Establishing different compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; 


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248See letters from ABA and SCSGP. 

249See Senate Report 111–176. 

250See letters from ABA and SCSGP. 

• clarifying, consolidating, or 

simplifying compliance and reporting 

requirements under the rules for small 

entities; 

• use of performance rather than 

design standards; and 

• exempting small entities from all or 

part of the requirements. 

In a change from the proposal, the 

final amendments will require 

disclosure of any practices or policies 

adopted by a company regarding 

employees’ or directors’ ability 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 equity 

securities granted to them as 

compensation, or directly or indirectly 

held by them. By focusing on a 

company’s existing practices or policies, 

we believe that the final amendments 

will result in a clearer, more 

straightforward disclosure standard that 

will be easier for all companies, 

especially small entities, to apply. Given 

the straightforward nature of the new 

disclosure, we do not believe that it is 

necessary to further simplify or 

consolidate the disclosure requirement 

for small entities. 

We have used performance standards 

in connection with the amendments by 

requiring disclosure of the practices or 

policies that a company has adopted 

regarding hedging. The company will be 

required either to disclose a fair and 

accurate summary of the practices or 

policies or to disclose the practices or 

policies in full. The amendments do not 

specify any specific procedures or 

arrangements a company must develop 

to comply with the standards, or require 

a company to have or develop a practice 

or policy regarding employee and 

director hedging activities. If the 

company does not have any such 

practices or policies, it must disclose 

that fact or state that hedging 

transactions are generally permitted. 

We considered, but have not adopted, 

an alternative approach of different 

compliance or reporting requirements 

that take into account the resources 

available to small entities. While we 

have not adopted different compliance 

or reporting requirements based on 

company size, we note that the change 

in the rule to provide for disclosure of 

a company’s practices or policies should 

result in reporting that is more tailored 

to each company’s particular 

circumstances and thus may have a 

similar effect to this alternative. 

Two commenters recommended 

exempting EGCs and SRCs from the new 

disclosure requirement, noting that 

these companies may not have hedging 

policies in place.248 We carefully 

considered these comments but are not 

exempting small entities from all or part 

of the amendments. The amendments 

are intended to provide transparency 

regarding whether the company has 

practices or policies regarding the 

ability of employees, directors, or their 

designees to engage in hedging 

transactions that will permit them to 

receive compensation without regard to 

company performance, or will permit 

them to mitigate or avoid the risks 

associated with long-term equity 

security ownership.249 We believe this 

transparency will be just as beneficial to 

shareholders of small companies as to 

shareholders of larger companies. By 

increasing transparency regarding these 

matters, the amendments are designed 

to improve the quality of information 

available to all shareholders, thereby 

promoting informed voting decisions. 

An exemption for small entities may 

interfere with the goal of enhancing the 

information provided by all issuers. We 

also note that the disclosure is expected 

to result in modest additional 

compliance costs for issuers although 

there could be indirect costs for some 

small entities, depending on their 

current hedging policies. Overall, we 

believe that the amendments, as 

adopted, will elicit disclosure about 

relevant hedging practices and policies 

in a manner that is tailored to each 

company’s particular circumstances, so 

as to avoid creating a significant new 

burden for small entities. 

However, in another change from the 

proposal, after considering the concerns 

of some commenters about the burden 

of complying with the disclosure 

requirement for SRCs and EGCs,250 we 

are adopting a delayed compliance date 

for these companies. SRCs and EGCs 

will be required to comply with the rule 

for fiscal years beginning on or after July 

1, 2020, one year after the compliance 

date for the remaining filers subject to 

the final amendments. A delayed 

compliance date will defer the costs of 

the final amendments for SRCs and 

EGCs. We expect that a delayed 

compliance date will allow SRCs and 

EGCs, which would include smaller 

filers, to observe how Item 407(i) 

operates in practice for other, larger and 

more established companies, which may 

incrementally reduce the costs 

associated with initially preparing the 

required disclosure. 

Statutory Authority and Text of the 

Amendments 

The amendments contained in this 

release are being adopted under the 

authority set forth in Section 955 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, and Sections 

14, 23(a) and 36(a) of the Securities 

Exchange Act of 1934, as amended. 

List of Subjects in 17 CFR Parts 229 and 

240 

Reporting and recordkeeping 

requirements, Securities. 

Text of the Amendments 

For the reasons set out in the 

preamble, the Commission amends title 

17, chapter II, of the Code of Federal 

Regulations as follows: 

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975— 

REGULATION S–K 

■ 1. The authority citation for part 229 

continues to read as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78j–3, 78l, 78m, 

78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78 mm, 

80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 80a– 

31(c), 80a–37, 80a–38(a), 80a–39, 80b–11 and 

7201 et seq.; 18 U.S.C. 1350; sec. 953(b), Pub. 

L. 111–203, 124 Stat. 1904 (2010); and sec. 

102(c), Pub. L. 112–106, 126 Stat. 310 (2012). 

■ 2. Section 229.402 is amended by 

adding Instruction 6 to Item 402(b) to 

read as follows: 

§ 229.402 (Item 402) Executive 

compensation. 

* * * * * 

(b) * * * 

Instructions to Item 402(b). * * * 

6. In proxy or information statements 

with respect to the election of directors, 

if the information disclosed pursuant to 

Item 407(i) would satisfy paragraph 

(b)(2)(xiii) of this Item, a registrant may 

refer to the information disclosed 

pursuant to Item 407(i). 

* * * * * 

■ 3. Section 229.407 is amended by 

adding paragraph (i) before the 

Instructions to Item 407 to read as 

follows: 

§ 229.407 (Item 407) Corporate 

governance. 

* * * * * 

(i) Employee, officer and director 

hedging. In proxy or information 

statements with respect to the election 

of directors: 


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2426 Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Rules and Regulations 

(1) Describe any practices or policies 

that the registrant has adopted regarding 

the ability of employees (including 

officers) or directors of the registrant, 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) Granted to the employee or director 

by the registrant as part of the 

compensation of the employee or 

director; or 

(ii) Held, directly or indirectly, by the 

employee or director. 

(2) A description provided pursuant 

to paragraph (1) shall provide a fair and 

accurate summary of the practices or 

policies that apply, including the 

categories of persons covered, or 

disclose the practices or policies in full. 

(3) A description provided pursuant 

to paragraph (1) shall also describe any 

categories of hedging transactions that 

are specifically permitted and any 

categories of such transactions 

specifically disallowed. 

(4) If the registrant does not have any 

such practices or policies regarding 

hedging, the registrant shall disclose 

that fact or state that the transactions 

described in paragraph (1) above are 

generally permitted. 

Instructions to Item 407(i). 

1. For purposes of this Item 407(i), 

‘‘registrant equity securities’’ means 

those equity securities as defined in 

section 3(a)(11) of the Exchange Act (15 

U.S.C. 78c(a)(11)) and § 240.3a11–1 of 

this chapter) that are issued by the 

registrant or by any parent or subsidiary 

of the registrant or any subsidiary of any 

parent of the registrant. 

2. The information required by this 

Item 407(i) will not be deemed to be 

incorporated by reference into any filing 

under the Securities Act or the 

Exchange Act, except to the extent that 

the registrant specifically incorporates it 

by reference. 

* * * * * 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 4. The authority citation for part 240 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 

78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 

78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 

80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 

4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C. 

2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 

1350; and Pub. L. 111–203, 939A, 124 Stat. 

1887 (2010); and secs. 503 and 602, Pub. L. 

112–106, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

■ 5. Section 240.14a–101 is amended 

by: 

■ a. Revising paragraph (b) of Item 7; 

■ b. Removing paragraphs (c) and (d) of 

Item 7; 

■ c. Removing the Instruction to Item 

7(e) of Item 7; 

■ d. Redesignating paragraph (e) as 

paragraph (c) of Item 7; 

■ e. Redesignating Instruction to Item 

7(f) as Instruction to Item 7 and revising 

it; 

■ f. Redesignating paragraph (f) as 

paragraph (d) of Item 7; and 

■ g. Redesignating paragraph (g) as 

paragraph (e) of Item 7. 

The revisions read as follows: 

§ 240.14a–101 Schedule 14A. Information 

required in proxy statement. 

Schedule 14A Information 

* * * * * 

Item 7. Directors and Executive 

Officers. * * * 

(b) The information required by Items 

401, 404(a) and (b), 405 and 407 of 

Regulation S–K (§§ 229.401, 229.404(a) 

and (b), 229.405 and 229.407 of this 

chapter), other than the information 

required by: 

(i) Paragraph (c)(3) of Item 407 of 

Regulation S–K (§ 229.407(c)(3) of this 

chapter); and 

(ii) Paragraphs (e)(4) and (e)(5) of Item 

407 of Regulation S–K (§§ 229.407(e)(4) 

and 229.407(e)(5) of this chapter) 

(which are required by Item 8 of this 

Schedule 14A). 

* * * * * 

Instruction to Item 7. The information 

disclosed pursuant to paragraphs (c) and 

(d) of this Item 7 will not be deemed 

incorporated by reference into any filing 

under the Securities Act of 1933 (15 

U.S.C. 77a et seq.), the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.), or the Investment Company Act of 

1940 (15 U.S.C. 80a–1 et seq.), except to 

the extent that the registrant specifically 

incorporates that information by 

reference. 

* * * * * 

Dated: December 20, 2018. 

By the Commission. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–28123 Filed 2–5–19; 8:45 am] 

BILLING CODE 8011–01–P 


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