On February 9th, 2015 SEC Commissioner Luis A. Aguilar released proposed amendments to Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Issue # 1: Can transparency align equity ownership and shareholder interests?
The amendments introduce a new section – 14(j) – which would enhance transparency by including disclosures that indicate whether employees and members of the board of directors are permitted to engage in transactions to hedge or offset any decrease in the market value of securities granted by their company as compensation – or held directly or indirectly.
Such disclosures would allow investors to fairly evaluate if employees and directors may, or may not, mitigate or circumvent alignment of equity incentives and financial performance.
For example, under the proposed amendment, an investor would be able to assess if a CEO was granted equity under an an incentive compensation plan and was also permitted to offset risk of falling share price by simultaneously holding a short position in his or her Company’s shares. In this case, there could be financial motivation for the CEO to take action (or conversely not take action) that is not aligned with the best interests of shareholders – effectively creating a conflict of interest and moral hazard.
An important distinction: The proposed amendments do not require the issuer to prohibit hedging transactions; nor adopt practices or implement policy that addresses hedging by employees, Named Executive Officers (“NEO”), or Directors. In this respect, the rule is purposefully designed to:
1. Leave corporate policy decisions to the discretion of the board of directors and management
2. Place the responsibility on investors to assess whether, or not, the issuer’s incentives promote value creation, in the form of financial performance and total returns to shareholders (“TRS”)
Issue # 2: Should non-Officer Employees be subject to the same requirements as Directors and NEOs?
The SEC believes the term “employee” should be interpreted to include everyone employed by an issuer, including its officers. The SEC claims it is just as relevant for shareholders to know if officers are allowed to effectively avoid restrictions on long-term compensation as it is for directors and other employees of the company.
I couldn’t agree more. There is shareholder value in cascading alignment.
Why? Employees have a direct, measurable impact on a company’s financial performance. I’m unable to think of fair and valid a reason to prohibit Directors and Officers to hedge equity ownership against equity price declines, but allow employees.
Commissioner Aguilar’s Statement and SEC Release No. 33-9723
Disclosure of Hedging by Employees, Officers and Directors (Feb. 9, 2015) is available via:
Comments can be submitted to the SEC on or before April 20, 2015.
See the proposed rule for instructions and alternative submission options.