SEC Adopts Final Dodd-Frank Act Hedging Rules

SEC Adopts Final Dodd-Frank Act Hedging Rules

Print Friendly, PDF & Email

On December 18, 2018, the SEC announced that it had finalized the hedging rules required by the Dodd-Frank Act (see The SEC then made the Final Rule release (Release No. 33-10593; File No. S7-01-15) available on its website at:

Final Rule Requirements

  • New Item 407(i) of Regulation S-K requires a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other 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.
  • Companies can satisfy this requirement by providing a summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed, or by disclosing 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.
  • Equity securities for which this disclosure requirement applies are equity securities of the company, any parent, or any subsidiary of the company or any parent.

Timing of Application of Final Rules

Companies must generally comply with these new disclosure rules in proxy and information statements for the election of directors during fiscal years beginning on or after:

  • July 1, 2020 for smaller reporting companies and emerging growth companies; and
  • July 1, 2019 for public companies
  • But note that the rules will not apply to closed-end funds and foreign private issuers.

ISS Issues FAQs and Burn Rate Benchmarks for 2019

Print Friendly, PDF & Email

ISS released its FINAL U.S. Compensation Policies FAQs for 2019 on December 14, 2018:

ISS released its U.S. Equity Compensation Plans FAQs for 2019 on December 19, 2018:

The Equity Compensation FAQs also include the ISS Burn Rate Benchmarks for 2019 in the Appendix.

I will summarize the above FAQs and post an updated Equity Usage 
Calculator shortly.

Are Environmental Goals the Next Big Thing?

Print Friendly, PDF & Email

A number of recent stories covered the move by Royal Dutch Shell to incorporate carbon emissions into the performance goals for its executives incentives. For example, see this story by CNN, Shell is tying executive pay to carbon emissions. Here’s why it could create real impact.

Some may believe this is an appropriate action by one of the big oil companies. Other may dispute whether any such action is needed at all. But, assuming that society as a whole has focused on environmental issues to the extent that boardrooms have begun to take notice, Royal Dutch Shell may be the first in a new wave of companies adopting environmentally-focused performance goals for their executives’ incentives. The number of companies this could impact is staggering–everything from the typical companies thought of when considering environmental impact (oil companies, manufacturers, and utilities) to the less thought of, but sometimes having even more of an impact on some aspects of the environment. For example, just recall the recent focus on the types of straws folks use after it was disclosed that plastic straws lead to an overall increase in plastic pollution that endangers wildlife and the environment. Many companies immediately sought out more environmentally-friendly alternatives and suddenly paper straws are all the rage (and the one company in the U.S. that manufactures them is having a hard time keeping up with demand).

We have seen this focus on bags in the retail environment too as plastic bags have given way to reusable shopping bags or the return of paper bags for shopping needs. My point is that these matters likely will continue to surface and with a frequency unseen in history as social media makes it easier for consumers and individual citizens to gain focus on things that the wider community may want to consider. So, will fast food chains be integrating carbon emissions into their incentives? Probably not that soon. But, for large restaurant chains that have large, wide-spread distribution networks I could see them focus incentives on finding the most cost effective solution that balances environmental impact. Perhaps that means that their delivery fleets get powered by alternative fuel sources. There could be more action in this area as social awareness of environmental issues grows. It may seem far-fetched today that business leaders would be rewarded based on both how a company performs financially,  as  well as how the company manages its environmental (and social) impacts. 
However, I think in the not too distant future this will be part of incentive designs, especially at companies that take a more holistic approacg to their businesses and how they define success.

So when more companies start adopting Environmental (and Social) goals into their incentive plans, they will need to take care that they do not create any perverse incentives that could cause problems later. Adopting such goals should be done carefully and discussed and reviewed from all sides. The goals should be tested–preferably by a number of folks who enjoy finding the loopholes in things to best identify where the goals may present weaknesses. Those should be shorn up through the use of countervailing goals and/or careful monitoring. If done properly, these such environmental (and social) goals could help propel companies to greater financial returns, especially if the goals lead to behaviors that are recognized by society as appropriate.

Dilution & Equity Plan Proposals

Print Friendly, PDF & Email

If you are taking an equity plan proposal to shareholders during the 2019 proxy season, you really need to know what your dilution is and will be at fiscal year-end. Why? First, it could impact the vote recommendation from ISS on your equity plan proposal. Second, it could negatively impact shareholder support for your equity plan proposal.


For 2019 shareholder meetings held on or after February 1, 2019, ISS has adopted a new “override” factor for its Equity Plan Scorecard (EPSC) model/policy. Regardless of how a proposed plan scores under the EPSC model, if the plan would cause dilution to be “excessive” ISS will recommend against it. For S&P 500 companies, excessive dilution means dilution greater than twenty percent (20%) and for other Russell 3000 companies it means dilution greater than twenty-five percent (25%). In some industries, this could be more of an issue than in others.

ISS is calculating dilution on a simple basis (as I explained in this Blog Post).

Shareholder Support

Based on prior research that I have conducted, the line in the sand for dilution that starts to see increased shareholder resistance, leading to less support for equity plan proposals, starts at about twenty percent (20%). As dilution goes above 20%, shareholder vote support starts to decline significantly, and then drops again once the 25% dilution level is passed.


Ensure that you have calculated your dilution currently and projected as of fiscal year-end, and also including any proposed equity plan share request. That way you will be alerted to whether dilution could cause an issue for your plan proposal. If so, it may necessitate some additional disclosures to illustrate why the request is sound and also require engaging with shareholders about the company’s need for shares in its equity compensation plans.