SEC Adopts Final Dodd-Frank Act Hedging Rules

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.

The Dodd-Frank Act – What Changes Will Impact Executive Compensation?

Unless you’ve been living under a rock or vacationing at the South Pole, you probably know that President Obama signed the Dodd-Frank Act into law on July 21, 2010.  If you’re like most folks, the thought of wading through over 2,200 pages of the Act isn’t all that appealing (especially if all you’re interested in are the changes to executive compensation).  Well, I’ve pulled together several presentations on the topic (all are available under my user account on, but thought a quick run-down of the big ticket items that will impact executive compensation might be helpful for folks.

  • Say on Pay Vote – nonbinding shareholder vote on the compensation of executives as disclosed in the proxy must be held at least once every 3 years.
  • Say on Pay Vote Frequency Vote – a nonbinding shareholder vote on the frequency of the say on pay vote must be held at least once every 6 years.
  • Vote on Golden Parachutes – a nonbinding shareholder vote on golden parachutes as part of a deal proxy; exception if the arrangement was previously approved by shareholders as part of a say on pay vote (SEC hopefully will offer some further details on how the exception will apply).
  • Independent Compensation Committees – most public companies will be required to have only independent directors on their compensation committees (SEC needs to develop definition of “independence” that will be applied; most commentators believe the SEC will draw heavily from the audit committee independence requirements).
  • Independent Advisers – most public companies’ compensation committees will be required to at least consider the independence of their advisers, e.g., attorneys, compensation consultants, and other advisers.
  • Compensation Committee Authority – mandates that most public company compensation committees must be given authority to retain a compensation consultant and independent legal counsel and other advisers, including fiscal authority.
  • Increased Disclosure About Executive Compensation – requirement for most public companies to disclose more information executive compensation, including:
    • Pay versus performance (hopefully SEC will clarify what will be required);
    • Median annual total compensation of all employees;
    • CEO’s annual total compensation; and
    • Ratio of median annual total compensation of all employees to that of the CEO (will require a lot of extra work for a figure that has questionable utility for shareholders).
  • Clawbacks Required – public companies will be required to implement a clawback policy (broader than the Sarbanes-Oxley Act’s clawback provision; likely will cause implementation issues for companies with existing clawback policies; several unanswered questions that I hope the SEC addresses).
  • Executive and Director Hedging – public companies must disclose their policy with respect to executive and director hedging of company securities.
  • Financial Institutions Subject to Greater Scrutiny – covered financial institutions will be subject to enhanced compensation structure reporting and prohibitions (important for all companies to watch executive compensation developments for financial institutions as these may eventual migrate over to all public companies through shareholder demand or otherwise).
  • Voting by Brokers – broker votes are eliminated on director elections, executive compensation, or any other significant matter, as determined by the SEC, for uninstructed shares held by beneficial owners.
  • Proxy Access – public companies will be required to (1) include a shareholder nominee to serve on the board of directors, and (2) follow a certain procedure with respect to the solicitation of proxies (the SEC is meeting this week to consider the proxy access rules).
  • Chairman and CEO Disclosures – SEC will issue rules that require public companies to disclose in their annual proxies the reasons why the company has chosen: (1) the same person to serve as chairman of the board and CEO, or (2) different individuals to serve as chairman of the board and CEO.

If you want to hear more about some of the practical things and action steps compensation professionals should be taking now to prepare for implementation of Dodd-Frank, tune in to the webcast, What compensation professionals need to know about financial reform legislation, I’ll be conducting with Dan Walter of Performensation and sponsored by HCR Software.  The webcast is this Wednesday (8/25) from 2 to 3 pm Eastern.  Here’s the link to the registration page:

Additional Provisions of the Dodd-Frank Act

In addition to the executive compensation provisions in the Dodd-Frank Act, there are a few corporate governance and miscellaneous provisions worth noting.

Corporate Governance:

Section 971. Proxy Access—SEC may include rules requiring issuers to include shareholder nominees for director elections and follow a certain procedure in relation to a solicitation of a proxy.

Section 972. Disclosures Regarding Chairman and CEO—SEC shall issue rules within 180 days after enactment of Dodd-Frank Act that will require companies to disclose in their annual proxies why the company has chosen:

  1. The same person to serve as chairman of the board and CEO (or in equivalent positions); or
  2. Different individuals to serve as chairman of the board and CEO (or equivalent positions).


Section 1503. Reporting Requirements Regarding Coal or Other Mine Safety—Requires companies that operate a coal or other mine to include in their periodic report with the SEC (Annual Report and Form 10-Qs) specified safety information about each mine, including total number of violations of mandatory health or safety standards.

Section 1504. Disclosure of Payment By Resource Extraction Issuers—requires “resource extraction issuers” to include in their annual reports information relating to any payment made by the company, a subsidiary or a company under control of company, to a foreign government or the Federal government for the purpose of the commercial development of oil, natural gas, or minerals, specifying the amount and type of such payments for each project and the type and total of such payments made to each government.

Dodd-Frank Act’s Executive Compensation Provisions

I put together a short presentation that outlines the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (below).

Generally, the executive compensation provisions apply to all public companies. However, there is at least one that only applies to covered financial institutions (the one subjecting such companies to enhanced compensation structure reporting and prohibitions).

Having discussed these provisions with a few folks at the Equilar ExecutiveCompensation Summit earlier this month, here are the provisions that will likely be the most burdensome for companies:

  • The requirement to disclose median total annual compensation for all employees (other than the CEO)—total compensation is defined as in the proxy disclosure rules for purposes of the Summary Compensation Table. So, in effect, companies will need to fill out a summary compensation table (or at least determine the amounts that would be disclosed in that table) for every employee! Needless to say, this will be a massive undertaking and cost companies quite a bit to assemble.
  • Developing and implementing a clawback policy—there are many open questions left by Dodd-Frank, so we’ll have to wait to see how the SEC fills things in.  But as it stands now, drafting a clawback policy will be a bit of a challenge given the language of the Act, for example, how would the Act’s language apply to stock options? You couldn’t really be able to determine what the stock price would have been absent the restatement triggering the clawback, so what happens?
  • Say on pay coupled with elimination of broker votes—could mean the first year of mandatory say on pay for all companies becomes a bit of a nail biter while everyone tries to figure out how things will work and how to ensure a sufficient favorable vote on companies’ compensation disclosed in the proxy.
  • For covered institutions, they’ll have to wait a bit longer to see how the appropriate Federal regulators come down on compensation structures.  Given the report of the Federal Reserve on large, complex banking organizations, I think it is safe to assume that these organizations’ compensation designs will be transformed once again.

Effective dates for the provisions are all over the map from immediately effective upon enactment, to having a delay of 6-, 9- or 12-months after enactment. It sounds like the House and Senate have ironed out their differences on this Act and the President is expected to sign it as soon as both houses of Congress pass it, which is expected to occur as soon as July 4th. So some of these provisions (most notably say on pay) most likely will be effective for the 2011 proxy season.

I hope you find the presentation helpful.  If you have any questions or would like to discuss implications, just let me know.