Supporting Statement Hedging -12-18-2018

SUPPORTING STATEMENT FOR PROPOSED RULES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND DODD-FRANK WALL STREET
REFORM AND CONSUMER PROTECTION ACT
This supporting statement is part of a submission under the Paperwork Reduction
Act of 1995, 44 U.S.C. §3501, et seq.
A.

JUSTIFICATION
1.

CIRCUMSTANCES MAKING THE COLLECTION OF
INFORMATION NECESSARY

In Release No. 33-9723,1 the Commission proposed amendments to implement
Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”).2 Section 955 of the Dodd-Frank Act added Section 14(j) to the
Securities Exchange Act of 1934 (“Exchange Act”), which directs the Commission to
adopt rules requiring registrants to disclose in any proxy or consent solicitation material
for an annual meeting of the shareholders of the issuer whether any employee or member
of the board of directors 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 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 Commission proposed amendments to require registrants to provide this
disclosure. The proposed amendments contain “collection of information” requirements
within the meaning of the Paperwork Reduction Act of 1995. The titles of the collections
of information impacted by the amendments are:





“Regulation S-K” (OMB Control No. 3235-0071);
“Regulation 14A and Schedule 14A” (OMB Control No. 3235-0059);
“Regulation 14C and Schedule 14C” (OMB Control No. 3235-0057); and
“Rule 20a-1 under the Investment Company Act of 1940, Solicitation of Proxies,
Consents, and Authorizations” (OMB Control No. 3235-0158)

Regulation 14A sets forth the requirements for the dissemination, content and filing
of proxy or consent solicitation materials in connection with annual or other meetings of
holders of a class of securities registered under Section 12 of the Exchange Act.
Regulation 14C sets forth the requirements for the dissemination, content and filing of an
information statement in connection with annual or other meetings of holders of a class of
securities registered under Section 12 of the Exchange Act when a proxy or consent is not
being solicited.
1

2

Disclosure of Hedging by Employees, Officers and Directors, Release No. 33-9723 [80 FR 8485].
Pub. L. No. 111-203, 124 Stat. 1900 (July 21, 2010).

Rule 20a-1 under the Investment Company Act of 1940 states that no person shall
solicit or permit the use of his or her name to solicit any proxy, consent, or authorization
with respect to any security issued by a registered Fund, except upon compliance with
Regulation 14A, Schedule 14A and all other rules and regulations adopted pursuant to
Section 14(a) of the Securities Exchange Act of 1934 that would be applicable to such
solicitation if it were made in respect of a security registered pursuant to Section 12 of the
Exchange Act. An instruction to the rule states that registrants that have made a public
offering of securities and that hold security holder votes for which proxies, consents, or
authorizations are not being solicited should refer to Section 14(c) of the Exchange Act
and the information statement requirements set forth in the rules thereunder.
2.

PURPOSE AND USE OF THE INFORMATION COLLECTION

The purpose of the amendments is to implement Section 955 of the Dodd-Frank
Act, which added Section 14(j) to the Exchange 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 long-term,
so that they will receive their compensation even in the case that their firm does not
perform.”3 In this regard, the Commission inferred that the statutory purpose of Section
14(j) is to provide transparency to shareholders, if action is to be taken with respect to the
election of directors, about whether employees or directors are permitted to engage in
transactions that mitigate or avoid the incentive alignment associated with equity
ownership. Neither Section 14(j) nor the proposed amendments would require a company
to prohibit hedging transactions or to otherwise adopt practices or a policy addressing
hedging by any category of individuals.
3.

CONSIDERATION GIVEN TO INFORMATION TECHNOLOGY

The collection of information requirements of the proposed amendments would
affect Schedules 14A, Schedules 14C and Rule 20a-1 under the Investment Company Act
of 1940, which refers to information required in Schedules 14A and 14C. These forms are
filed electronically with the Commission using the Commission’s Electronic Data
Gathering and Retrieval (EDGAR) system.
4.

DUPLICATION OF INFORMATION

In order to reduce potentially duplicative disclosure between proposed Item 407(i)
and the existing requirement for CD&A under Item 402(b) of Regulation S-K, the
Commission proposed to add an instruction to Item 402(b) 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 proposed Item
407(i) to the extent that the information disclosed there satisfies this CD&A disclosure

3

See Report of the Senate Committee on Banking, Housing, and Urban Affairs, S. 3217, Report No. 111176 (Apr. 30, 2010) (“Senate Report 111-176”).

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requirement. This instruction, like the Item 407(i) disclosure requirement, would apply
to the company’s proxy or information statement with respect to the election of directors.
5.

REDUCING THE BURDEN ON SMALL ENTITIES

The proposed amendments would affect some companies that are small entities
that have a class of securities that are registered under Section 12 of the Exchange Act.
The Commission estimated that there are approximately 428 issuers that may be
considered small entities. The proposed amendments would affect small entities that have
a class of securities that is registered under Section 12 of the Exchange Act. 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. The Commission estimated that there are approximately 29
investment companies that would be subject to the proposed amendments that may be
considered small entities.
The proposed amendments would require clear and straightforward disclosure of
whether employees or directors are permitted to engage in transactions 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. Given the straightforward nature of the proposed
disclosure, the Commission did not believe that it is necessary to simplify or consolidate
the disclosure requirement for small entities. The Commission proposed to use a
principles-based approach to identify transactions that would hedge or offset any
decrease in the market value of equity securities. Additionally, the amendments did 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 policy regarding employee and
director hedging activities.
6.

CONSEQUENCES OF NOT CONDUCTING COLLECTION

Schedule 14A and Schedule 14C set forth the disclosure requirements for proxy
and information statements filed by issuers to help investors make informed investment
decisions. Less frequent collection of the information required by the proposed
amendments would frustrate the statutory intent of Section 14(j) of the Exchange Act
because there would not be transparency to shareholders, if action is to be taken with
respect to the election of directors, about whether employees or directors are permitted to
engage in transactions that mitigate or avoid the incentive alignment associated with
equity ownership.
7.

SPECIAL CIRCUMSTANCES
None

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8.

CONSULTATIONS WITH PERSONS OUTSIDE THE AGENCY

The Commission issued a release soliciting comment on the new “collection of
information” requirements and associated paperwork burdens.4 Comments on the
Commission’s releases are generally received from registrants, investors, and other
market participants. In addition, the Commission and staff participate in an ongoing
dialogue with representatives of various market participants through public conferences,
meetings and informal exchanges. The Commission considers all comments received.
Comments received on the proposed amendments are available at
https://www.sec.gov/comments/s7-01-15/s70115.shtml .
9.

PAYMENT OR GIFT TO RESPONDENTS
Not applicable.

10.

CONFIDENTIALITY
Not applicable.

11.

SENSITIVE QUESTIONS

No information of a sensitive nature, including social security numbers, will be
required under these collections of information. The information collections collect basic
Personally Identifiable Information (PII) that may include name and job title. However,
the agency has determined that the information collections do not constitute a system of
record for purposes of the Privacy Act. Information is not retrieved by a personal
identifier. In accordance with Section 208 of the E-Government Act of 2002, the agency
has conducted a Privacy Impact Assessment (PIA) of the EDGAR system, in connection
with this collection of information. The EDGAR PIA, published on January 29, 2016, is
provided as a supplemental document and is also available at
https://www.sec.gov/privacy.
12/13. ESTIMATES OF HOUR AND COST BURDENS
The paperwork burden estimates associated with the proposed rules include the
burdens attributable to collecting, preparing, reviewing and retaining records.
Schedules 14A and 14C
The Commission proposed to add new Item 407(i) to Regulation S-K.5 This item
would require disclosure of whether employees and directors of the company, or their
4

See, Disclosure of Hedging by Employees, Officers and Directors, supra, note 1.
Regulation S-K contains the disclosure requirements for filings under both the Securities Act and the
Exchange Act, including the item requirements in Schedules 14A and 14C. The paperwork burden from
Regulation S-K is imposed through the forms that are subject to the disclosures in Regulation S-K, and is
reflected in the analysis of those forms. To avoid a Paperwork Reduction Act inventory reflecting
5

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designees, are permitted to hedge or offset any decrease in the market value of equity
securities that are granted to them by the company as part of their compensation, or that
are held, directly or indirectly, by them. Pursuant to the proposed amendment to Item 7 of
Schedule 14A, and for listed closed-end funds, the proposed amendment to Item 22 of
Schedule 14A, this new disclosure would be required in proxy or consent solicitation
materials with respect to the election of directors, or an information statement in the case
of such corporate action authorized by the written consent of security holders.
If adopted, proposed Item 407(i) would require 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 would thus increase the burden hour
and cost estimates for each of those forms. For purposes of the PRA, we estimate the total
annual increase in the paperwork burden for all affected issuers to comply with the
proposed collection of information requirements, averaged over the first three years, to be
approximately 16,540 hours of in-house personnel time and approximately $2,505,300
for the services of outside professionals (see the Table below). These estimates include
the time and cost of collecting and analyzing the information, preparing and reviewing
disclosure, and filing the documents. In deriving these estimates, we assumed that the
information that proposed Item 407(i) would require to be disclosed would be readily
available to the management of a company because it only requires disclosure of policies
they already have but does not direct them to have a policy or dictate the content of the
policy.
Since the first year of compliance with the proposed 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. Based on our assumptions, 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. We recognize that the burdens may vary among individual
companies based on a number of factors, including the size and complexity of their
organizations, and whether or not they prohibit or restrict hedging transactions by
employees, directors and their designees and if they do, the specificity and complexity of
such restrictions. The table below shows the three-year average annual compliance
burden, in hours and in costs, of the collection of information pursuant to proposed Item
407(i) of Regulation S-K.
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 proposed 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
duplicative burdens, for administrative convenience we estimate the burdens imposed by Regulation S-K to
be a total of one hour.

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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.
Incremental Paperwork Burden and Costs under the proposed amendments
affecting Schedules 14A and 14C – Three Year Average

Schedule 14A
Schedule 14C
Rule 20a-1

14.

Number of
Responses
(A)

Increase in
Burden
Hours
(B)

Increase
in Total
Burden
Hours
(C)
(A)*(B)

Internal
Company
Time
(D)
(C)*0.75

External
Professional
Time
(E)
(C)*0.25

External
Professional
Costs
(F)
(E)*$400

5,586
569
1,196

3
3
3

16, 758
1,707
3, 588

12, 568.5
1,280.25
2,691

4189.5
426.75
897

$1,675,800
$170,700
$358,800

COSTS TO FEDERAL GOVERNMENT

We estimate that the cost of preparing the amendments is approximately
$100,000.
15.

REASON FOR CHANGE IN BURDEN

As explained in further detail in Items 12 and 13 above, the proposed rules in
Release No. 33-9723 are mandated by Section 955 of the Dodd-Frank Act.
The changes in burden of Schedule 14A and Schedule 14C relate to enhanced
disclosure requirements in Regulation S-K to provide transparency to shareholders, if
action is to be taken with respect to the election of directors, about whether employees or
directors are permitted to engage in transactions that mitigate or avoid the incentive
alignment associated with equity ownership. The change in burdens of Schedule 14A and
Schedule 14C corresponds to these proposed disclosure requirements.
The changes in burden of Rule 20a-1 relate to enhanced disclosure requirements
in Schedule 14A and Schedule 14C to provide transparency to shareholders, if action is to
be taken with respect to the election of directors, about whether employees or directors
are permitted to engage in transactions that mitigate or avoid the incentive alignment
associated with equity ownership. The change in burden of Rule 20a-1 corresponds to
these proposed disclosure requirements

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16.

INFORMATION COLLECTION PLANNED FOR STATISTICAL
PURPOSES
Not applicable.

17.

APPROVAL TO OMIT OMB EXPIRATION DATE

We request authorization to omit the expiration date on the electronic version of
the form. Including the expiration date on the electronic version of the form will result in
increased costs, because the need to make changes to the form may not follow the
application’s scheduled version release dates. The OMB control number will be
displayed.
18.

EXCEPTIONS TO CERTIFICATION FOR PAPERWORK REDUCTION
ACT SUBMISSIONS
Not applicable.

B.

STATISTICAL METHODS
Not applicable.

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