PRA adopting Supporting Statement Hedging. 04-03-2019- Final

SUPPORTING STATEMENT FOR AMENDMENTS ADOPTED 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. 33-10593, 1 the Commission adopted amendments to implement
Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”).2 The amendments require 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. 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” (“SRCs”) or “emerging growth companies”
(“EGCs”) 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.
The 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); and
“Regulation 14C and Schedule 14C” (OMB Control No. 3235-0057).

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
1

Disclosure of Hedging by Employees, Officers and Directors, Release No. 33-10593 (Dec. 20, 2018)
[84 FR 2402]. The amendments were proposed in Release No. 33-9723 (Feb. 9, 2015) [80 FR 8485]
(Proposing Release).
2

Pub. L. No. 111-203, 124 Stat. 1900 (July 21, 2010).

class of securities registered under Section 12 of the Exchange Act when a proxy or
consent is not being solicited.
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 may engage in transactions
that reduce or avoid the incentive alignment associated with equity ownership related to
their employment or board service. Neither Section 14(j) nor the 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 amendments affect Schedules
14A and Schedules 14C. These forms are filed electronically with the Commission using
the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
4.

DUPLICATION OF INFORMATION

In order to reduce potentially duplicative disclosure between Item 407(i) and the
existing requirement for Compensation Discussion and Analysis (“CD&A”) under Item
402(b) of Regulation S-K, the Commission added 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 Item 407(i) to the extent that the information disclosed there satisfies this
CD&A disclosure 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 amendments 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
performed a Final Regulatory Flexibility Act Analysis and estimated that there are
approximately 1,144 issuers that may be considered small entities. The amendments
would affect small entities that have a class of securities that is registered under Section
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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12 of the Exchange Act. The Commission estimated that 876 of these small entities have
a class of securities registered under Section 12(b) or Section 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. The Commission estimated that
there are approximately 26 business development companies that will be subject to the
amendments that may be considered small entities.
The amendments require clear and straightforward disclosure of any practices or
policies the company has adopted regarding the ability of employees or directors to
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. 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. Given
the straightforward nature of the disclosure, the Commission does not believe that it is
necessary to simplify or consolidate the disclosure requirement for small entities.
Additionally, 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 policy regarding employee and director hedging activities.
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.
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 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 reduce or avoid the incentive alignment associated with equity ownership.

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7.

SPECIAL CIRCUMSTANCES

There are no special circumstances in connection with these proposed
amendments.
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
Commission 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 considered all comments received.
Comments received are available at https://www.sec.gov/comments/s7-0115/s70115.shtml. The Commission received no substantive comments relating to our
Paperwork Reduction Act analysis.
9.

PAYMENT OR GIFT TO RESPONDENTS
No payment or gift has been provided to any respondents.

10.

CONFIDENTIALITY

All documents submitted to the Commission are available to the public via the
EDGAR system.
11.

SENSITIVE QUESTIONS

No information of a sensitive nature, including social security numbers, will be
required under Regulation S-K. This collection of information does not collect
personally identifiable information (PII). The agency has determined that a system of
records notice (SORN) and privacy impact assessment (PIA) are not required in
connection with the collection of information.
No information of a sensitive nature, including social security numbers, will be
required under Regulation 14A (Schedule 14A) and Regulation 14C (Schedule 14C).
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.
4

See supra note 1.

4

12/13. ESTIMATES OF HOUR AND COST BURDENS
The paperwork burden estimates associated with the final rules include the
burdens attributable to collecting, preparing, reviewing and retaining records.
The Commission added new Item 407(i) to Regulation S-K.5 This item requires a
company to describe any practices or policies it has adopted regarding the ability of its
employees or directors, or their designees, to purchase financial instruments, or otherwise
engage in transactions, that 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.
Pursuant to the amendment to Item 7 of Schedule 14A, 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
would thus increase the burden hour and cost estimates for each of those forms. 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 decrease the burden hour and
cost estimates per company compared to the proposal. 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.
For purposes of the PRA, we estimate the total annual increase in the paperwork
burden for all affected issuers to comply with the new collection of information
requirements, averaged over the first three years, to be approximately 5,253.45 hours of
in-house personnel time and approximately $700,460 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
5

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 disclosure requirements in Regulation
S-K, and is reflected in the analysis of those forms. To avoid a Paperwork Reduction Act inventory
reflecting 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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the documents. In deriving these 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 the policy.
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 two total hours per form the first year and
one total hour per form in all subsequent years.6 Based on our assumptions, we estimated
that the amendments will 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.
Emerging growth companies and smaller reporting companies which are 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.7 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.8 The
table below shows the three-year average annual compliance burden, in hours and in
costs, of the collection of information pursuant to 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 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.9 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.
6

In the Proposing Release, we assumed it would take five total hours per form the first year and two total
hours per form in all subsequent years.
7

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

8

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

9

We recognize that the costs of retaining outside professionals may vary depending on the nature of the
professional services, but for purposes of this PRA analysis we estimate that such costs would be an
average of $400 per hour. This estimate is based on consultations with several companies, law firms and
other persons who regularly assist companies in preparing and filing reports with the Commission. Our
estimates reflect average burdens, and therefore, some companies may experience costs in excess of our
estimates and some companies may experience costs that are lower than our estimates.

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Incremental Paperwork Burden and Costs under the amendments affecting
Schedules 14A and 14C – Three Year Average
Number
of
responses
(A) 10

Incremental
burden
hours/form
(B)

Total
incremental
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

Sch. 14A

5,586

Filers
eligible for
an
extended
compliance
date11
Filers not
eligible for
an
extended
compliance
date
Sch. 14A
Totals

5,586*0.5
4 = 3,016

1.0

3,016

2,262

754

$301,600

5,586*0.4
6 = 2,570

1.3

3,341

2,505.75

835.25

$334,100

6,357

4,767.75

1,589.25

$635,700

Sch. 14C
Filers
eligible for
an
extended
compliance
date
Filers not
eligible for
an
extended
compliance
date
Sch. 14C
Totals
Sch. 14A
and Sch.
14C Totals

5,586

569
569*0.54
= 307

1.0

307.0

230.25

76.75

$30,700

569*0.46
= 262

1.3

340.6

255.45

85.15

$34,060

569

647.6

485.7

161.9

$64,760

6,155

7,004.6

5,253.45

1,751.15

$700,460

10

For Schedules 14A and 14C, the number of responses reflected in the table equals the three-year average
of the number of schedules filed with the Commission and currently reported by the Commission to OMB.
11

We estimate that 54% of the filers subject to the amendments will have an additional year to comply.
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.

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14.

COSTS TO FEDERAL GOVERNMENT
The estimated cost of preparing the amendments was approximately $100,000.

15.

REASON FOR CHANGE IN BURDEN

As explained in further detail in Items 12 and 13 above, the amendments are
mandated by Section 955 of the Dodd-Frank Act and will increase the burdens and costs
for companies.
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 the ability of
employees or directors to engage in transactions that reduce or avoid the incentive
alignment associated with equity ownership. The change in burdens of Schedule 14A and
Schedule 14C corresponds to these disclosure requirements.
There is no change in burden for Regulation S-K. (See footnote 5 for further
explanation.)
Summary of Revised Burden Hours and Cost Burden Estimates for Each
Information Collection

Current Burden
Current Current
Annual Burden
Response Hours
s
(B)
(A)

Sche
dule
14A
Sche
dule
14C

16.

5,586

569

Current
Cost
Burden
(C)

546,333 $72,844,312

55,870

$7,450,184

Program Change

Requested Change in Burden

Number Change Change in Burden Hours
of
in Profession for Affected
Affected Compa al Costs
Responses
Respons ny
(F)
(G) = (B) + (E)
es
Hours
(D)
(E)
5,586 4,767.75 $635,700

569

485.7

$ 64,760

Proposed Cost
Burden for
Affected
Responses
(H) = (C)+(F)

551,100.75

$73,480,012

56,355.7

$7,514,944

INFORMATION COLLECTION PLANNED FOR STATISTICAL
PURPOSES
The information collections do not employ statistical methods.

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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
EDGAR application’s scheduled version release dates. The OMB control number will be
displayed.
18.

EXCEPTIONS TO CERTIFICATION FOR PAPERWORK REDUCTION
ACT SUBMISSIONS

There are no exceptions to certification for Paperwork Reduction Act
Submissions.
B.

STATISTICAL METHODS
The information collections do not employ statistical methods.

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