Analysis of Dodd Frank Act.. Executive hedging disclosures Sec 955

Below is an exact copy of Section 955 of the Dodd Frank Wall Street ACT

SEC. 955. DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING.

Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n),
as amended by this title, is amended by adding at the end the following:
``(j) Disclosure of Hedging by Employees and Directors.--

The  Commission shall, by rule, require each
issuer 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 member, 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--
``(1) granted to the employee or member of the board of
directors by the issuer as part of the compensation of the
employee or member of the board of directors; or
``(2) held, directly or indirectly, by the employee or
member of the board of directors.''.

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Essentially the Dodd Frank Act section 955 orders the SEC to make a Rule requiring the issuer companies to disclose whether any executive or employee is permitted to purchase financial instruments, that are designed to hedge or offset any decrease in the market value of equity securities--"... "granted to or held by employees or directors".

Questions and some answers.

Does the Dodd Frank Act order any disclosure?

No, Sec.955 orders the SEC to make a Rule requiring disclosures.

The Act mentions disclosures by the issuer of permitted purchases of financial instruments. Does that include sales of out-of-the money calls that are designed to generated income.?

What does "hedge or offset any decrease in the market value of equity securities" mean? Does short selling stock in Juniper hedge or offset your ESO holdings in JDS Uniphase.

If you hold un-vested JDSU ESOs, do they have a market value?

Will the companies be required to change their equity compensation plan to comply with the SEC rule. The answer is no. They will merely be required to disclose their policy.

Do companies generally prohibit hedging or selling calls to created income at present? Companies generally allow hedging but prohibit or restrict transferring and pledging the restricted stock or ESOs.

Most experts hold the view that hedging is generally permitted by the companies, although, Inside Trading Policies can restrict the timing of sales of stock and options.

The following experts are some of the ones who hold the view that hedging is generally allowed in the plan documents.

Professor David Schizer... Dean of Columbia Law School

Carr Bettis ...Arizona State University

John Bizjak... Teaxas Christian Univeristy

Swaminathan Kalpurdy... Southern Methodist University

Heusheng Gao ... Nanyang University, Singapore

Robert Gordon ... Adjunct Professor New York University

Chris Murphy ...  Employee compensation expert, Credit -suisse

John Summa Ph.D.

475 Goldman Sachs executives and others.

In order to change their policy if the issuers wish to change it, will they need to have the permission of holders of restricted stock, ESOs, SARs and other equity compensation? Most plans require that any change to the terms that may affect the rights of holders of equity compensation must be approved by the grantees.

Is it expected that some issuer companies will change their plan in order to validly claim that employees and executives are prohibited from hedging by the use of selling calls and buying puts? That remains to be seen.

How much will the grantees' value be diminished by prohibiting hedging as opposed to allowing hedging? That is not a simple question and the answer is complicated.

It should be an interesting year in the equity compensation arena.

John Olagues