During 2023, the U.S. Securities and Exchange Commission (the SEC) continued its trend from 2022, actively engaging in regulatory rulemaking, providing disclosure guidance, and undertaking enforcement actions related to public disclosures and disclosure controls.
This Advisory provides a summary of the relevant SEC rules and guidance that we expect to have an impact on the upcoming annual reporting and proxy season for calendar year reporting companies. We also touch on other SEC guidance issued in 2023 and proposed guidance on the horizon. Where applicable, we include links to our Advisories providing additional detail on the summarized items, including the extent to which they are applicable to foreign private issuers (FPIs).
New Regulations and Regulations to Take Effect in 2023
Below are the SEC’s regulatory requirements that are to take effect with respect to fiscal year 2023 (in order of compliance date).
Recovery of Erroneously Awarded Compensation (Clawbacks). On October 26, 2022, the SEC adopted Rule 10D-1 directing national securities exchanges to establish listing standards that require each issuer to develop and implement a policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information. Since then, the SEC has approved listing standards adopted by the NYSE and the Nasdaq, each of which will become effective on October 2, 2023. Registrants must comply with these listing standards by December 1, 2023, as well as file their clawback policies as an exhibit to their Annual Reports on Form 10-K. In addition, issuers must make specified disclosures (tagged in In-line XBRL) related to their clawback policies in their Annual Reports and proxy statements. In particular disclosures are required if at any time during or after an issuer’s last completed fiscal year such issuer was required to prepare an accounting restatement that triggered its clawback policy, or if there was an outstanding balance as of the end of the last completed fiscal year of erroneously awarded compensation from the application of that policy to a prior accounting restatement. See our Advisory for additional detail.
Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure. On July 26, 2023, the SEC approved new disclosure rules designed to allow investors to evaluate a registrant’s exposure to cybersecurity risks and incidents, as well as their ability to manage and mitigate them. These rules are intended to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and material cybersecurity incidents by public companies. As a result, registrants must disclose on Form 8-K material cybersecurity incidents and describe the material aspects of their nature, scope, timing, and impact. In addition, registrants must describe in their Annual Report on Form 10-K their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats and whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect their business strategy, results of operations, or financial condition. The registrant must also disclose their board’s oversight of cybersecurity risks and management’s role in assessing and managing material cybersecurity risks. The new requirement for disclosure of material cybersecurity incidents on Form 8-K is effective on December 18, 2023 (June 15, 2024 for smaller reporting companies). Registrants must comply with the risk management and strategy and governance disclosures beginning with annual reports for fiscal years ending on or after December 15, 2023. See our Advisory for additional detail, including compliance dates for tagging the foregoing disclosures in Inline XBRL.
Insider Trading Arrangements and Related Disclosures. On December 14, 2022, the SEC adopted amendments tightening the Rule 10b5-1 plan requirements and increasing the disclosure requirements for registrants, aiming to enhance investor protection concerning insider trading. In addition to substantive changes to the requirements that a plan must meet to rely on the affirmative defense under Rule 10b5-1, the amendments require (i) quarterly disclosure in issuers’ Form 10-Qs and Form 10-Ks (tagged in In-line XBRL) of the adoption and termination by directors and officers of Rule 10b5-1 and non-Rule 10b5-1 trading arrangements and their material terms (other than price), (ii) annual disclosure in Form 10-Ks and proxy statements of (a) whether the registrant has adopted insider trading policies and procedures (and, if so, to file a copy as an exhibit to the Annual Report), (b) disclosure of policies and practices on the timing of certain awards in relation to the disclosure of material nonpublic information, and (c) disclosure of certain awards made to named executive officers during the period beginning four business days before and ending one business day after the filing of a Form 10-Q or Form 10-K, or the filing or furnishing of a Form 8-K that discloses material nonpublic information, other than a Form 8-K disclosing a material new option award grant under Item 5.02(e). Issuers must comply with the new disclosure and tagging requirements in periodic reports on Form 10-Q, Form 10-K, and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023 (or October 1, 2023 for smaller reporting companies). See our Advisory for additional detail.
Increased Share Repurchase Disclosures. On May 3, 2023, the SEC adopted amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities, noting that although issuers often conduct share repurchases in a manner aligned with maximizing shareholder value, such repurchases may be at least partially motivated by other factors. As a result, the amendments require the quarterly disclosure in specified tabular format (tagged in Inline XBRL) in an exhibit to Form 10-Qs and Form 10-K of repurchase activity on a daily basis, including whether any officers or directors subject to Exchange Act Section 16(a) purchased or sold shares that were subject to a publicly-announced repurchase plan or program within four business days before or after the announcement of the repurchase plan or the announcement of an increase of an existing share repurchase plan or program. In addition, registrants must also disclose the objectives or rationales for each repurchase plan or program, the process or criteria used to determine the amount of repurchases, any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, and whether the issuer adopted or terminated a plan to purchase or sell its securities intended to satisfy a Rule 10b5-1 trading arrangement. Issuers must comply with these new disclosure and tagging requirements in their periodic reports beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023 (a Form 10-K that includes fiscal quarters beginning before October 1, 2023 need only present data with respect to fiscal quarters beginning on or after that date). See our Advisory for additional detail.
For additional information on the applicability of these regulatory requirements to FPIs, see our Advisory.
Other SEC Guidance Issued in 2023
In addition to the regulations promulgated by the SEC described above, the SEC Staff also issued interpretive guidance during 2023 in the form of Compliance and Disclosure Interpretations (C&DIs) and sample comment letters. While such guidance is not legally binding and only represents the views of the Staff, it nonetheless provides valuable direction for compliance with the federal securities laws and the direction the SEC may take when reviewing disclosures and considering enforcement actions.
Rule 10b5-1 C&DIs. On August 25, 2023, the Staff issued five C&DIs relating to the new Rule 10b5-1 trading arrangement requirements described above. These interpretations touch on various aspects, including the timing of trades for directors and officers, the treatment of arrangements matching participant contributions with employer stock, and the disclosure requirements for trading arrangements. See our Advisory for additional detail.
XBRL Disclosures. On September 7, 2023, the Staff published a Sample Comment Letter Regarding XBRL Disclosures. Among other things, the Sample Comment Letter addresses XBRL tagging, including the cover pages of filings, “Pay versus Performance” disclosures, and a registrant’s financial statements and supplementary data. The Staff emphasized the importance of compliance with Inline XBRL presentation and tagging requirements and consistent and accurate information throughout a registrant’s filings, and warned that issuers may be asked to amend or revise the disclosures accepted by EDGAR if they have failed to comply with the EDGAR Filer Manual.
Crypto Asset Disclosures. On December 8, 2022, the Staff published a Sample Comment Letter to Companies Regarding Recent Developments in Crypto Asset Markets (Sample Letter) in response to bankruptcies among crypto asset market participants and related widespread disruption, noting that “companies may have disclosure obligations under the federal laws related to the direct or indirect impact that these events and collateral events have had or may have on their business.” The Sample Letter provides insight as to the Staff’s views of how it may review and enforce the SEC’s existing disclosure requirements with respect to crypto assets. See our Advisory for additional detail.
Rulemaking and Guidance on the Horizon
Issuers should also keep a close watch on the following proposed rules currently slated to be finalized later this year as well as those finalized rules with compliance dates occurring in the future.
Climate Change Disclosures. The SEC issued the proposed rule on The Enhancement and Standardization of Climate-Related Disclosures for Investors in March 2022. See our Advisory for more information about the proposed disclosures regarding climate change. However, the SEC has since postponed the issuance of a final climate change disclosure rule twice, with the Spring 2023 Regulatory Agenda now saying that a final rule can be expected in fall 2023. Until any final rule is adopted, however, issuers should continue to refer to the SEC’s Sample Comment Letter to Companies Regarding Climate Change Disclosures for guidance regarding climate change disclosures currently expected by the Staff.
Shareholder Proposals Under Rule 14a-8. In July 2022, the SEC proposed new amendments to Rule 14a-8, which generally requires companies subject to the federal proxy rules to include shareholder proposals in their proxy statements unless there is a basis for exclusion. The proposed amendments would revise three of the substantive bases for exclusion of shareholder proposals: the substantial implementation exclusion, the duplication exclusion, and the resubmission exclusion. The Spring 2023 Regulatory Agenda currently states that a final rule can be expected in fall 2023, which means the 2024 proxy season could see an increased number of shareholder proposals received by registrants.
Nasdaq Diversity Rule. On August 6, 2021, the SEC issued an order approving the Nasdaq’s proposed rule regarding board diversity disclosures. Most Nasdaq-listed issuers have already had to comply with this rule’s requirements regarding disclosing a board diversity matrix and having, or explaining why they do not have, at least one Diverse director by the later of August 7, 2023 or the filing date of its proxy statement for its annual stockholders’ meeting that calendar year. However, these issuers must have, or explain why they do not have, at least two Diverse directors by a later date in 2025 or 2026, depending on which Nasdaq exchange they are listed. See our Advisory for additional detail.
Takeaways for SEC Registrants
The new regulations and guidance from the SEC in 2022 and 2023 alter the disclosure requirements for the upcoming annual reporting and proxy season. Issuers should consider the following proactive measures now to better navigate the evolving landscape of disclosure requirements from the SEC:
- Educate team members (audit committee and other board members, disclosure committee members, in house counsel, and financial reporting team) on the new requirements.
- Evaluate the new requirements and determine which rules will require changes or enhancements to the upcoming Annual Report on Form 10-K and proxy statement. Early advice of securities compliance counsel will be helpful in this endeavor.
- Obtain the information related to each new disclosure item in a way that complies with a registrant’s disclosure controls and procedures, including establishing new processes and controls as necessary. Inadequate disclosure controls have been a recent focus of SEC enforcement.
- Revisit risk management policies, processes, and procedures with respect to risk assessment and up-the-ladder reporting to maintain strong and nimble disclosure reporting processes upfront, in particular to help address the new requirements related to cybersecurity breaches and the clawback of compensation from executive officers.
- Consider how SEC enforcement in 2023 thus far may affect disclosures related to crypto assets, ESG activity, non-GAAP financial measures, cybersecurity, and credit.
 The Nasdaq Diversity Rule remains subject to a pending challenge in the 5th Circuit, which was argued in September 2022 but has not yet been decided.
This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm’s memorandum, “2023 Annual Reporting and 2024 Proxy Season — Time to Start Preparing,” dated September 20, 2023, and available here. Sara Adler, Joel Greenberg, and Kexi Jin contributed to the memorandum.