It’s Annual Reporting season again for most public companies. The Securities and Exchange Commission (SEC) has released numerous new disclosure obligations for the upcoming filing period. Companies should take the time to review the new requirements while preparing their Form 10-K and proxy statements and seek guidance with securities counsel when needed.
As a reminder, the Form 10-K’s for the fiscal year ended December 31, 2023 are due as follows:
- Large Accelerated Filer: Thursday, February 29, 2024
- Accelerated Filer: Friday, March 15, 2024
- Non-Accelerated Filer: Monday April 1, 2024
Cybersecurity and Risk Governance
The SEC added Item 106 of Regulation S-K, which requires companies to describe their processes, if any, for assessing, identifying and managing material risks from cybersecurity threats. They also need to disclose the material effects or reasonably likely effects, of risks from cybersecurity threats and—most importantly–previous cybersecurity incidents actually experienced.
The board of director’s oversight of cybersecurity threats and management’s expertise or ability to assess and manage material risks should also be discussed. Any delegation of cybersecurity responsibilities to committee or subcommittee should be included.
Drafting Tip: All Form 10-K’s for fiscal years ending on or after December 15, 2023, will be required to provide such disclosures in response to newly added Part 1 Item 1C. Regarding cybersecurity, the Item 106 disclosures must be tagged in Inline XBRL, but not until the Form 10-K’s for the fiscal year ending on or after December 15, 2024 (next year’s Form 10-K for most issuers).
Executive Compensation Clawbacks
Effective October 2, 2023, registrants on Nasdaq and the New York Stock Exchange (NYSE) (but not over-the-counter (OTC)) are required to adopt a policy relating to the recovery of erroneously awarded compensation. Such policy must be filed as an exhibit to the 10-K for year 2023.
Furthermore, item 402(w) of Regulation S-K requires a company to disclose if, at any time during the last completed fiscal year, the company was required to prepare an accounting restatement that required recovery of erroneously awarded compensation to Named Executive Officers pursuant to the their clawback policy, or there was an outstanding balance as of the end of the last completed fiscal year of erroneously awarded compensation to be recovered. The disclosure must include:
- The date the company became required to make such accounting restatement;
- The aggregate dollar amount of the erroneously awarded compensation, including how it was calculated;
- If the erroneously awarded compensation was based on a stock price or a total shareholder return metric, then (i) the estimates used in determining the erroneously awarded compensation and (ii) explaining the methodology used for such estimates;
- The aggregate dollar amount of erroneously award compensation that remains outstanding at the end of the last completed fiscal year; and
- If the aggregate dollar amount of the erroneously awarded compensation has not yet been determined, the company should disclose that fact and an explanation of the reason.
If the Company determines that recovery of the erroneously award compensation is impracticable, it must disclose the reason(s) why it did not pursue recovery for each current and named executive (and all other current and former executive officers as a group) and the amount(s).
Drafting Tip: The Form 10-K cover page includes two checkboxes that a company must now check if (i) it is including financial statements that reflect the correction of an error to previously issued financial statements; and (ii) any of those corrections are restatements that required a recovery analysis of incentive-based compensation. For clawback policies that are adopted in accordance with New York Stock Exchange or Nasdaq requirements, companies should include them as Exhibit 97 to the Form 10-K.
Insider Trading Disclosures
Item 408(a) of Regulation S-K requires disclosure of Rule 10b5-1 trading arrangements and non-Rule 10b5-1 trading arrangements either adopted or terminated by a company’s director or Section 16 officer during the fourth quarter of the fiscal year, except for when the plan expired based on its terms. When disclosure is required, the company must (i) identify the officer or director, and (ii) describe the material terms of such arrangement including date, duration and total amount of securities to be sold or purchase (but excluding pricing terms).
In addition to the above, companies preparing their Form 10-K should also be sure to:
- Review and update Risk Factors, especially relating to cybersecurity, artificial intelligence, international geopolitics, inflation, COVID (including whether to remove or scale back), climate and internal controls;
- Review the consistency of XBRL tagging, looking for errors or tagging issues causing misalignment of disclosures; and
- Closely review the Management’s Discussion and Analysis Sections to properly identify key performance indicators, critical accounting estimates and the supporting qualitative and quantitative information.
