RECENTLY ADOPTED RULES

Clawback Rules. As previously discussed in last Winter’s Corporate Communicator, the Securities and Exchange Commission (“SEC") adopted final rules in October 2022 directing the NYSE and Nasdaq to adopt listing standards that require listed companies to develop and implement a policy for the recovery of erroneously awarded incentive-based compensation received by current or former executives. In June 2023, the SEC approved the NYSE’s and Nasdaq’s proposed clawback listing standards, which were materially consistent with Rule 10D-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the new clawback listing standards became effective on October 2, 2023, and listed companies had until December 1, 2023 to adopt clawback policies in compliance with the applicable clawback listing standard.

Moving forward, listed companies should be mindful of the following:

• The clawback policy will need to be filed as Exhibit 97 to the first annual report filed on or after December 1, 2023, pursuant to Item 601(b)(97) of Regulation S-K. Thus, listed companies with a calendar year-end will need to file their clawback policy as an exhibit to their upcoming Annual Report on Form 10-K for the year ended December 31, 2023.
• Annual Reports on Form 10-K will need to include the checkboxes on the cover indicating (1) whether the financial statements included in the filing reflect the correction of an error to previously issued financial statements, and (2) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the company’s executive officers during the relevant recovery period pursuant to Exchange Act Rule 10D-1(b).
• If (i) at any time during or after the last completed fiscal year a listed company is required to prepare an accounting restatement that required recovery of erroneously awarded compensation pursuant to its clawback policy, or (ii) there was an outstanding balance as of the end of the last completed fiscal year of erroneously awarded compensation to be recovered from the application of the policy to a prior restatement, the company will be required to provide certain disclosures relating to the accounting restatement and erroneously awarded compensation in accordance with Item 402(w) of Regulation S-K. This information must be provided in the proxy statement (or under Part III, Item 11 of the Annual Report on Form 10-K) and tagged in Inline eXtensible Business Reporting Language (“XBRL”).

Beneficial Ownership Reporting Rules. On October 10, 2023, the SEC adopted amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Exchange Act. The following is a summary of key changes reflected in the new rules:

• Shortened the deadlines for initial and amended Schedule 13D filings as follows:
  • The initial filing deadline was shortened from 10 days to five business days after exceeding the 5% beneficial ownership threshold.
  • The filing deadline for amendments was changed from “promptly” to within two business days after the triggering event requiring the amendment (no change to the rules governing what is deemed to be a triggering event).
• Shortened the deadlines for initial and amended Schedule 13G filings as follows:
  • For Schedule 13G filers that qualify as a “passive investor”: the initial filing deadline was shortened from 10 days to five business days after exceeding the 5% beneficial ownership threshold.
  • For Schedule 13G filers that qualify as an “exempt investor” or a “qualified institutional investor”: the initial filing deadline was changed from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter in which the 5% beneficial ownership threshold was exceeded.
  • For all Schedule 13G filers, the amendments generally require that an amendment be filed 45 days after the end of the calendar quarter in which a material change occurred, rather than 45 days after the end of the calendar year in which any change occurred. Additionally, the new rules accelerate the Schedule 13G amendment deadlines for passive investors and qualified institutional investors when their beneficial ownership exceeds 10%, or if there are increases or decreases in beneficial ownership of more than 5%.
• The EDGAR filing “cut-off” time for Schedules 13D and 13G was extended from 5:30 p.m. Eastern Time to 10:00 p.m. Eastern Time.
• Schedule 13D and 13G filings are now required to be made using a structured, machine-readable data language, which applies to all information disclosed in the schedules other than exhibits.
• Item 6 (Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer) of Schedule 13D was amended to clarify that the disclosure of interests in all derivative securities (including cash-settled derivative securities) that use the company’s equity security as a reference security is now required to be disclosed under this item.

Additionally, the adopting release included guidance on the applicability of the current beneficial ownership reporting rules to cash-settled derivative securities (other than security-based swaps), in particular as to whether a holder’s use of certain cash-settled derivative securities may result in the person being treated as a beneficial owner of the class of the reference equity securities (e.g., to the extent a derivative security provides the holder, directly or indirectly, with exclusive or shared voting or investment power over the reference class of securities through a contractual term of the derivative or otherwise). The adopting release also included guidance relating to the determination of whether two or more persons are acting as a “group” for purposes of Exchange Act Sections 13(d)(3) and 13(g)(3) to clarify that the determination does not depend solely on the presence of an express agreement. Rather, depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding, or disposing of securities of an issuer are sufficient to constitute the formation of a group.

The new rules will become effective on February 5, 2024, with the following exceptions: (i) compliance with the revised Schedule 13G filing deadlines will be required beginning September 30, 2024, and (ii) compliance with the structured data requirement for Schedules 13D and 13G will be required beginning December 18, 2024.

Rule 10b5-1 Insider Trading Plans and Related Disclosures. As discussed in last Winter’s Corporate Communicator, on December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Exchange Act, which provides an affirmative defense to insider trading liability for individuals and entities if the trades at issue are made pursuant to a written trading plan that satisfies certain conditions. The amendments added new conditions to the availability of the affirmative defense, such as, among others, a cooling-off period, restrictions on multiple overlapping plans, and a limitation on single-trade arrangements. The SEC also adopted new requirements to disclose insider trading policies and procedures, the adoption and termination of insider trading plans, and stock options awards made close in time to an issuer’s disclosure of material nonpublic information. Finally, the SEC adopted amendments to Forms 4 and 5 to require the identification of transactions made pursuant to a Rule 10b5-1 trading plan and to require disclosure of bona fide gifts of securities on Form 4 within two business days of the event.

In May and August 2023, the SEC issued new Compliance and Disclosure Interpretations (“C&DIs”) relating to such amendments, summarized as follows:

Compliance dates for quarterly Item 408(a) disclosures and annual Item 402(x) and Item 408(b) disclosures in periodic reports: Companies other than smaller reporting companies are required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q and 10-K as follows:

• Quarterly disclosures (i.e., director or officer Rule 10b5-1 and non-Rule 10b5-1 trading arrangements): For December 31 fiscal year-end companies, quarterly disclosures were first required to be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in subsequent periodic reports, including the Form 10-K for the fiscal year ended December 31, 2023.
• Annual disclosures (i.e., disclosures regarding insider trading policies and procedures, including insider trading policy exhibit, and timing of stock option awards in relation to disclosure of material nonpublic information): For December 31 fiscal year-end companies, annual disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2024. For June 30 fiscal year-end companies, annual disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2024.

Smaller reporting companies must comply with the new disclosure and tagging requirements as follows:

• Quarterly disclosures: For December 31 fiscal year-end companies, quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023, and in Form 10-Qs filed thereafter.
• Annual disclosures: For December 31 fiscal year-end companies, annual disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2024. For June 30 fiscal year-end companies, annual disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2025.

Compliance dates for disclosures in proxy or information statements: Companies other than smaller reporting companies must first provide the new disclosures required under Item 408(b) in proxy statements for the first annual meeting for the election of directors after completion of the first full fiscal year beginning on or after April 1, 2023. Smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors after completion of the first full fiscal year beginning on or after October 1, 2023.

Overlapping plans and “effective cooling-off period”: Where an individual maintains two separate Rule 10b5-1 plans with trading under the later-commencing plan not to begin until after all trades under the earlier-commencing plan are completed or have expired without execution, if such individual terminates the earlier-commencing plan, the later-commencing plan’s “effective cooling-off period” begins on the termination date of the earlier-commencing plan and will last for the cooling-off period applicable to such individual. But, if the earlier-commencing plan ends by its terms and without action by the individual, the cooling-off period for the later-commencing plan is not reset, and trading may begin as soon as the plan’s original cooling-off period is satisfied.

Calculation of “two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K”: For purposes of the cooling-off period specified in Rule 10b5-1(c)(1)(ii)(B)(1), the first business day is the next business day following the filing date of the relevant Form 10-Q or Form 10-K. The SEC provides the following example: If the relevant form is filed on a Monday, trading under the Rule 10b5-1 plan may commence on Thursday (assuming no intervening Federal holidays).

401(k) plans: An open-market transaction that is conducted by a 401(k) plan administrator, and not at the direction of a plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan.

Form 4: The Rule 10b5-1 check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan only applies to transactions made pursuant to Rule 10b5-1 trading plans adopted on or after February 27, 2023 (the effective date of the amendments to Rule 10b5-1).

Rule 10b5-1 plan terminations: Disclosure regarding termination of a Rule 10b5-1 trading plan is not required under Item 408(a)(1) of Regulation S-K for a plan that ends due to its expiration or completion (i.e., the plan ends by its terms and without any action by an individual).

Scope of Item 408(a): Item 408(a) applies to any Rule 10b5-1 or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate.

Cybersecurity Disclosures. As discussed in our Fall 2023 Corporate Communicator, on July 26, 2023, the SEC adopted final rules relating to enhanced cybersecurity disclosures, which became effective on September 5, 2023, and apply to all registrants, including smaller reporting companies and emerging growth companies. For all issuers other than smaller reporting companies, the obligation to disclose a material cybersecurity incident on a Form 8-K began on December 18, 2023. For smaller reporting companies, such obligation will begin on June 15, 2024. All issuers are required to make cybersecurity risk management and oversight disclosures in their annual reports on Form 10-K for fiscal years ending on or after December 15, 2023. All disclosures must be tagged in Inline XBRL beginning one year after the initial compliance date for the related disclosure requirement. Following is a summary of the annual and periodic reporting requirements:

Form 8-K

New Item 1.05 of Form 8-K requires disclosure within four business days if an issuer experiences a “cybersecurity incident” that is determined to be material. Required disclosure includes the material aspects of the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the issuer, including its financial condition and results of operations. To the extent that any information is not determined or is unavailable at the time of filing the Form 8-K, the issuer must include a statement to this effect and then file a Form 8-K amendment containing such information within four business days after it determines such information or such information becomes available. Item 1.05(c) and (d) of Form 8-K provides for two limited circumstances for when disclosure may be delayed. Companies considering making a request under item 105(c) that the U.S. Attorney General authorize a delay of cybersecurity incident disclosures should refer to guidelines recently issued by the Department of Justice¹ and Section 104B of the SEC's C&DIs to Form 8-K.

Disclosure under Item 1.05 will be treated as “filed” instead of “furnished”; however, the untimely filing of an Item 1.05 Form 8-K will not automatically result in the registrant’s loss of Form S-3 eligibility. Item 1.05 is also included in the list of Form 8-K items eligible for a limited safe harbor from liability under Exchange Act Rule 10b-5.

Form 10-K

Companies will be required to disclose information regarding their cybersecurity risk management, strategy, and governance under a new “Item 1C. Cybersecurity” in Part I of Form 10-K pursuant to new Item 106 of Regulation S-K. Unlike the information under Part III of Form 10-K, cybersecurity disclosures cannot be deferred to the proxy statement.

Under new Item 106(b) of Regulation S-K, a company must disclose its processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats in sufficient detail for a reasonable investor to understand those processes. A company must also describe whether and how any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the company, including its business strategy, results of operations, or financial condition.

New Item 106(c) covers the governance aspects of the new rules. Under this section, a company must describe its board of directors’ oversight of risks from cybersecurity threats. If applicable, a company must identify any board committee or subcommittee responsible for the oversight of risks from cybersecurity threats and describe the processes by which the board or such committee is informed about such risks. Companies must also describe management’s role in assessing and managing the company’s material risks from cybersecurity threats.

RECENTLY PROPOSED RULES

Climate-Related Disclosures. As discussed in last Winter’s Corporate Communicator, on March 21, 2022, the SEC proposed new disclosure requirements under Regulation S-K to enhance and standardize climate-related disclosure. The SEC’s recently released Fall 2023 Regulatory Flexibility Agenda (the “Fall 2023 Reg-Flex Agenda”) has targeted April 2024 for the adoption of final climate-related disclosure rules. Please refer to last Winter’s Corporate Communicator for a detailed discussion on the proposed climate-related disclosure requirements. Until final rules are adopted, issuers should follow guidance set forth under the SEC’s February 2010 Commission Guidance Regarding Disclosure Related to Climate Change (the “SEC Climate Guidance”). In addition, companies are reminded of the SEC’s Sample Letter to Companies Regarding Climate Change Disclosures issued in 2021 (the “Climate Change Disclosure Sample Letter”), which builds on the SEC Climate Guidance, each of which was discussed in greater detail in our Winter 2021-2022 Corporate Communicator.

Changes to Rule 14a-8. On July 13, 2022, the SEC announced proposed amendments to Exchange Act Rule 14a-8, which governs the process for including shareholder proposals in a company’s proxy statement. The Fall 2023 Reg-Flex Agenda targets April 2024 as the date for final action to approve the final rule changes. The proposed amendments look to revise 3 of the 13 substantive bases for excluding shareholder proposals under Exchange Act Rule 14a-8: the substantial implementation exclusion, the duplication exclusion, and the resubmission exclusion. The SEC believes that the proposed amendments would improve the shareholder proposal process by promoting more consistency and predictability in applying these exclusions, including as follows:

Substantial Implementation: Exchange Act Rule 14a-8(i)(10) currently allows a company to exclude a shareholder proposal that it has already “substantially implemented.” Under the proposed amendment, a proposal could be excluded as substantially implemented if the company has implemented all of the “essential elements” of the proposal. The SEC notes that the analysis of determining the essential elements of a proposal would be guided by the degree of specificity of the proposal and of its stated primary objectives. For example, the more objectives, elements, or features a proponent of a proposal identifies, the less essential the SEC staff would view each of them.

Duplication: Exchange Act Rule 14a-8(i)(11) currently allows a company to exclude a shareholder proposal that “substantially duplicates” another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting. The proposed amendment would specify that a proposal substantially duplicates another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” The SEC believes the proposed amendment would facilitate the consideration by shareholders of multiple shareholder proposals at the same meeting that may be similar to and/or address the same subject matter, but which seek different objectives or offer different means of addressing the same matter.

Resubmission: Exchange Act Rule 14a-8(i)(12) currently allows a company to exclude a shareholder proposal that “addresses substantially the same subject matter” as proposal(s) previously included in the company’s proxy materials within the preceding five years if the matter was voted on at least once in the last three years and did not otherwise achieve certain specified approval thresholds as of the most recent vote. The proposed amendments would revise the standard of what constitutes a resubmission under the rule from a proposal that addresses substantially the same subject matter as a prior proposal to a proposal that “substantially duplicates” a prior proposal. Of note is that the “substantially duplicates” standard would be in line with the changes to Exchange Act Rule 14a-8(i)(11) discussed above—that is, to be excluded, a proposal would need to address the same subject matter and seek the same objective by the same means as a prior proposal. The proposed amendments do not change the resubmission thresholds currently specified in Exchange Act Rule 14a-8(i)(12).

OTHER

Share Repurchase Rule Vacated

On November, 22, 2023, in response to a decision by the U.S. Court of Appeals for the Fifth Circuit in Chamber of Com. of the USA v. SEC, No. 23-60255 (5th Cir.), the SEC issued an order postponing the effective date of the amendments that it had adopted on May 3, 2023 that would have required additional narrative disclosure regarding an issuer’s share repurchase plans and programs, the quarterly filing of daily quantitative repurchase data, indication by a check box on Forms 10-Q and 10-K whether any Section 16 officers or directors traded in the issuer’s equity securities within four business days before or after the issuer’s announcement of a repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program, and quarterly disclosure of an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.

With a deadline of November 30, 2023 to correct defects in the share repurchase rule, the SEC made a request for an extension, which the Fifth Circuit denied on November 26, 2023. On December 1, 2023, the SEC’s Office of the General Counsel submitted a letter to the Fifth Circuit informing it that the SEC was not able to correct the defects in the rule by November 30, 2023. On December 7, 2023, the Petitioners filed a motion to vacate the share repurchase rule, which the Fifth Circuit ultimately vacated on December 19, 2023. It remains to be seen whether the SEC will appeal the decision or, alternatively, propose a new share repurchase rule that addresses the defects identified by the Fifth Circuit. Accordingly, with the share repurchase rule vacated, companies should plan on providing the disclosures required under the pre-amended version of Item 703 of Regulation S-K (i.e., prior to the adoption of the now vacated share repurchase rule) in their upcoming Annual Report on Form 10-K, subject to further guidance from the SEC on this matter.

XBRL Sample Comment Letter

On September 7, 2023, the SEC’s Division of Corporation Finance (the “Division”) posted a sample comment letter, or a “Dear Issuer” letter, containing sample comments that, depending on the particular facts and circumstances and type of filing under review, the Division may issue to companies relating to their XBRL and Inline XBRL disclosures. The sample comment letter focuses on the following, which the Division noted are not meant to be an exhaustive list of the issues that companies should consider as they prepare their XBRL and Inline XBRL disclosures:

• failure to include the required Inline XBRL presentation under Item 405 of Regulation S-T;
• materially different values tagged for the common shares outstanding reported on the cover page of a filing and on the company’s balance sheet (e.g., where this data is presented using different scales);
• ensuring that the appropriate Inline XBRL tagging is provided for all the required Regulation S-K Item 402(v) data points relating to pay versus performance disclosures (e.g., making sure to provide separate XBRL tags for each required item where a company has combined one or more sets of relationship disclosures under Item 402(v)(5) into one graph, table, or other format); and
• providing additional explanatory information to the Division where different XBRL elements were used to tag the same reported line item on the income statement from period to period or where custom tags rather than XBRL elements consistent with current U.S. GAAP were used in a company’s income statement.

The SEC noted that there is increased evidence that data in these XBRL and Inline XBRL formats is useful to investors, and with several of the recently adopted SEC rules requiring XBRL tagging (e.g., clawback, pay versus performance, and insider trading disclosures, among others), companies should make sure their SEC filings, including registration statements, proxy statements, and periodic and current reports, continue to comply with the SEC’s XBRL rules.

SEC COMMENT LETTER TRENDS AND OTHER CURRENT ITEMS

SEE COMMENT LETTER TRENDS

During the 12 months ended June 30, 2023, the first and second most common comment areas by the SEC were management’s discussion and analysis of financial condition and results of operations (“MD&A”) (number 2 in 2022 and 2021), followed by non-GAAP financial measures (number 1 in the 2022 and 2021).² In fact, within the top 5 areas of comment, there was little movement with segment reporting, revenue recognition, and climate change being the numbers 3, 4 and 5 areas of comment, respectively (numbers 3, 4 and 6 in 2022, respectively).³ Other frequent areas of comment included: risk factors; goodwill and intangible assets; business combinations; accounting error corrections, internal control over financial reporting, and disclosure controls and procedures; and statement of cash flows.⁴ According to Ernst & Young’s analysis, the SEC staff issued comment letters to significantly more registrants in 2023, reversing years of a declining trend.⁵

The majority of SEC staff comment letters relating to MD&A focused on results of operations, including insufficiently detailed discussion about the drivers of period-to-period changes in financial statement line items, as well as comments about trends and uncertainties (such as the impact of macroeconomic factors (e.g., inflation, changes in interest rates, and supply chain issues)).⁶

The SEC staff has been focused on non-GAAP financial measures for the last several years, and 2023 was no different. According to Ernst & Young, in 2023, many of the SEC staff’s comments about non-GAAP financial measures focused on the December 2022 updates to the SEC staff’s Non-GAAP Financial Measures C&DIs, specifically C&DI 100.01.⁷ For reference, C&DI 100.01 provides that although not explicitly prohibited, presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading. In this regard, many of the SEC staff’s comments inquired about whether operating expenses excluded from performance measures were “normal” or “recurring.”⁸

According to Ernst & Young, the SEC Staff’s comments on climate change disclosures continue to align with the SEC’s Climate Change Disclosure Sample Letter⁹, which builds on the SEC Climate Guidance.

As more and more companies prepare and publish extensive reports covering a variety of environmental, social, and governance matters (sometimes titled “sustainability” reports), issuers should consider that the SEC Staff may review these reports and compare the disclosure in the sustainability report to the climate-related disclosures in the issuer’s SEC filings.

Ernst & Young further noted that with respect to climate change comments, the SEC staff has often issued multiple rounds of comments, including reissuing the exact same comment where the initial response did not address all items in the comment.¹⁰

DETERMINATION AND DESIGNATION OF “EXECUTIVE OFFICERS”

As part of preparing for the annual meeting season, companies may want to carefully consider which individuals should be designated as “executive officers.” Being an executive officer of a public company brings with it important reporting requirements and other restrictions, all of which can be burdensome. As a result, the ramifications for being designated an executive officer have increased and we believe that the SEC and plaintiff attorneys may place increased scrutiny on which officers are designated, or, more importantly, not designated, as “executive officers.” As a summary, being determined and designated an executive officer implicates the following disclosure requirements and restrictions:

• New—subject to the longer 90-day cooling off period when establishing a Rule 10b5-1 trading plan (Exchange Act Rule 10b5-1)
• New—quarterly disclosure on Form 10-Q and 10-K of the terms of any adopted Rule 10b5-1 trading plan, including the name and title of the officer, the date on which the plan was adopted, modified or terminated, the duration of the plan, and the aggregate amount of securities to be sold under the plan (Regulation S-K, Item 408)
• New—for listed companies (e.g., NYSE and Nasdaq), subject to the clawback of erroneously awarded excess incentive compensation following an accounting restatement (Exchange Act Rule 10D-1)
• Existing—identification in the annual report/proxy statement as an executive officer with related biographical information (Regulation S-K, Item 401)
• Existing—subject to Section 16(a) reporting (Forms 3, 4 and 5) and related Section 16(b) disgorgement of short-swing profits (Exchange Act Rules 16a and 16b)
• Existing—companies are required to report on Form 8-K the hiring, promotion, termination, or retirement of certain executive officers as well as the details of any material compensatory plan, contract or arrangement, involving such executive offices (Form 8-K, Item 5.02)
• Existing—companies are required to file as an exhibit to Form 10-K any compensatory plan, contract or arrangement in which any executive officer participates (Regulation S-K, Item 601(b)(10))
• Existing—certain executive officers may be deemed a “named executive officer” for purposes of the extensive compensation disclosures that are required to be included in the proxy statement/Form 10-K (Regulation S-K, Item 402)
• Existing—certain executive officers may be deemed an “affiliate” under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and thus subject to additional restrictions and requirements in order to be able to avail themselves of the Rule 144 safe harbor.

Generally, the definition of “executive officer” for each of the above reporting requirements and restrictions is identical or nearly identical.¹¹ Companies should carefully consider who qualifies to be designated an executive officer and if the composition of the executive officer group for any of the above reporting requirements or restrictions is different, the company should carefully understand and document the reasons for that difference in composition. Consider whether there may be a delicate balance between having an overly broad and inclusive group, and having a group that is particularly small that might attract inquiry or increased scrutiny from the SEC or plaintiff attorneys.

ISS AND GLASS LEWIS VOTING GUIDELINES UPDATES

INSTITUTIONAL SHAREHOLDER SERVICES

On December 19, 2023, Institutional Shareholder Services (“ISS”) issued its annual update to its voting guidelines to the 2024 proxy season. While ISS updated its guidelines for Canada, Japan, and other international jurisdictions, ISS did not update or revise its guidelines for the U.S. market.

GLASS LEWIS

On November 16, 2023, Glass, Lewis & Co. (“Glass Lewis”) issued its annual update to its voting guidelines for the 2024 proxy season. At a high level, the updates focused on board and committee oversight, compensation awards and executive equity ownership. In addition, Glass Lewis clarified several of its previously stated positions.

Board Oversight of Cybersecurity Risks. In response to the SEC’s adoption of enhanced rules for public companies to disclose cybersecurity incidents and material risks, Glass Lewis will take the view for the 2024 proxy season that cyber risk is material for all companies. However, in the absence of material cybersecurity incidents, it will generally not recommend voting against any director nominees based on a registrant’s cybersecurity-related risks and oversight disclosures. If, however, a company has experienced a material cybersecurity incident, then it should expect Glass Lewis to evaluate the board’s oversight of cybersecurity risks and the company’s disclosure of the incident and remediation updates. If Glass Lewis finds the board’s oversight, response, or disclosures to be insufficient, then it may recommend against reelection of the relevant directors.

Board Oversight of Environmental and Social Issues. Due to the growing importance of the board’s role in overseeing environmental and social risks, for the 2024 proxy season, Glass Lewis believes that the board should formally designate and codify this responsibility into an appropriate committee governing document. Glass Lewis defers to the board’s discretion regarding the structure of the formal oversight of environmental and social risks, emphasizing only that the formal oversight is “meaningful.” As with the 2023 proxy season, if a company in the Russell 1000 index does not explicitly disclose the board’s role in overseeing environmental and social risks, then Glass Lewis will generally recommend voting against the governance committee chair of such a company.

Board Accountability for Climate-Related Issues. As with cybersecurity risks, Glass Lewis believes that climate-related risks are material to all companies. In the 2023 proxy season, for companies with material exposure to climate risks, Glass Lewis may have recommended voting against the board chair or the chair of the committee charged with the oversight of climate-related issues (or, if neither any committee nor the board was charged with such oversight, the chair of the nominating committee), and potentially against other responsible board members, if the company did not disclose clear board-level oversight responsibilities for climate risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures. For the 2024 proxy season, Glass Lewis is revising this position to apply to (a) companies in the S&P 500 index with material exposure to climate risk stemming from their own operations, and (b) companies where Glass Lewis believes emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.

Audit Committee Accountability for Material Weaknesses. Glass Lewis’ 2024 Voting Guidelines state Glass Lewis’ new position where a company has disclosed a material weakness in its internal control over financing reporting. For the 2024 proxy season, Glass Lewis will take the position that (a) if a material weakness is reported and the company has not disclosed a remediation plan, or (b) when a material weakness has been ongoing for more than one year, and the company has not disclosed an updated remediation plan that clearly outlines the company’s progress toward remediating such material weakness, it will consider recommending the company’s shareholders vote against all members of a company’s audit committee who served on the committee during the time when the material weakness was identified. In its consideration, Glass Lewis will consider the extent to which the audit committee report offers investors substantive information and transparency when a problem such as a material weakness, restatement, or late filing occurs, or whether such audit committee report is boilerplate.

Clawback Provisions. For the 2024 proxy season, in evaluating how to recommend voting on an advisory vote for executive compensation, Glass Lewis will consider if a company has not followed its clawback policy when applicable and, if not, the sufficiency of the company’s disclosure of its reasoning for not following its clawback policy.

Executive Equity Ownership Guidelines. For the 2024 proxy season, Glass Lewis has formalized its view on executive equity ownership guidelines: that companies should adopt and enforce minimum executive share ownership requirements and clearly disclose such requirements in their Compensation Discussion and Analysis section, along with how outstanding equity awards are counted for the ownership level calculation. However, this view does not formally impact any voting recommendations of Glass Lewis.

Proposals for Equity Awards for Shareholders. In regard to individual equity award proposals where the proposed recipient is a large shareholder with meaningful voting rights, Glass Lewis believes the company should, in its decision to grant such award, emphasize the level of approval from disinterested shareholders, and suggests that companies require an abstention vote or non-vote from the proposed recipient. For the 2024 proxy season, in its decision to recommend approving such grants, Glass Lewis will consider the presence of an abstention vote from the proposed recipient, along with the structure, disclosure, dilution, provided rationale, and other related provisions of the grant.

Clarifying Amendments. For the 2024 proxy season, Glass Lewis clarified several of its previously stated positions. Most notably, it has clarified its position on the implementation of a diverse board composition. In its voting guideline updates for the 2023 proxy season, Glass Lewis stated it would recommend voting against the chair of the nominating committee if a board is less than 30% diverse (for Russell 3000 companies) or has no directors from an underrepresented community (for Russell 1000 companies), and would also recommend voting against the chair of the governance committee of any Russell 1000 company that has not provided disclosure regarding demographic information for directors, in each case unless such company disclosed its rationale for not having such diverse characteristics and the company’s timeline for implementing such diverse characteristics. Further, Glass Lewis has revised its definition of an “underrepresented community director” to now include those directors who self-identify as “a member of the LGBTQIA+ community,” replacing the previous inclusion of directors who self-identify as “gay, lesbian, bisexual, or transgender.”

Footnotes

1. U.S. Department of Justice, Department of Justice Material Cybersecurity Incident Delay Determinations (December 12, 2023), https://www.justice.gov/media/1328226/dl?inline

2. See Ernst & Young LLP, SEC Reporting Update, Highlights of trends in 2023 SEC staff comment letters (Sept. 14, 2023), sourced from Audit Analytics—SEC UPLOAD comment letters issued related to Form 10-K and 10-Q for the 12-month periods ended June 30, 2023 and 2022, excluding SPACs and other blank check entities.

3. See id.

4. See id.

5. See id.

6. See id.

7. See id.

8. See id.

9. See id.

10. See id.

11. With the notable exception of Exchange Act Rule 16a-1(f) which is expanded to include the “principal accounting officer (or, if there is no such accounting officer, the controller)”; see also Exchange Act Rule 10b5-1(c)(ii)(B) (referencing Exchange Act Rule 16a-1(f)), Regulation S-K, Item 408(a)(1) (also referencing Exchange Act Rule 16a-1(f)), Exchange Act Rule 10D-1(d), Exchange Act Rule 3b-7, Regulation S-K, Item 402(a)(3)(iii)-(iv), and Securities Act Rule 144(a)(1).