The SEC adopted a flurry of new and amended rules in the last few months and as the various requirements of these rules go into effect, this will lead to changing disclosure requirements for SEC registrants. With new disclosures related to share repurchases, executive compensation clawback policies, 10b5-1 plans and cybersecurity incidents, among others, keeping track of when different disclosure and compliance requirements are applicable is a complex maze for in-house counsel.
In the below chart, we outline the timeline for compliance, noting when ongoing reporting obligations are first applicable, and we discuss additional practical implications below the chart (as the information in the chart is a summary of the changes, the chart is of course not a substitute for referring to the rules themselves). For more information about the specifics of each of the different rules by topic, see our prior blog posts [1]:
- Rule 10b5-1 amendments: The SEC Adopts Final Rules on Rule 10b5-1 Trading Plans and Related Disclosures, SEC Issues Three C&DIs Addressing the Rule 10b5-1 Amendments;
- Clawbacks: SEC Adopts Final Clawback Rules for Incentive-Based Compensation, Recent Legal Developments Relating to Compensation Clawbacks, Compliance with new clawback rules may be required by August 8, Compliance with new US clawback rules delayed to December 1, 2023;
- Share repurchases: If You Buy, Tell Us Why (and When, and How): SEC Adopts New Share Repurchase Disclosure Requirements and
- Cybersecurity disclosure: SEC Adopts Cybersecurity Disclosure Rule.
| Key Dates & Deadlines [2] | Disclosure Requirements | Relevant Rule | Disclosure Frequency | |
|---|---|---|---|---|
| Beginning January 11, 2023 |
|
| Annually | |
| Beginning February 27, 2023 |
|
| ||
| Beginning April 1, 2023 | New Form 4 disclosures
| As needed | ||
| Beginning April 13, 2023 |
|
| As needed | |
| Beginning Late Summer 2023 Q2 Form 10-Q and quarterly thereafter | Use of Rule 10b5-1 by a registrant’s directors or Section 16 officers
|
| Quarterly | |
| December 1, 2023 |
| |||
| Beginning December 18, 2023 | New Form 8-K requirement: cybersecurity incident reporting
|
| Current Reporting | |
Beginning Winter 2024 Form 10-K for FY 2023 and quarterly thereafter | Disclosure of share repurchases by the registrant or its “affiliated purchasers”
|
| Quarterly | |
Additional disclosure of share repurchases
|
| Quarterly | ||
Disclosure related to the registrant’s clawback policy
|
| Annually | ||
Disclosure when clawback policy is triggered
|
| Annually | ||
Disclosure when clawback policy is triggered
|
| Annually | ||
Disclosure of cybersecurity risk management, strategy and governance
|
| Annually | ||
| Beginning December 18, 2024 | Tagging of cybersecurity incident reporting on Form 8-K*
|
| Current Reporting | |
Beginning Winter 2025 Form 10-K for FY 2024 and annually thereafter | Disclosure of the registrant’s insider trading policy as an exhibit
|
| Annually | |
Disclosure related to the registrant’s insider trading policy
|
| Annually | ||
Disclosure of option awards made close in time to the release of material nonpublic information, including
|
| Annually | ||
|
| Annually |
Additional Considerations and Tips for Compliance
Please refer below for additional details on the new SEC rules discussed above along with practical recommendations to help registrants address the broader implications of the new rules.
Section 16 Filings
Recommendations:
- Registrants should consider advising their Form 4 filers to review their gifting and estate planning practices with their personal advisors to ensure compliance with the two-day filing deadline for reporting gifts of equity securities
- For registrants that handle Section 16 filings for directors and Section 16 officers, ensure there is sufficient training and that internal practices are updated to allow for the registrant to continue making timely filings on their behalf
10b5-1 Trading Plans
Recommendations:
- Review internal processes to ensure that they are designed to review and track insider trading plans for purposes of complying with the new disclosure obligations
- Educate directors, Section 16 officers and other employees with 10b5-1 plans regarding the new rules (e.g., cooling off periods, new director and Section 16 officer certifications and reporting of bona fide gifts) to ensure compliance
- Review the registrant’s reporting calendars to ensure directors, officers and others understand how compliance with the new “cooling off” period requirements align with registrant practices on open windows
- Be mindful of the sell-to-cover exception when approving full value equity awards and managing equity award programs to allow insiders to take advantage of this exception (if desired), in particular consider:
- For registrants that provide for a sell-to-cover mechanism for settling tax withholding obligations, approve a non-discretionary sell-to-cover tax withholding mechanism as part of the equity award grant or equity award program; and/or
- Eliminate the discretion for insiders (e.g., directors, officers and others who might potentially possess material non-public information) to select their tax withholding percentages and methods for equity compensation awards
Rule Recap:
- Trading plans adopted or modified on or after February 27, 2023 are subject to new requirements
- Cooling off period for first trades to begin after adoption or modification of a 10b5-1 plan
- Directors and Section 16 officers: later of 90 days or 2 business days after a Form 10-Q or Form 10-K filing for the fiscal quarter in which the plan was adopted (up to a maximum of 120 days)
- All others: 30 days
- Director and Section 16 officer certification (which can be included in the Rule 10b5-1 plan as a representation)
- At the time of adoption or modification of any 10b5-1 plan, directors and Section 16 officers must certify, via representations in the 10b5-1 plan, that:
- They are not aware of any material non-public information about the registrant or its securities; and
- They are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5
- At the time of adoption or modification of any 10b5-1 plan, directors and Section 16 officers must certify, via representations in the 10b5-1 plan, that:
- Clarification that 10b5-1 plans must be entered into in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 and the person who entered into the plan has acted in good faith with respect to the plan
- Limitations on the ability for persons, other than registrants, to rely on the affirmative defense for a single-trade plan to one single-trade plan during any consecutive 12-month period
- The affirmative defense under Rule 10b5-1 is not available for persons, other than registrants, entering into overlapping 10b5-1 plans with limited exceptions for:
- separate contracts with different broker dealers due to securities being held in different accounts (treated as a single plan);
- sell-to-cover transactions undertaken to satisfy tax withholding obligations arising from the vesting or settlement of compensatory awards (other than stock options); and
- two separate plans where trades under the later-commencing plan is not authorized to begin until all trades under the earlier-commencing plan are completed or expire without execution and after the “effective” cooling off period has elapsed (except for expiring plans that are not terminated or modified where trades under the later-commencing plan may begin immediately following the expiration of the expiring plan)
- Cooling off period for first trades to begin after adoption or modification of a 10b5-1 plan
Insider Trading Policies
Recommendations:
- Update insider trading policies or 10b5-1 plan policies to align with the amendments to Rule 10b5-1 (including cooling off periods, overlapping or single-trade plans, amendments/terminations of existing plans and applicability to gifts)
- Pay particular attention to blackout periods when reviewing insider trading policies as these policies will be required to be publicly disclosed
Share Repurchases
Recommendations:
- Carefully consider and plan for how the justifications, triggers and timing of repurchase programs and repurchase activity will be perceived by investors, stakeholders and regulators
- Limit or coordinate transactions that would trigger potentially unfavorable disclosure
- Incorporate the repurchase activity reporting and qualitative disclosure into disclosure controls and procedures by:
- carefully considering how to implement these new requirements in disclosure controls and procedures;
- assessing whether any changes will be required; and
- communicating as necessary with disclosure committees, internal or external auditors or audit committees and modifying upward certification processes
Option Awards
Recommendations:
- Consider adopting new or amending existing option grant policies to provide specific parameters for granting option awards to reduce the discretion registrants can exercise when granting such awards
- e.g., prescribing a predetermined, non-discretionary schedule for granting option awards
- Be mindful of when option awards are granted to named executive officers to avoid triggering the new tabular disclosure of option awards granted close in time to the release of material non-public information
- e.g., registrants may need to reschedule preestablished board or compensation committee meetings at which option grants are scheduled to be made
Compensation Clawback Policies
Recommendations:
- Review existing clawback policies for compliance with the anticipated new listing standards
- Consider whether go-forward clawback policy will include provisions beyond the legal requirements (e.g., clawback on misconduct)
- Prepare a compliant clawback policy and make any other amendments to existing compensation plans or arrangements with the compensation committee and board calendars
- Socialize the clawback policy among management, the compensation committee and/or board and other key stakeholders
- Implement compliance practices to align with new clawback policy and designate a person responsible for tracking compliance
- Consider any changes to executive compensation programs to provide executive officers additional financial security and ease increased administrative burdens under the new rules
Rule Recap:
- Registrants will have 60 days after the effective date of October 2, 2023 (i.e., by December 1, 2023) to adopt clawback policies that are compliant with the applicable listing standards
- The SEC directed the stock exchanges to establish listing standards requiring registrants to adopt clawback policies that:
- apply to any current or former executive officer of a registrant who served in that capacity at any time during the 3-year look-back period or any transition period (within the meaning of the final rules)
- the 3-year look-back period consists of the three completed fiscal years immediately preceding the earlier of:
- the date a registrant concludes, or reasonably should have concluded, that it is required to prepare a restatement; or
- the date a court or authorized body mandates a registrant to prepare a financial restatement
- the 3-year look-back period consists of the three completed fiscal years immediately preceding the earlier of:
- are triggered if a registrant is required to prepare either:
- a financial restatement that corrects an error in prior period financial statements that is material to that financial statement; or
- a financial restatement to correct an error that is not material to prior period financial statements of the registrant, but would result in a material misstatement in the current period financial statement if left uncorrected or if the correction were recorded only in the current period
- include clawback of cash and equity-based incentive compensation that is granted, earned or vested based wholly or in part on the achievement of a financial reporting measure and received or deemed received during the covered period to the extent it is in excess of what would have been received
- require registrants to seek recovery reasonably promptly after the policy is triggered except in limited circumstances where recovery would be impracticable because:
- the cost of enforcement exceeds the amount to be recovered;
- recovery violates the pre-existing home-country laws of a foreign registrant as in effect on the publication date of the final rules based on the opinion of counsel; or
- recovery would likely cause the loss of tax-qualified status of a broad-based employee benefit plan
- Before concluding that recovery is impracticable, however, a registrant must make a “reasonable attempt” to recover the incentive-based compensation
- restrict the registrant from indemnifying executives against the losses of recovered amounts or pay premiums on an insurance policy that would cover executives’ potential clawback obligations
- may be amended as the compensation committees/boards deem necessary, including as and when it is legally required by any federal securities laws (including the final rules)
- apply to any current or former executive officer of a registrant who served in that capacity at any time during the 3-year look-back period or any transition period (within the meaning of the final rules)
- Both the NYSE and Nasdaq proposed listing standards include a notice and cure period for registrants that fail to timely adopt compliant clawback policies by the applicable effective date. Failure to adopt compliant clawback policies after the cure period is expected to lead to suspension and delisting procedures
Cybersecurity Disclosure
Recommendations:
- Review disclosure control policies and procedures for identifying and escalating cybersecurity incidents
- Perform periodic reviews of cyber posture and resourcing
- Strengthen governance and oversight of mission-critical cybersecurity risks, and consider auditing policy framework and implementation practices
- Seek vulnerability assessment and penetration testing to enable necessary remedial efforts
Asterisks (*) indicate an XBRL tagging requirement.
† indicates that this information is required to be disclosed in a registrant’s Form 10-K, but may be incorporated by reference from the relevant proxy statement so long as the proxy statement is filed within 120 days of the end of the fiscal year.
[1]
The final SEC rule setting listing standards for clawback policies and the new C&DI regarding Form 10-K clawback checkboxes can be found here and here, respectively; the NYSE and Nasdaq proposed rules can be found here and here, respectively; the amendments filed by the NYSE and Nasdaq can be found here and here, respectively. The final SEC rule on Rule 10b5-1 trading plans and related disclosures and the new C&DI regarding overlapping 10b5-1 trading plans and the timing for compliance can be found here and here, respectively. The final SEC rule on share repurchase disclosure can be found here. The final SEC rule on cybersecurity disclosure can be found here.
[2]
Each of the deadlines assume the registrant is not a smaller reporting company or a foreign private issuer and has a fiscal year end of December 31, unless otherwise noted.
