SEC adopts amendments to rules governing 10b5-1 plans, related disclosures

On December 14, the Securities and Exchange Commission announced that it had voted unanimously to adopt new rules regarding Rule 10b5-1 plans and related disclosures, in addition to other matters.

The following are the key changes to the affirmative defense to insider trading liability under Rule 10b5-1(c)(1):

  • A mandatory cooling-off period (time between plan adoption and first trade) for directors and (Section 16) officers of the later of:
    • 90 days following plan adoption or modification.
    • Two business days after the disclosure of the issuer's financial results in a Form 10-Q or 10-K for the fiscal quarter in which the plan was adopted (but not to exceed 120 days after plan adoption or modification) before any trading can begin under the trading arrangement.
  • A mandatory 30-day cooling-off period for persons other than issuers or directors and officers before any trading can begin under the trading arrangement or modification. (The SEC didn't adopt a cooling-off period for issuers, given pushback from commenters on how this would impact buyback programs.)
  • A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying that, at the time of the adoption of a new or modified plan:
    • They are not aware of material nonpublic information about the issuer or its securities.
    • 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.
  • Limitations on anyone other than issuers to:
    • Use multiple overlapping Rule 10b5-1 plans, although there's an exception for separate 10b5-1 plan arrangements in place solely to enable sell-to-cover transactions upon vesting of equity awards (but not upon exercise of options).
    • Rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period.
  • A condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan.

The amendments also create new disclosure requirements that include:

  • Quarterly disclosure by registrants regarding the use of Rule 10b5-1 plans and certain other written trading arrangements by a registrant's directors and officers for the trading of its securities.
  • Annual disclosure of a registrant's insider trading policies and procedures (filed as 10-K exhibit).
  • Certain tabular and narrative disclosures regarding awards of options close in time to the release of material nonpublic information and related policies and procedures.
  • Tagging of the required disclosures.
  • A requirement that Form 4 and 5 filers indicate by check box that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

The final rules become effective 60 days after publication of the adopting release in the Federal Register. Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers will be required to comply with the new disclosure requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F, 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. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies. Read more about the new rules on the Cooley PubCo blog.

SEC updates guidance on non-GAAP financial measures

On December 13, the SEC's Division of Corporation Finance updated its Compliance and Disclosure Interpretations (C&DIs), reflecting the SEC's ongoing focus on use of potentially misleading non-generally accepted accounting principles (GAAP) financial measures. The changes include these revisions and updates:

  • C&DI 100.01 states that whether an adjustment that's not explicitly prohibited is misleading depends on the company's facts and circumstances; it also expands what may be misleading, indicating that normal recurring cash operating expenses are one example, and that an operating expense occurring repeatedly or occasionally, including at irregular intervals, will be viewed as recurring.
  • C&DI 100.04 updates prior interpretation regarding problematic individually tailored accounting principles and provides an expanded list of example presentations that may be considered misleading.
  • C&DI 100.05 is a new C&DI with examples of misleading labeling of non-GAAP measures.
  • C&DI 100.06 is a new C&DI explaining that a non-GAAP financial measure could be so misleading that even extensive, detailed disclosure about each adjustment's nature and effect would not prevent it from being materially misleading.
  • C&DI 102.10 updates, breaks into subparts and expands examples of presentations of non-GAAP financial measures that would violate the equal or greater prominent requirement.

SEC announces enforcement results for 2022

On November 15, the SEC announced its fiscal year 2022 enforcement statistics, setting records and highlighting the current administration's robust enforcement activity. According to the press release, the SEC filed 760 enforcement actions in 2022, representing a 9% increase over 2021, including 462 new enforcement actions, a 6.5% increase over 2021. The SEC recovered a record $6.4 billion in civil penalties, disgorgement and prejudgment interest in actions, a 68% increase from $3.8 billion in 2021. While civil penalties hit a record high of $4.2 billion in 2022, disgorgement penalties declined by 6% from 2021.

As reported by The Wall Street Journal, Division of Enforcement Director Gurbir Grewal highlighted the fact that the SEC imposed more penalties than disgorgements in 2022, which "demonstrates that the potential consequences of violating the law are significantly greater than the potential rewards.'" The SEC press release also addressed various other focus areas for enforcement, including investigations in parallel with criminal law enforcement, the use of data analytics, meaningful cooperation during an investigation, rewarding and protecting whistleblowers, environmental, social and governance (ESG), cybersecurity, crypto, financial fraud and public company disclosures, and the Foreign Corrupt Practices Act, among other topics. For more information, refer to this PubCo blog post about SEC enforcement stats.

Spencer Stuart publishes 2022 board index

Spencer Stuart published its 2022 US board index in October, analyzing the board governance practices of the S&P 500. This annual index includes statistics on board diversity and demographics, as well as trends related to board size, average director age and tenure, CEO demographics, director compensation matters, and other topics. A few key takeaways include:

  • 72% of the 395 new independent directors added over the past year are from historically underrepresented groups.
  • 98% of boards include two or more women directors, compared with 61% of boards in 2012.
  • 18% of the incoming class of 2022 directors were age 50 and younger, up from 16% in 2021.
  • 70% of boards report a mandatory retirement policy, and 53% of those boards have set the retirement age at 75 or older.
  • 93% of companies disclose their board's racial or ethnic composition, up from 60% in 2021.
  • 15% of companies included LGBTQ+ disclosure in their proxy statement, more than twice as many as in 2021 (6%).
  • Average board tenure is 7.8 years, up from 7.7 years in 2021, but down from 8.6 years in 2012.

For more information, refer to this brief highlights report and this comparison of governance practices by sector.

Glass Lewis releases policy guidelines for US proxy voting, ESG initiatives

On November 17, Glass Lewis published its 2023 US proxy voting policy guidelines, with several changes to its 2022 guidelines, including:

  • It will transition from a fixed numerical approach to a percentage-based approach for gender diversity, and it will generally recommend voting against the nominating committee chair of any board that is less than 30% gender diverse at companies in the Russell 3000.
  • It will generally recommend voting against the nominating committee chair of any board with fewer than one director from an "underrepresented community" at companies in the Russell 1000.
  • It will generally recommend voting against the chair of the nominating and/or governance committee for companies in the Russell 1000 with particularly poor disclosure of director diversity and skills.
  • It will generally recommend voting against the chair of the governance committee where companies in the Russell 1000 have not provided any disclosure of individual or aggregate racial/ethnic minority board demographic information.
  • It will generally recommend voting against the governance committee chair of any company in the Russell 1000 that fails to provide explicit disclosure concerning the board's role in overseeing environmental and social issues.
  • It believes companies with material exposure to climate risk stemming from their own operations should provide thorough climate-related disclosures in line with recommendations from the Task Force on Climate-Related Financial Disclosures.
  • It notes that boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues, and that it may recommend voting against responsible directors in instances where it finds these disclosures to be absent or significantly lacking.
  • It will closely evaluate proposals to adopt officer exculpation provisions on a case-by-case basis and, unless a compelling rationale for the adoption is provided by the board and the provisions are reasonable, it generally will recommend voting against proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers.

In addition, Glass Lewis made changes to its voting guidelines related to overboarding, board oversight of cybersecurity risks and the minimum percentage of long-term incentive grants that should be performance-based.

In its 2023 ESG initiatives policy guidelines, Glass Lewis made further changes from 2022, including:

  • In their proxy statements, companies should provide clear disclosure concerning the identity of the proponent (or lead proponent, if multiple proponents have submitted a proposal) of any shareholder proposal that may be going to a vote, or it will generally recommend voting against the governance committee chair.
  • For shareholder proposals requesting racial equity or civil rights audits, it will assess these factors, after which it will generally recommend voting in favor of well-crafted proposals:
    • The nature of the company's operations.
    • The level of disclosure provided by the company and its peers on its internal and external stakeholder impacts - and the steps it is taking to mitigate any attendant risks.
    • Any relevant controversies, fines or lawsuits.
  • It may recommend voting against proposals requesting companies adopt a policy that shareholders must approve severance payments exceeding 2.99 times the amount of the executive's base salary and bonus, where companies have already adopted such policies.

ISS ESG updates Governance QualityScore methodology

On October 31, ISS ESG announced changes to the methodology it uses to calculate its Governance QualityScore (GQS), which is a scoring and screening solution designed to assist institutional investors in reviewing a company's governance quality and governance risk. The methodology updates include 23 new factors affecting scores, spread across the following areas:

  • Information security
  • Director skills
  • Director and executive pledging
  • Emerging risk oversight
  • Diversity, equity and inclusion
  • ISS pay-for-performance concerns
  • The Holding Foreign Companies Accountable Act

The announcement also included the news that 52 existing factors will be applied to companies based in new jurisdictions for global comparability of best governance practices.

SEC announces strategic plan for 2022 to 2026

On November 23, the SEC announced its strategic plan for fiscal years 2022 to 2026, which substantially tracks with the draft plan released in August. (Refer to our September One-Minute Reads for more on the draft plan.) The strategic plan lays out three primary goals:

  1. "Protect the investing public against fraud, manipulation, and misconduct."
  2. "Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies."
  3. "Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives."

The strategic plan also includes several components for each primary goal, such as pursuing enforcement and examination programs, updating existing SEC rules and approaches for evolving technologies, and supporting a skilled and diverse workforce.

ISS publishes cybersecurity disclosure benchmarking report

On November 17, ISS published a progress report that benchmarks cybersecurity disclosures among the S&P 500 and Russell 3000, while referencing cybersecurity-related questions included in ISS's GQS. Some key takeaways include:

  • While 31% of the S&P 500 and 58% of the Russell 3000 provide just general disclosure when identifying and mitigating information security risks, 69% and 40% (respectively) disclose a "clear approach."
  • 11% of the S&P 500 and 48% of the Russell 3000 disclosed no directors with cybersecurity experience, while most S&P 500 companies disclosed having more than one director with cybersecurity experience.
  • While only 23% of the S&P 500 do not disclose whether or how often senior leadership briefs the board on information security matters, 62% of the Russell 3000 does not disclose the same information.
  • 64% of the Russell 3000 disclose no information on the company's information security training program, compared to just 24% of the S&P 500.
  • 61% of the S&P 500 and 49% of the Russell 3000 disclose entering into an information security risk insurance policy.

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