Fenwick Securities Law Update—November 25, 2024

Welcome to the latest edition of Fenwick's Securities Law Update. This issue contains updates and important reminders on:

• Form 10-K and proxy statement disclosures and upcoming compliance deadlines
• Glass Lewis releasing its 2025 Proxy Voting Policy Guidelines 2025 U.S. Benchmark Policy Guidelines
• The U.S. Securities and Exchange Commission adopting EDGAR Next, which overhauls filer access and account management
• The Public Company Accounting Oversight Board pausing Non-Compliance with Laws and Regulations rulemaking, which was scheduled to be finalized by the end of the year
• The SEC charging an independent director with disclosure failures related to a personal relationship
• The SEC charging the audit committee chair of AI company with failing to adequately investigate a report of financial misdeeds and signing a Form 10-K containing fake revenue

Important Reminders

• Beginning December 18, Schedules 13D and 13G must be filed using an XML-based language. This structured data requirement applies to all disclosures (other than exhibits), including all quantitative disclosures, textual narratives and identification checkboxes. Filers will have the option of (1) using a fillable web form that converts inputted disclosures into 13D/13G-specific XML or (2) submit filings directly in 13D/G-specific XML format. Filers submitting filings directly in 13D/G-specific XML format may need to involve a financial printer, which could increase the time and costs of compliance. Issuers and filers should be aware that this structured data requirement will make the information easier for the public to access and analyze. For more information, please see our client alert and the SEC's final rule.
• New requirements and reminders for upcoming Annual Reports on Form 10-K (FY2024):
• • Insider Trading: Disclosure of insider trading policies and procedures required for companies, including smaller reporting companies (SRCs). A company can incorporate by reference in its Form 10-K the information required under Item 408(b) from a definitive proxy statement if the proxy statement is filed within 120 days of the end of the fiscal year. See Item 408(b)(1), C&DI 120.26, and our client alert.
  • Insider Trading: Insider trading policies must be filed as an Exhibit 19 by all companies. See Item 408(b)(2), C&DI 120.26, and our client alert.
  • Insider Trading: Narrative disclosure of certain equity award practices is required for companies, including SRCs. A company can incorporate by reference in its Form 10-K the information required under Item 402(x) from a definitive proxy statement if the proxy statement is filed within 120 days of the end of the fiscal year. See Item 402(x), C&DI 120.26,and our client alert.
  • Insider Trading: Tabular disclosure of certain equity awards granted in close proximity to the release of material non-public information is required for companies, including SRCs. A company can incorporate by reference in its Form 10-Kthe information required under Item 402(x) from a definitive proxy statement if the proxy statement is filed within 120 days of the end of the fiscal year. See Item402(x), C&DI 120.26and our client alert.
  • Clawback Checkboxes: Reminder to include the following check boxes on the Form 10-K and confirm if either event has occurred:
  • • If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
    • • According to recent SEC guidance, this first checkbox generally applies to all corrections, including "Big R" restatements, "little r" restatements, and voluntary restatements.
      • Jessica Barberich, Assistant Chief Accountant in Corp Fin, provided the following example: "If the error is immaterial to the prior year and correction in the current year would also be immaterial, the company is permitted to correct the financials through an out-of-period adjustment to the current year, and the company isn't required to restate the prior year. If the company chooses to correct the error via a restatement of the prior year, it will need to check the box. If the company instead uses an out-of-period adjustment to the current year, it does not need to check the box, because it hasn't revised previously issued financial statements." Clawbacks: Common Questions on Form 10-K Checkboxes (CompensationStandards.com, April 2024).
    • Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).
    • • According to recent SEC guidance, this check box should be marked for all "Big R" restatements and "littler" restatements, even if the company concludes that no recovery was actually required.
  • Cybersecurity: In 2024, the SEC Staff selectively reviewed Form 10-K cyber security disclosure as part of its annual review process and have issued a number of comments on the new disclosure. Initial comments primarily focused on inconsistent disclosures, not fully addressing the disclosure requirements in some cases, forgetting to include the required disclosures altogether. The areas that the SEC focused on in these comments were:
  • • Whether and how the company has integrated processes for assessing, identifying, and managing material risks from cybersecurity threats into the overall risk management system or processes
    • Whether the company engages assessors, consultants, auditors, or other third parties in connection with its processes for assessing, identifying, and managing material risks from cybersecurity threats
    • The relevant expertise of members of management involved in assessing and managing the company's material risks from cybersecurity threats
  • Recent SEC Staff commentary has also warned against boilerplate disclosure. Companies should consider these comment letter trends and recent guidance when updating cybersecurity disclosures this year.
  • Artificial Intelligence: Consider whether disclosure about how a company uses artificial intelligence and the related risks is required. Based on recent SEC Staff commentary, the SEC expects companies to:
  • • Clearly define artificial intelligence
    • Explain how they are actually using artificial intelligence
    • Explain how they are managing artificial intelligence risks
    • Have a reasonable basis for any claims about artificial intelligence prospects
  • XBRL Tagging: Insider trading and cybersecurity disclosures must now be XBRL tagged, including for SRCs.

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