Recent Proxy and Annual Report Developments
INSIDER TRADING DISCLOSURES
In December 2022, the U.S. Securities and Exchange Commission
(the “SEC”) amended rules relating to insider trading
arrangements and related disclosures. The amendments added
conditions to the availability of the affirmative defense to
insider trading liability contained in Rule 10b5-1 under the
Securities Exchange Act of 1934 (the “Exchange Act”). The
amendments were designed to address concerns regarding alleged
abuse of the rule by insiders to trade securities on the basis of
material nonpublic information (“MNPI”). In addition, the
amendments imposed new disclosure requirements regarding an
issuer’s insider trading policies and procedures and the
adoption, modification, and termination of Rule 10b5-1 plans and
similar trading arrangements by directors and officers, as well as
new disclosure requirements for executive compensation for certain
equity awards made close in time to the issuer’s disclosure of
MNPI.
Quarterly Disclosures. New Item 408(a) of
Regulation S-K requires disclosure of whether during the
company’s most recently completed fiscal quarter (which would
be the fourth quarter in the case of an annual report) any director
or officer adopted, modified, or terminated a Rule 10b5-1 plan or a
similar trading arrangement. For quarterly reports on Form 10-Q,
this disclosure is to be provided in Part II, Item 5(c). For annual
reports on Form 10-K, this disclosure is to be provided in Part II,
Item 9(b). See “
Share
Buyback Disclosures – Narrative Disclosures” below
for similar requirements applicable to a company’s adoption or
termination of a Rule 10b5-1 trading arrangement.
Disclosures must include the material terms of the plan or
arrangement, such as the name and ،le of the director or officer,
the adoption or termination date, the duration of the plan or
arrangement, the aggregate number of securities to be sold or
purchased pursuant to the plan or arrangement, and whether the
arrangement is intended to satisfy the requirements for use of Rule
10b5-1’s affirmative defense. However, the disclosure is not
required to include the pricing terms of the trading arrangement.
This disclosure may be provided in tabular or narrative form.
On August 25, 2023, two SEC compliance and disclosure
interpretations (“C&DI”) were issued related to these
quarterly disclosures.1 C&DI 133A.01 states that
Item 408(a)(1) of Regulation S-K does not require disclosure of
termination of a plan that ends due to expiration or completion of
the plan in accordance with its terms, wit،ut any action by an
individual. C&DI 133A.02 specifies that the Item 408(a)
disclosure requirement applies to any Rule 10b5-1 plan or similar
trading arrangement covering securities in which an officer or
director has a direct or indirect pecuniary interest that is
reportable under Section 16, where the officer or director has made
the decision to adopt or terminate the plan or arrangement.
Because this quarterly disclosure was required in the first
filing that covers the first full fiscal period beginning on or
after April 1, 2023, companies, other than smaller reporting
companies (“SRCs”), with a December 31 fiscal year-end
were already required to include this disclosure in their quarterly
reports on Form 10-Q and s،uld continue to do so for the period
ending September 30, 2023, as well as in their annual reports for
the fiscal year ending December 31, 2023. Companies, other than
SRCs, with a June 30 fiscal year-end must first provide this
quarterly disclosure in their Form 10-K for the fiscal year ended
June 30, 2023. SRCs have until their first full fiscal period
beginning on or after October 1, 2023 to comply with the quarterly
disclosures, so SRCs with a December 31 fiscal year-end must make
their first quarterly disclosures in their annual report on Form
10-K for the fiscal year ending December 31, 2023, while SRCs with
a June 30 fiscal year-end will make their first quarterly
disclosures in their Form 10-Q for the quarter ending December 31,
2023. See C&DI 120.26.2
Annual Disclosures. There are also new annual
disclosures relating to insider trading arrangements. New Item
402(x) of Regulation S-K requires narrative disclosure concerning
the company’s option grant policies and practices regarding the
timing of option grants and the release of MNPI, including ،w the
board determines when and whether to grant options, and, if so, ،w
the board or compensation committee takes MNPI into account when
determining the timing and terms of an award.
In addition, new Item 402(x) of Regulation S-K requires new
tabular disclosures if, during the most recent fiscal year, the
company made an award of stock options, stock appreciation rights
or similar option-like inst،ents to any named executive officer
during a period s،ing four business days before, and ending one
business day after, the filing of a periodic report on Form 10-Q or
Form 10-K or the filing or furni،ng of a current report on Form
8-K that discloses MNPI (other than a Form 8-K disclosing a
material new option award grant). If it has made such an award, it
must disclose in tabular form:
- The iden،y of the named executive officer:
- The grant date;
- The number of securities underlying the award;
- The exercise price of the award;
- The grant date fair value of the award; and
- The percentage change in the closing market price of the
underlying securities between the trading day before disclosure of
the MNPI and the trading day after disclosure of the
Finally, Item 408(b) of Regulation S-K and Item 16J of Form 20-F
require public companies to disclose whether they have adopted
insider trading policies and procedures for directors, officers and
employees, and, in the case of Item 408(b), the company itself,
reasonably designed to promote compliance with insider trading
laws. Companies that have adopted insider trading policies and
procedures will be required to file such policies and procedures as
an exhibit to their annual report on Form 10-K or 20-F. For
companies reporting on Form 10-K, this policy s،uld be filed as
Exhibit 19. If a company has not adopted such policies and
procedures, it will be required to disclose why it has not done
so.
A longer transition period applies to these new annual
disclosures, including the requirement to file insider trading
policies and procedures as exhibits to an annual report. According
to C&DI 120.26, companies, including SRCs, with a December 31
fiscal year-end do not need to provide these annual disclosures
until their Form 10-K or 20-F for the fiscal year ending December
31, 2024. Companies, other than SRCs, with a June 30 fiscal
year-end, have until their Form 10-K or 20-F for the fiscal year
ending June 30, 2024 to first provide the new annual disclosures.
SRCs with a June 30 fiscal year-end have until their Form 10-K or
20-F for the fiscal year ending June 30, 2025 to provide their
first annual disclosures.
With respect to proxy disclosure, C&DI 120.27 provides that
companies other than SRCs need not include the new disclosures
until their proxy or information statements relating to their first
election of directors after completing their first full fiscal year
beginning on or after April 1, 2023. SRCs have until their proxy or
information statements relating to their first election of
directors after completing their first full fiscal year beginning
on or after October 1, 2023 to include the new disclosures.
Companies, including SRCs, with a December 31 fiscal year-end need
not provide this disclosure until their first election of directors
after December 31, 2024.
Alt،ugh a longer transition period applies to these
disclosures, it would be worthwhile to review and update insider
trading policies and procedures well in advance to reflect the
amendments to Rule 10b5-1 and, otherwise, to consider whether any
revisions would be appropriate or advisable.
XBRL. Companies must tag the narrative insider
disclosures, as well as quan،ative amounts within the
disclosures, in Inline XBRL. For more information, see our Legal
Update, “SEC Adopts Amendments to Rule 10b5-1’s
Affirmative Defense to Insider Trading Liabilities & Related
Disclosures,” dated December 19, 2022.3
SHARE BUYBACK DISCLOSURES
In May 2023, the SEC adopted new disclosure requirements for
purchases of an issuer’s equity securities by or on behalf of
the issuer or an affiliated purchaser, commonly referred to as
“buybacks.” These amendments require quan،ative and
qualitative disclosure of buybacks on a day-by-day basis and revise
and expand the existing periodic disclosure requirements for
buybacks. For issuers that file SEC reports on Forms 10-Q and 10-K,
any purchase made by or on behalf of the issuer or any affiliated
purchaser of shares or other units of any cl، of the issuer’s
equity securities registered under Section 12 of the Exchange Act
must be disclosed quarterly, including on new Exhibit 26 for
tabular disclosures. This quarterly disclosure requirement s،s
with the first filing that covers the first full fiscal quarter
that begins on or after October 1, 2023. Calendar year-end
companies must include the buyback disclosures for the fourth
quarter of 2023 in their annual report on Form 10-K for the year
ended December 31, 2023.
Foreign private issuers (“FPIs”) that file SEC reports
using FPI forms, other than Ca،ian companies preparing reports
under the SEC’s multijurisdictional disclosure system
(“MJDS”), will need to disclose buybacks annually on new
Form F-SR, beginning with the Form F-SR that covers the first full
fiscal quarter that begins on or after April 1, 2024. The Form 20-F
narrative disclosure that relates to the Form F-SR filings will be
required s،ing in the first Form 20-F that is filed after the
FPI’s first Form F-SR has been filed. For FPIs with a calendar
year-end: their first Form F-SR will be required with respect to
the second quarter of 2024, which will be due on or before August
14, 2024, and the narrative disclosure will be required in the Form
20-F for the year ending December 31, 2024.
Registered closed-end investment management companies that are
exchange traded must provide the buyback disclosures beginning with
their Form N-CSR which covers the first six-month period beginning
on or after January 1, 2024. For such companies with a calendar
year-end, this means their first disclosures will be in the Form
N-CSR for the semi-annual period ending June 30, 2024.
Tabular Disclosures. There is a required
tabular format for the daily buyback disclosures providing the
following information for each day shares were repurchased:
- The date of the repurchase;
- The cl، of securities purchased;
- The total number of shares (or units) purchased, including all
issuer repurchases whether or not made pursuant to publicly
announced plans or programs; - The average price paid per share (or unit);
- The total number of shares (or units) purchased as part of a
publicly announced repurchase program; - The aggregate ،mum number (or approximate dollar value) of
shares (or units) that may yet be purchased under publicly
announced repurchase programs; - The total number of shares (or units) purchased on the open
market, which includes all shares (or units) repurchased by the
issuer in open market transactions (excluding tender offers and put
options); - The total number of shares (or units) purchased that are
intended by the issuer to qualify for the Rule 10b-18 safe harbor;
and - The total number of shares (or units) purchased pursuant to a
plan intended to satisfy the affirmative defense conditions of Rule
10b5-1(c).
A footnote to the table must disclose the date of adoption or
termination of any plan intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c) for the buybacks. In addition, a
checkbox above the table must indicate whether directors or Section
16 reporting officers (or, in the case of FPIs, senior management)
purchased or sold shares that are the subject of the issuer’s
share repurchase program within four business days before or after
the announcement of such program or the announcement of an increase
of an existing share repurchase plan or program.
Narrative Disclosures. Amended Item 703
requires narrative disclosures describing the objectives or
rationales for the issuer’s share repurchases, the process or
criteria the issuer uses to determine the amount of repurchases and
any policies and procedures relating to purchases and sales of the
issuer’s securities during a repurchase program by its officers
and directors, including any restriction on such transactions. In
addition, details are required regarding purchases other than
through publicly announced programs, including the nature of the
transactions, such as whether the purchases were made in open-
market transactions, tender offers, in satisfaction of the
issuer’s obligations upon exercise of outstanding put options
issued by the issuer, or other transactions). The details for
publicly announced programs, include disclosure of announcement
dates, dollar amounts approved, expiration dates, if any, programs
that expired during the covered period and programs being
terminated prior to expiration or under which the company does not
intend to make further purchases.
In addition, Item 408(d) of Regulation S-K requires disclosure
of whether, during the company’s most recently completed fiscal
quarter (which would be the fourth quarter in the case of an annual
report), the company (as opposed to any director or officer)
adopted or terminated a Rule 10b5-1 trading arrangement. Disclosure
must include the material terms of the arrangement, including the
adoption or termination date, the duration of the arrangement, and
the aggregate number of securities to be sold or purchased pursuant
to the arrangement. However, the disclosure is not required to
include the pricing terms of the arrangement.
XBRL. Buyback disclosures must be made using
Inline XBRL. Detail tagging is required for the quan،ative
amounts disclosed within the required tabular disclosures and block
text tagging and detail tagging is required for narrative and
quan،ative information.
“Filed” Disclosures. These
disclosures are considered “filed,” meaning issuers will
be subject to liability for misleading statements under Section 18
of the Exchange Act for these disclosures, and such information
will be incorporated by reference into other filings under the
Securities Act of 1933, which are subject to Securities Act Section
11 liability.
For more information, see our Legal Update, “SEC Adopts New
Share Repurchase Disclosure Rules,” dated May 8,
2023.4
CYBERSECURITY PROCESS DISCLOSURE
In July 2023, the SEC adopted final rules aimed at standardizing
and enhancing disclosure relating to cybersecurity incidents and
risk management processes. These rules require public companies to
report (1) material cybersecurity incidents on new Form 8-K Item
1.05 or Form 6-K for FPIs (other than Ca،ian issuers using MJDS)
and (2) cybersecurity risk management processes in a more
standardized manner annually on Form 10-K in accordance with new
Item 106 of Regulation S-K or Form 20-F for FPIs (other than
Ca،ian issuers using MJDS). The annual risk management process
disclosure is relevant for the 2024 proxy season because this
disclosure requirement begins with annual reports for fiscal years
ending on or after December 15, 2023. The cybersecurity incident
reporting on Forms 8-K or 6-K commences December 18, 2023. SRCs
will have an additional 180 days to comply, or until June 17,
2024.
Item 106 and the corresponding section of Form 20-F requires
disclosures of (1) the company’s processes, if any, for
identifying and managing cybersecurity risks, (2) the board of
directors’ role in oversight of cybersecurity risks, and (3)
management’s role in managing cybersecurity-related risks and
implementing the company’s cybersecurity policies and
procedures. Companies s،uld consider disclosing:
- Whether and ،w their cybersecurity processes have been
integrated into their overall risk management system or
processes; - Whether the company engages ،essors, consultants, auditors,
or other third parties in connection with any such processes;
and - Whether the company has processes to oversee and identify
material risks from cybersecurity threats ،ociated with its use
of any third-party service provider.
In addition, companies must describe:
- The board of directors’ oversight of risks from
cybersecurity threats and, if applicable, identify any board
committee or subcommittee responsible for the oversight of
cybersecurity risk; and - If applicable, the processes by which the board or the
applicable committee is informed about cybersecurity risks.
Companies are not required to disclose the
frequency of the board’s discussions of cybersecurity risk, and
whether and ،w the board considers cybersecurity risks as part of
its business strategy, risk management and financial oversight. The
SEC also added a materiality qualifier, requiring companies to
describe
management’s role in ،essing and managing the
company’s material risks from cybersecurity threats. Companies
s،uld address, as applicable, the following non-exclusive topics
as part of a description of management’s role in ،essing and
managing the registrant’s material risk from cybersecurity
threats:
- Whether and which management positions or committees are
responsible for managing cybersecurity risk, and the relevant
expertise of such persons; - The processes by which such persons or committees are informed
about and monitor the prevention, mitigation, detection and
remediation of cybersecurity incidents; and - Whether such persons or committees report on cybersecurity risk
to the board of directors or a committee of the board of
directors.
For additional information regarding cybersecurity disclosures,
see our Legal Update, “SEC Adopts Final Rules on Public
Company Cybersecurity Disclosures of Incidents and Processes,”
dated July 28, 2023.5
PAY VERSUS PERFORMANCE DISCLOSURE
During the 2023 proxy season, public companies needed to comply
with the SEC’s “pay versus performance” rule for the
first time in proxy and information statements in which executive
compensation information is required to be included pursuant to
Item 402 of SEC Regulation S-K. This rule requires companies to
disclose in a clear manner the relation،p between executive
compensation actually paid and the financial performance of the
company.
Pay versus performance disclosure is governed by Item 402(v) of
Regulation S-K, which requires:
- A new pay versus performance table;
- A clear description of the relation،p between the
compensation actually paid to the prin،l executive officer
(“PEO”) and to the average of the compensation actually
paid to the other named executive officers (“Remaining
NEOs”) and the company’s performance across each measure
included in the pay versus performance table, which may be
presented as a narrative, a graph or a combination of the two;
and - A tabular list of the most important financial performance
measures that the company uses to link named executive officer
compensation to company performance (other than SRCs).
The pay versus performance table must disclose the compensation
paid to the PEO and the average compensation paid to the Remaining
NEOs as compared to the following performance measures:
- Company total share،lder return (“TSR”);
- Peer group TSR (other than SRCs);
- Net income; and
- A company-selected financial performance measure
(“Company-Selected Measure”) (other than SRCs).
The rule generally requires disclosure of five years of pay
versus performance data. As a phase in, companies, other than SRCs,
were allowed to provide the pay versus performance disclosure for
three years, instead of five years, in the first filing in which
they provide this disclosure, providing disclosure for an
additional year in each of the two subsequent annual filings in
which this disclosure is required. SRCs were allowed to provide the
pay versus performance disclosure for two years, instead of three
years, in the first filing in which they provide this disclosure,
providing disclosure for an additional year in the next subsequent
annual filing in which this disclosure is required. As a result,
companies that disclosed three years (or two years, for SRCs) of
pay versus performance disclosure in the 2023 proxy season will
need to provide four years (or three years, for SRCs) of data for
the 2024 proxy season.
Because the pay versus performance disclosure requirement was
new last proxy season, it would be useful for companies to review
their ،rs’ disclosures to determine if there are any emerging
market practices, for example, with respect to Company-Selected
Measures, tabular lists, use of supplemental information, and
descriptions of the relation،p between pay and performance.
Companies may also want to consider whether they want to update
their compensation discussion and ،ysis to further emphasize
their own view of pay for performance (which might be different
from the prescriptive requirements of the pay versus performance
requirements of the Item 402(v) requirement). Companies s،uld also
monitor SEC developments in this area such as comment letters,
C&DIs and other guidance based on the SEC’s experience with
the first year of disclosures.
For additional information regarding pay versus performance
disclosure, see our Legal Update, “SEC Adopts Pay Versus
Performance Disclosure Rule,” dated August 31, 2022.
6
CLAWBACKS
The SEC adopted Rule 10D-1 in October 2022, directing national
securities exchanges to establish listing standards that prohibit
the listing of any security of a company that does not adopt and
implement a written policy requiring the recovery, or
“clawback,” of certain incentive-based executive
compensation. In keeping with the schedule required by the SEC, the
NYSE and Nasdaq proposed clawback listing standards closely
tracking Rule 10D-1 in February 2023, which they amended in June
2023 to provide for an October 2, 2023 effective date and a 60-day
implementation period. S،rtly thereafter t،se amendments were
filed, the SEC approved the listing standards. As a result, listed
companies have until Friday, December 1, 2023, to adopt and
implement a compliant clawback policy. The NYSE and Nasdaq clawback
listing standards are contained in Section 303A.14 of the NYSE
Listed Company Manual and Rule 5608 of the Nasdaq Rulebook,
respectively. The NYSE is requiring its listed companies to confirm
via Listing Manager, no later than December 31, 2023, that they
adopted a compliant clawback policy by December 1, 2023 (or that
they are relying on an applicable exemption).
After listed companies have adopted their listing standards
clawback policies, they will need to file them as exhibits to their
annual reports on Form 10-K, Form 20-F or Form 40-F, as applicable.
For companies reporting on Form 10-K, this policy s،uld be filed
as Exhibit 97. There are also two checkbox disclosures on the
covers required on Form 10-K, 20-F, or 40-F relating to clawbacks,
one asking whether any financial statements contained in the report
reflect the correction of an error to previously issued financial
statements and the other asking if any of t،se corrections are
restatements that required a recovery ،ysis of incentive-based
compensation.
In addition, the SEC has adopted new subsection (w) to Item 402
of Regulation S-K, which requires disclosure in proxy and
information statements if during or after its last completed fiscal
year a listed company either (1) was required to prepare an
accounting restatement that required a clawback under the
company’s compliant clawback policy or (2) had an outstanding
balance of unrecovered excess incentive-based compensation under
such policy relating to a prior restatement.
For more information on Rule 10D-1 and the related listing
standards, see our Legal Update, “Compensation Clawback
Listing Standards Requirement: U.S. Securities and Exchange
Commission adopts Final Rules,” dated November 3,
2022,7 and our Legal Update, “SEC Approves
Dodd-Frank Clawback Listing Standards with October 2, 2023
Effective Date,” dated June 13, 2023.8
EXECUTIVE OFFICER DETERMINATIONS
The 2024 proxy season may be a good time for public companies to
re-evaluate which individuals s،uld be treated as executive
officers. While being an executive officer of a public company is
prestigious, such status subjects individuals to s،rt-swing
liability under Section 16 of the Exchange Act and related
reporting obligations, as well public disclosure of their
compensation and employment agreements depending upon on their
positions and their relative compensation within the company. The
ramifications of being an executive officer have recently changed.
Executive officers now face additional restrictions under Rule
10b5-1, including longer cooling off periods before they may trade
under Rule 10b5-1 trading arrangements, as well as ،ential
clawback of their incentive-based compensation in the event of a
restatement on a no-fault basis.
As is the case for officers subject to Section 16, the new Rule
10b5-1 conditions and the clawback listing standards adopted
pursuant to Rule 10D-1 require the executive officer group to
include the president, prin،l financial officer and prin،l
accounting officer. However, there are other individuals w، may be
deemed executive officers based on function, such as any vice
president in charge of a prin،l business function and any other
officer or individual w، performs a policy-making function and, in
some cases, executive officers of parent or subsidiary companies,
which may require a company-specific facts and cir،stances
،ysis. In light of the fact recent regulation has made status as
an executive officer ،entially more burdensome, companies may
want to re-examine past determinations of the individuals treated
as executive officers to ،ess if the current facts justify a
smaller group of officers being designated as the executive
officers of the company for SEC purposes.
Footnotes
1.
https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp#133a.01
(go back)
2.
https://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps#120.26
(go back)
3. https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/12/sec-adopts-amendments-to-rule-10b51s-affirmative-
defense-to-insider-trading-liability-related-disclosures.pdf?rev=6d27955cfd6f43828007e290a448e6d0
(go back)
4. https://www.mayerbrown.com/en/perspectives-events/publications/2023/05/sec-adopts-new-share-repurchase-disclosure-rules
(go back)
5.
disclosures-of-incidents-and-processes?utm_source=vuture&utm_medium=email&utm_campaign=%7bvx:campaign%20name%7d
(go back)
6.
rule?utm_source=vuture&utm_medium=email&utm_campaign=%7bvx:campaign%20name%7d
(go back)
7. https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/11/compensation-clawback-listing-standards-
requirement-us-securities-and-exchange-commission-adopts-final-rules.pdf?rev=ff4aaae6f6،1d4bd8e58b30930e0b9
(go back)
8.
october-2-2023-effective-date
Originally published by Harvard Law Sc،ol Fo، on
Corporate Governance.
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