Category Archives: Hot Topic

So Many Form 10-Q and 10-K Changes! [Part 2 of 5] Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans)

Hot Topic, Reporting, Uncategorized

As we overviewed in the first post in this series, in late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.

This is the second of five posts that provide details and suggestions to help companies analyze and implement these changes in upcoming periodic reports. This post goes into detail about the disclosure changes from the SEC’s December 2022 Final Rule “Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans).” 

And, to help keep track of the topics we will explore, here is a reminder list of our current and future posts in this series to help you implement all these new disclosure requirements:

Current posts:

Future posts:

    • Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures [Part 3 of 5]
    • Share Repurchase Disclosure Modernization Disclosures [Part 4 of 5]
    • Pay Versus Performance Disclosures (Proxy statement only disclosures) [Part 5 of 5]

Details of Form 10-Q Changes for Insider Trading Arrangements and Related Disclosures

The changes to Form 10-Q from the Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) Final Rule are in Part II – Item 5 – Other Information, where disclosure of officer and director Rule 10b5-1 plans and “non-10b5-1 trading arrangements” is now required.

This change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – i.e., now.

The mechanics of this change start with this modification to the instructions to Part II – Item 5, adding new paragraph (c):

Item 5. Other Information.

*****
(c) Furnish the information required by Item 408(a) of Regulation S-K (17 CFR 229.408(a)).

S-K Item 408(a) requires the following disclosures:

229.408 (Item 408) Insider trading arrangements and policies.

(a)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated:

(i) Any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter) (a “Rule 10b5-1 trading arrangement”); and/or

(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of this section.

(2) Identify whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c), and provide a description of the material terms, other than terms with respect to the price at which the individual executing the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement is authorized to trade, such as:

(A) The name and title of the director or officer;

(B) The date on which the director or officer adopted or terminated the trading arrangement;

(C) The duration of the trading arrangement; and

(D) The aggregate number of securities to be purchased or sold pursuant to the trading arrangement.

(3) The disclosure provided pursuant to paragraphs (a)(1) and (2) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

(Note:  Company 10b5-1 plan disclosure is required by the Share Repurchase Final Rule and will be reviewed in Post 4 of 5.)

Details of Form 10-K Changes for Insider Trading Arrangements and Related Disclosures

The four changes to Form 10-K from the Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) Final Rule are in:

    • 1.  Part II – Item 9B. Other Information, where disclosure of officer and director Rule 10b5-1 plans and “non-10b5-1 trading arrangements” is now required.  This change is effective for Form 10-K if it contains a fourth quarter that begins on or after April 1, 2023.  Thus, it will also be effective for a fiscal year that ends on or after June 30, 2023.
    • 2.  Part III – Item 10. Directors, Executive Officers and Corporate Governance, which now includes information about insider trading policies. This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
    • 3.  Part III – Item 11. Executive Compensation, which now requires disclosures about policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information.  This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
    • 4.  Part IV – Item 15. Exhibit and Financial Statement Schedules, which now includes exhibit 19 for insider trading policies.  This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024. 

1.  The mechanics of the change to Item 9B start with this modification to the instructions:

PART II – Item 9B. Other Information

Furnish the information required by Item 408(a) of Regulation S-K (§ 229.408(a) of this chapter).

S-K Item 408(a) requires the following disclosures:

229.408 (Item 408) Insider trading arrangements and policies.

(a)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated:

(i) Any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter) (a “Rule 10b5-1 trading arrangement”); and/or

(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of this section.

(2) Identify whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c), and provide a description of the material terms, other than terms with respect to the price at which the individual executing the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement is authorized to trade, such as:

(A) The name and title of the director or officer;

(B) The date on which the director or officer adopted or terminated the trading arrangement;

(C) The duration of the trading arrangement; and

(D) The aggregate number of securities to be purchased or sold pursuant to the trading arrangement.

(3) The disclosure provided pursuant to paragraphs (a)(1) and (2) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

2.  The mechanics of the change to Item 10 start with this modification to the instructions to include S-K Item 408(b):

Item 10. Directors, Executive Officers and Corporate Governance

Furnish the information required by Items 401, 405, 406, 407(c)(3), (d)(4), (d)(5), and 408(b) of Regulation S-K (§ 229.401, § 229.405, § 229.406, § 229.407(c)(3), (d)(4), (d)(5), and § 229.408(b) of this chapter).

S-K Item 408(b) requires the following disclosures:

229.408 (Item 408) Insider trading arrangements and policies.

(b)(1) Disclose whether the registrant has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the registrant’s securities by directors, officers and employees, or the registrant itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the registrant. If the registrant has not adopted such policies and procedures, explain why it has not done so.

(2) If the registrant has adopted insider trading policies and procedures, the registrant must file such policies and procedures as an exhibit. If all of the registrant’s insider trading policies and procedures are included in its code of ethics (as defined in 17 CFR 229.406(b)) and the code of ethics is filed as an exhibit pursuant to 17 CFR 229.406(c)(1), that would satisfy the exhibit requirement of this paragraph.

(3) The disclosure provided pursuant to paragraph (b)(1) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 in accordance with the EDGAR Filer Manual.

3.  The mechanics of the change to Item 11. Executive Compensation do not require any updates to the instructions to the form, as the Item 11 instructions already refer to S-K Item 402. New paragraph (x) has been added to S-K item 402.

229.402 (Item 402) Executive compensation.

*****
(x) Disclosure of the registrant’s policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information.

(1) Discuss the registrant’s policies and practices on the timing of awards of options in relation to the disclosure of material nonpublic information by the registrant, including how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether the board or compensation committee takes material nonpublic information into account when determining the timing and terms of such an award, and, if so, how the board or compensation committee takes material nonpublic information into account when determining the timing and terms of such an award; and whether the registrant has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.

(2) (i) If, during the last completed fiscal year, the registrant awarded options to a named executive officer in the period beginning four business days before the filing of a periodic report on Form 10-Q (§ 249.308a of this chapter) or Form 10-K (§ 249.310 of this chapter), or the filing or furnishing of a current report on Form 8-K (§ 249.308 of this chapter) that discloses material nonpublic information (other than a current report on Form 8-K disclosing a material new option award grant under Item 5.02(e) of that form), and ending one business day after the filing or furnishing of such report provide the information specified in paragraph (x)(2)(ii) of this section, concerning each such award for each of the named executive officers in the following tabular format:

(ii) The Table shall include:

(A) The name of the named executive officer (column (a));

(B) On an award-by-award basis, the grant date of the option award reported in the table (column (b));

(C) On an award-by-award basis, the number of securities underlying the options, (column (c));

(D) On an award-by-award basis, the per-share exercise price of the options (column (d));

(E) On an award-by-award basis, the grant date fair value of each award computed using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles (column (e)).

(F) For each instrument reported in column (b), disclose the percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and the trading day beginning immediately following the disclosure of material nonpublic information (column (f)).

Instruction to paragraph (x)(2). A registrant that is a smaller reporting company or emerging growth company may limit the disclosures in the table to its PEO, the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and up to two additional individuals who would have been the most highly compensated but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year.

(3) The disclosure provided pursuant to this paragraph (x) must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

4. The mechanics of the change to Item 15. Exhibit and Financial Statement Schedules are to add new exhibit 19:

(b)* * *

(19) Insider trading policies and procedures. Any insider trading policies and procedures, or amendments thereto, that are the subject of the disclosure required by § 229.408(b) (Item 408(b) of Regulation S-K).

(Note:  S-K Item 408(b) is reviewed above with Item 10 changes.)

To implement all these new disclosure requirements companies will need to establish a process and appropriate disclosure controls and procedures to accumulate information from officers and directors about their 10b5-1 plans.  In addition, adopting a compliant insider trading policy, or, as necessary, updating insider trading policies, will be necessary.

You can find more information about the changes to the use of Rule 10b5-1 plans, including the cooling-off period and certification provisions, in this blog post.

As always, your thoughts and comments are welcome!

So Many Form 10-Q and 10-K Changes! [Part 1 of 5]

Hot Topic, Reporting

In late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.  (The rules also affected proxy statements – more about that in a later post.)

This is the first of five posts that provide details and suggestions to help companies analyze and implement these changes in coming periodic reports. This post summarizes all the disclosure changes in Forms 10-K and 10-Q.  The next four posts will go into the details of the changes for each of the four new rules.  Here is a list of our upcoming posts to help appropriately implement these new disclosures requirements:

    • Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) [Part 2 of 5]
    • Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures [Part 3 of 5]
    • Share Repurchase Disclosure Modernization Disclosures [Part 4 of 5]
    • Pay Versus Performance Disclosures (Proxy statement only disclosures) [Part 5 of 5]

Below is a big-picture summary of all the Form 10-Q and 10-K disclosure changes, Item by Item:

Overview of Changes to Form 10-Q

Part II – Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

The old month-by-month table of share repurchases has been removed.  New exhibit 26 requires daily details of share repurchases.  New language in S-K Item 703 requires narrative disclosure of the rationale and purpose of share repurchases.  These changes are effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Part II – Item 5. Other Information.

Now includes detailed disclosures of:

      • Quarterly disclosures regarding the adoption, modification or termination by officers and directors of Rule 10b5-1 plans and “non-10b5-1 trading arrangements” (S-K Item 408(a)). This change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – e., now.
    •  
      • Company 10b5-1 plans. (S-K Item 408(d)) This change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

 Part II – Item 6 – Exhibits.

New exhibit in S-K Item 601:

      • Exhibit 26 for daily details of share repurchases. This change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Overview of Changes to Form 10-K

Two new check boxes on the cover page related to clawback disclosures:

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. □

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). □

These boxes already have been added to the cover of the 10-K; however, they will apply only to issuers with exchange-listed securities.  Additionally, for those issuers, no response to the disclosures is required until after October 2, 2023, when the exchange listing standards become effective.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The old month-by-month table of share repurchases has been removed.  New exhibit 26 requires daily details of share repurchases.  New language in S-K Item 703 requires narrative disclosure of the rationale and purpose of share repurchases. As stated above, these changes are effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Item 9B. Other Information.

Now includes detailed disclosures of:

      • Quarterly disclosures regarding the adoption, modification or termination by officers and directors of Rule 10b5-1 plans and “non-10b5-1 trading arrangements” (S-K Item 408(a)).As stated above, this change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – e., now – and the fourth quarter of each year will be reflected in the 10-K.
      • Company 10b5-1 plans (S-K Item 408(d)). This change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Item 10. Directors, Executive Officers and Corporate Governance.

Now includes information about insider trading policies – S-K Item 408(b). This change is effective for 10-Ks for fiscal year ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.

Item 11. Executive Compensation.

Now requires:

      • Details of any recovery of erroneously awarded compensation (S-K 402(w)), and related changes to executive compensation disclosures.These disclosures are required on or after December 1, 2023 for issuers who have securities listed on a national securities exchange.
      • Disclosures about policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information (S-K Item 402(x)). This change is effective for 10-Ks for fiscal year ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
      • (Note:The new pay versus performance disclosures (S-K 402(v)) are NOT required in Form 10-K.  They are only required in proxy statements.)

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Administrative updates related to recovery of erroneously awarded compensation (S-K Item 404, Instruction 5a)

Item 15. Exhibit and Financial Statement Schedules.

New exhibits, all in S-K Item 601:

      • Exhibit 26 for daily details of share repurchases – as stated above, this change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).
      • Exhibit 97 for clawback policies – as stated above, this change is effective on December 1, 2023 for issuers who have securities listed on a national securities exchange.
      • Exhibit 19 for insider trading policies – as stated above, this change is effective for 10-Ks for fiscal year ending on or after December 31, 2024.

Our next post will review the 10b5-1 plan  disclosures in detail.

As a final note, here are links to each of the Final Rules that create these changes:

Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans)

Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures

Share Repurchase Disclosure Modernization Disclosures

Pay Versus Performance Disclosures

As always, your thoughts and comments are welcome!

Focus on SEC Comments – Non-GAAP Measure EBITDA Adjustments – Part Two

Hot Topic, SEC Comment of the Week

As we discussed in the preceding post in this series, non-GAAP measures have been at or near the top of frequent SEC comment letter topics for several years.  The earlier post explored Rite Aid’s adjustment for “facility exit and impairment charges” in its computation of Adjusted EBITDA along with a first round SEC comment about this presentation and the company’s initial response.

As a reminder, here is Rite Aid’s reconciliation for adjusted EBITDA:

After receiving the company’s first response, the SEC issued this follow-on comment on March 30, 2023:

With regard to the adjustment to exclude facility exit charges, you state that your presentation of Adjusted EBITDA eliminates charges that “do not reflect ongoing operations and underlying operational performance.” We note, however, that you have incurred facility exit charges, inventory write-downs related to store closings, and restructuring-related costs for the last 6, 6, and 4 years, respectively, and in the 39 week period ending November 26, 2022. We also note from your response that your 2022 strategic initiative resulted in the expectation of closing 195 stores, of which only 48 were closed in 2022. In your third quarter 2023 earnings call, you indicated that in building out your plans for 2024, you will continue to look at opportunities to close stores. Based on the consistency with which you have incurred such costs in the past and the apparent expectation that such costs will be incurred in the future, it appears these costs are normal for your business. Had an investor disregarded such costs several years ago on the basis that they would not be reflective of your future ongoing operations, it appears their expectations would have varied significantly from your actual subsequent results. To the extent you continue to adjust for facility exit charges, inventory write-downs related to store closings, and restructuring-related costs, please revise to disclose a substantive reason, specific to you, of usefulness to investors, to disclose your history of incurring such costs, and to provide appropriate cautionary language regarding the likelihood of you incurring such costs in the future.

The language in this follow-on comment clearly articulates CorpFin’s concerns about how investors could interpret and potentially be misled by this adjustment.

In the company’s next response, it appears there were further discussions with the staff and the company stated:

In response to the Staff’s additional feedback on the Company’s disclosure around continued adjustments to Adjusted EBITDA and Adjusted Net Income (Loss), as applicable, related to facility exit charges, inventory write-downs related to stores closings, and restructuring charges, the Company acknowledges and confirms that in future filings the Company will provide the requested enhanced disclosure. The Company will also continually evaluate the appropriateness of adjustments to its non-GAAP measures based upon the nature of the activity within the specific period presented within the purview of the Company’s current financial reports. Please find attached, as Exhibit A, the supplemental non-GAAP measures disclosure for the upcoming Form 10-K for the fiscal year ended March 4, 2023, which illustrates the Company’s intended revised disclosure, in accordance with the Staff’s comment, in addition to existing reconciliation and related disclosures.

Here is the updated disclosure the company presented to the staff:

We present these non-GAAP financial measures in order to provide transparency to our investors because they are measures that management uses to assess both management performance and the financial performance of our operations and to allocate resources. In addition, management believes that these measures may assist investors with understanding and evaluating our initiatives to drive improved financial performance and enables investors to supplementally compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. While we have excluded certain of these items from historical non-GAAP financial measures, there is no guarantee that the items excluded from non-GAAP financial measures will not continue into future periods. For instance, we expect to continue to experience charges for facility exit and impairment charges and inventory write-downs related to store closures as the Company continues to complete a multi-year strategic initiative designed to improve overall performance. We also expect to continue to experience and report restructuring-related charges associated with continued execution of our strategic initiatives.

Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies, including companies in our industry.

With this explanation, the SEC issued its closing letter and the company, with the additional disclosure, was not required to change its presentation.

As always, your thoughts and comments are welcome.

SEC Approves NYSE and NASDAQ Clawback Listing Standards

Hot Topic, Reporting

As we discussed in this blog post, as part of implementing the Dodd-Frank clawback provisions, the SEC required the NYSE and NASDAQ to adopt appropriate clawback listing standards.

On June 9, 2023, the SEC approved the NYSE’s and NASDAQ’s clawback listing standards, which will be effective on October 2, 2023.  Companies listed on the NYSE and NASDAQ will be required to adopt appropriate clawback policies by December 1, 2023.  These policies will apply to any incentive-based compensation paid after October 2, 2023.

As always, your thoughts and comments are welcome.

SEC’s Spring 2023 Regulatory Agenda Released

Hot Topic, Reporting

On June 13, 2023, the Office of Information and Regulatory Affairs, of the U.S. Government’s Office of Management and Budget, released the “Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions,” which includes the short-term and long-term projects on the SEC’s regulatory agenda.

In a Statement about the agenda, Chair Gary Gensler said:

“Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Technology, markets, and business models constantly change. Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve.

In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.”

As you review the short-term agenda, you will find that both the SEC’s climate-related disclosures and cybersecurity risk projects are scheduled for the final rule process in October 2023.

As always, your thoughts and comments are welcome!

Corp Fin Clarifies Transition to New Rule 10b5-1 Plan Disclosures

Hot Topic, Reporting

In the SEC’s December 14, 2022, Final Rule, Insider Trading Arrangements and Related Disclosures, the transition provisions provided:

    • Issuers that are SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.
    • All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.

This language is clear with respect to which quarter would start this reporting for Form 10-Q, but was a bit unclear about when an annual report on Form 10-K or 20-F would require the annual disclosures.  On May 25, 2023, the staff issued three Compliance and Disclosure Interpretations to clarify this timing issue and address when proxy statements will require these disclosures and explain when a situation where a person with two plans may create an “effective cooling off period.”

As you read these C&DI’s, you will note that the transition for the quarterly disclosures is in fact different from the transition for annual disclosures.  Generally, the quarterly disclosures include information about officer and director 10b5-1 plans and the annual disclosures include information about insider trading policies and grants of equity awards made close in time to the release of material non-public information.

Question 120.26

Question: When are companies required to begin providing the quarterly Item 408(a) disclosures and the annual Item 402(x) and Item 408(b) disclosures (Item 16J of Form 20-F disclosures for foreign private issuers) in periodic reports?

Answer: Release No. 33-11138 states that companies other than smaller reporting companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, the following compliance dates apply:

      • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
      • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
      • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
      • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.

Smaller reporting companies must comply with these new disclosure and tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, the following compliance dates apply:

      • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
      • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
      • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
      • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025. [May 25, 2023]

Question 120.27 

Question: When are companies required to begin providing the disclosures in proxy or information statements?

Answer: For transition purposes only, companies other than smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) 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 (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.[May 25, 2023]

Question 120.28

Question: The Rule 10b5-1(c) affirmative defense generally is not available if a person has multiple Rule 10b5-1 contracts, instructions, or plans in place. However, Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate Rule 10b5-1 plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. If an individual terminates the earlier-commencing plan (i.e., the earlier-commencing plan does not end by its terms and without any action by the individual), when can trading begin under the later-commencing plan?

Answer: Pursuant to Rule 10b5-1(c)(1)(ii)(D)(2), if an individual terminates the earlier-commencing plan, the later-commencing plan will be subject to an “effective cooling-off period.” The effective cooling-off period will begin on the termination date of the earlier-commencing plan and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). On the other hand, if the earlier-commencing plan ends by its terms 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. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends. See Footnote 180 of Release No. 33-11138.[May 25, 2023]

As a reminder, the Final Rule requires that Section 16 reporting persons comply with the amendments to Forms 4 and 5 filed on or after April 1, 2023.

The staff has prepared a very helpful Small Entity Compliance Guide which provides a good overview of the rule.

As always, your thoughts and comments are welcome!

Four Projects to Watch at the FASB

Hot Topic, Reporting

While the FASB’s current technical agenda does not include landmark projects like revenue recognition and lease accounting, the Board is working on several projects that may significantly impact company reporting.  Four projects to watch are:

Segment Reporting Improvements

On October 6, 2022, the Board issued a proposed Accounting Standard Update to ASC 280 – Segment Reporting, that would expand segment disclosure requirements for public business entities.  While the new standard would not change how operating segments are identified or aggregated, it would require:

    • Disclosure, on an annual and interim basis of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss,
    • Disclosure, on an annual and interim basis, of an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed under the significant expense principle and each reported measure of segment profit or loss, and
    • Disclosure of all annual information about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods.

In addition, the proposed ASU would clarify that multiple measures of segment profit or loss may be disclosed in certain circumstances and require all current and proposed disclosures for a public entity that has a single reportable segment

Enhanced Income Tax Disclosures

The Board’s tax project has evolved over time and is now focused on two key disclosure areas for public business entities:

    • The effective tax rate reconciliation, and
    • Cash paid for income taxes.

The FASB’s deliberations have focused on providing detailed information in each of these areas.  The proposed disclosures for the effective rate reconciliation include addressing eight specific categories and related qualitative disclosures.  For taxes paid the proposals focus on providing disaggregated information about taxes paid by jurisdiction.  Developing appropriate disclosures, particularly for companies that operate in multiple tax jurisdictions could be challenging.  In March of 2023 the FASB issued this Proposed ASU and you can read more in this Tentative Board Decisions document.  The Proposed ASU would also require certain new disclosures for private entities.

Disaggregated Expense Disclosure

This project is now focused on “improving the decision usefulness of business entities’ income statements through the disaggregation of any relevant expense line items.”  As you can read in this Tentative Board Decisions document, it is likely a proposed standard would focus on disclosures about selling expenses, costs capitalized to inventory, employee compensation, depreciation, amortization and other details.  In March 2023, the Board directed the FASB staff to draft a proposed ASU and decided on a 90-day comment period.  This new standard would apply to public business entities.  Companies may face challenges to accumulate this information and provide appropriate controls for these disclosures.

Accounting and Disclosure for Crypto Assets

While this project may not affect as many companies as the three discussed above, for companies that hold crypto assets its impact could be significant.  This project would require that crypto assets, as defined by the Board, would be accounted for at fair value with unrealized gains and losses recognized in income.  This would be a major change from the existing indefinite lived intangible asset accounting model currently applied to these assets.  You can read more in this March 23, 2023, Proposed Accounting Standards Update and this Tentative Board Decisions document.

While these projects are in process companies can certainly provide their thoughts and input to the Board.  In addition, given how each of these projects would present challenges to gather information and build appropriate controls, putting them on the planning horizon now likely makes sense.

The board is working on several other projects, and you can find the Board’s current Technical Agenda here.

As always, your thoughts and comments are welcome!

SEC Finalizes New Share Repurchase Rule

Hot Topic, Reporting, SEC News

On May 3, 2023, the SEC adopted a Final Rule requiring new disclosures about share repurchases.  The new rule includes quantitative disclosures such as daily repurchases and qualitative disclosures such as the objectives or rationales behind repurchases.  The new rule is intended to “enhance information to assess the purposes and effects” of share repurchases.

Companies that file Forms 10-Q and 10-K will be required to provide these new disclosures beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.  Foreign private issuers that file Form 20-F will be required to provide this information via a new Form F-SR beginning with the first full fiscal quarter that begins on or after April 1, 2024.  Form F-SR will be due within 45 days after the end of each fiscal quarter.

The new rule requires companies that file Forms 10-K and 10-Q to:

    • Disclose share repurchases on a daily basis in each Form 10-Q and in Form 10-K for their fourth quarter
    • Include this information in new exhibit 26
    • Provide details using a format for exhibit 26 such as the table below from S-K Item 601, which will also be tagged using iXBRL:

This new exhibit will include language disclosing whether officers or directors subject to Section 16 reporting traded within four business days of certain company announcements about a repurchase plan:

Use the checkbox to indicate if any officer or director reporting pursuant to Section 16(a) of the Exchange Act (15 U.S.C. 78p(a)), or for foreign private issuers as defined by Rule 3b-4(c) (§ 240.3b-4(c) of this chapter), any director or member of senior management who would be identified pursuant to Item 1 of Form 20-F (§ 249.220f of this chapter), purchased or sold shares or other units of the class of the issuer’s equity securities that are registered pursuant to section 12 of the Exchange Act and subject of a publicly announced plan or program within four (4) business days before or after the issuer’s announcement of such repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program. □

The amendments also add this language to S-K Item 703 to require disclosure in Forms 10-Q and 10-K of:

“(1) The objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases;

(2) The number of shares (or units) purchased other than through a publicly announced plan or program, and the nature of the transaction (e.g., 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);

(3) For publicly announced repurchase plans or programs:

(i) The date each plan or program was announced;
(ii) The dollar amount (or share or unit amount) approved;
(iii) The expiration date (if any) of each plan or program;
(iv) Each plan or program that has expired during the period covered by the table in § 229.601(b)(26) (Item 601(b)(26) of Regulation S-K); and
(v) Each plan or program the issuer has determined to terminate prior to expiration, or under which the issuer does not intend to make further purchases.

(4) Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions.”

As mentioned above, Foreign Private Issuers that file Form 20-F will provide this same information each quarter on Form F-SR.

The new rule adds a requirement to S-K Item 408 for quarterly disclosure in Forms 10-K and 10-Q regarding company adoption and termination of 10b5-1 trading arrangements.

The new rule eliminates the existing share repurchase disclosure requirements in Regulation S-K Item 703.

Listed Closed-End Funds will include this repurchase data in their annual and semi-annual reports on Form N-CSR.

You can learn more in the related Final Rule and Fact Sheet.

As always, your thoughts and comments are welcome.

SEC Extends Time to Approve Clawback Listing Standards But Rulemaking Process Remains Ahead of Original Schedule

Hot Topic

Updated Clawback Policy template and adopting resolutions provided

On April 24, 2023, the SEC extended to June 11, 2023 the period to approve, or begin the process to disapprove, the NYSE’s and Nasdaq’s proposed listing standards relative to the “clawback” rules.  Those rules require companies to adopt policies and to recoup from executives, following an accounting restatement, incentive-based compensation that was paid based upon financial measures that were restated.  Even with this extension, the process will likely be finished before the original deadline set in the October 2020 “Listing Standards for the Recovery of Erroneously Awarded Compensation” rule.  As we wrote in this post, the rule requires national securities exchanges to propose and adopt listing standards requiring companies to adopt an appropriate clawback policy.  This post contains links to the listing standards proposed by the NYSE and Nasdaq.  This post reviews new disclosures and Form 10-K cover page check boxes required by the rule.

At this time, the relevant dates are:

    • Nasdaq’s and NYSE’s proposed listing standards were published in the Federal Register on March 13, 2023 – so originally, the SEC had until April 27, 2023 to approve the listing standards.
    • The new deadline to approve or begin the process to disapprove the standards is June 11, 2023. 
    • June 11 is a Sunday, so we would assume that they get the same consideration as others when a deadline falls on a Sunday – i.e., the deadline probably is June 12.
    • If the SEC approves the listing standards on or before June 12, 2023, that is the effective date of the listing standards – if they take no action, the listing standards will be effective on June 13, 2023.
    • Companies have 60 days after the effective date of the listing standards within which to adopt a clawback policy – so the outside date (assuming SEC approval by June 12, 2023) will be August 10, 2023, but again, it could be sooner, if the SEC acts before that date.

Gary Brown, Partner at Nelson Mullins Riley & Scarborough LLP, and SEC Institute workshop leader and PLI author, has updated his draft “Incentive Compensation Recoupment Policy” template to incorporate the provisions of proposed listing standards as well as provided a set of template resolutions that could be used by boards to adopt a policy.  The templates are usable by either a NYSE or Nasdaq company.  Here are links to the policy and resolution templates.

As always, your thoughts and comments are welcome!

Don’t Forget the New Rule 10b5-1 Plan Quarterly Disclosures!

Hot Topic, Reporting

As we enter financial reporting periods beginning on or after April 1, 2023, here is a hopefully helpful reminder to include the new Rule 10b5-1 plan disclosures in your next quarterly report.  As a reminder, the SEC’s December 2022 Final Rule implementing changes to how individuals use 10b5-1 plans, also requires new disclosures about:

    • Officer and director plans, and
    • Company insider trading policies.

The rule became effective on February 27, 2023.

The new officer and director plan disclosures are required quarterly in both the 10-Q and 10-K.  The mechanics of this process is that S-K Item 408(a) disclosure requirements have been added to the Form 10-K Instructions in Item 9B and the Form 10-Q Instructions in Part II – Item 5.  These disclosures include details of adoption, modification and termination and material terms (other than pricing) of both 10b5-1 plans and “non 10b5-1 trading arrangements.”  You can find all the details in S-K Item 408.

For non-Smaller Reporting Companies, the new officer and director plan disclosures are required for fiscal periods, including quarters, that begin on or after April 1, 2023.  The transition date for Smaller Reporting Companies is periods that begin on or after October 1, 2023 .

These disclosures must be tagged with iXBRL.

The new annual requirements include disclosure of insider trading policies and procedures and disclosures surrounding option awards made to executives where the timing of the award is close in time to the release of material non-public information.

The timing for the new annual disclosures is a bit uncertain.  The Final Rule states that non-Smaller Reporting Companies:

“…will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.”

While this is clear for quarterly fiscal periods, it could be read to mean that the annual disclosures would not be required for years that end on December 31, 2023, but rather the year after that.  If this was indeed the intent of the rule, that will hopefully be clarified at some point by the staff.

As always, your thoughts and comments are welcome!