This Sidley Update highlights certain key disclosure considerations for preparing your annual report on Form 10-K for the 2023 fiscal year, including recent amendments to U.S. Securities and Exchange Commission (SEC) disclosure rules and other developments that impact 2023 Form 10-K filings, as well as certain disclosure trends and current areas of SEC focus.
New SEC Disclosure Requirements Applicable to 2023 Form 10-Ks
The following summarizes new disclosures that will first be required in 2023 Form 10-K filings.
Form 10-K Sections
Cybersecurity Risk Management, Strategy, and Governance Disclosures
Part I, New Item 1C. Cybersecurity
New Regulation S-K Item 106
Compensation Clawback Disclosures
Cover Page (New Check Boxes)
Part III, Item 11. Executive Compensation
Part IV, Item 15 – New Exhibit 97
New Regulation S-K Item 402(w)
Item 601(b)(97) of Regulation S-K
Rule 10b5-1 Plan and Insider Trading Policy Disclosures
Part II, Item 9B. Other Information
Regulation S-K Item 408(a)
Cybersecurity Risk Management, Strategy, and Governance Disclosures
In July 2023, the SEC adopted final rules adding two new types of annual disclosure requirements relating to cybersecurity risk management, strategy, and governance under new Item 106 of Regulation S-K.
- Cybersecurity risk management and strategy. A company must describe its processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats, addressing applicable items specified in Item 106(b)(1). In addition, a company must disclose whether any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the company, including its business strategy, results of operations, or financial condition and if so, how.
- Board and management governance. A company must describe its board of directors’ oversight of risks from cybersecurity threats, including identifying any board committee or subcommittee responsible for such oversight and describing the processes by which the board or such committee is informed about such risks. A company must also describe management’s role and expertise in assessing and managing material risks from cybersecurity threats, addressing applicable items specified in Item 106(c)(2).
All Form 10-Ks for fiscal years ended on or after December 15, 2023 must include the new Item 106 disclosures in new Part I, Item 1C (Cybersecurity) of Form 10-K. For calendar-year companies, the new Item 106 disclosures will first be required in the 2023 Form 10-K filed in 2024.
A more detailed discussion of the new cybersecurity disclosure requirements can be found in the Sidley Update here and the Sidley Podcast here. These resources also address the new requirement as of December 18, 2023 for companies to disclose a material cybersecurity incident under Item 1.05 of Form 8-K within four business days of determining that the incident is material, with limited exceptions.
Compensation Clawback Disclosures
In October 2022, the SEC adopted final rules on disclosures related to the clawback of erroneously awarded incentive-based executive compensation. The rules directed the national securities exchanges to establish listing standards that require companies to adopt, disclose, and comply with a written compensation clawback policy as a condition to listing their securities. In June 2023, the NYSE and Nasdaq amended their listing standards to require that companies adopt clawback policies compliant with their listing standards by December 1, 2023. Certain requirements in the SEC’s final rules will first apply to 2023 Form 10-Ks.
- Cover page check boxes. The final rules amended the cover page of Form 10-K to add two new check boxes that companies must check if applicable. The text of the check boxes is as follows:
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). □
The SEC staff has informally confirmed that a company must check the first box when the filing reflects the correction of an accounting error and “previously issued” financial statements included in the Form 10-K are corrected. An “out of period adjustment” does not require a company to check the first box (e.g., where an adjustment is recorded in the current period financial statements to correct an error when the error is immaterial to the previously issued financial statements, and the correction of the error is also immaterial to the current period).
A company is required to check the second box only for material error corrections (i.e., a “little r” restatement or “Big R” restatement) that trigger a clawback recovery analysis.
- Clawback policy exhibit filing. Now that the deadline for adopting compliant clawback policies has passed, the final rules require a company to file its clawback policy as an exhibit to its Form 10-K under new paragraph (b)(97) of Regulation S-K Item 601.
- Required disclosures if a recovery analysis is triggered under the clawback policy. The final rules added new Item 402(w) of Regulation S-K to require companies that were required to prepare an accounting restatement to disclose certain information about how they have applied their clawback policies, including the date of and amount of erroneously awarded compensation attributable to the restatement, any estimates that were used in determining the amount, the amount that remains to be collected, and the names of, and amounts owed by, executive officers where amounts due are owed or forgone. While this disclosure is required under Part III, Item 11 (Executive Compensation), of Form 10-K, we expect impacted companies to incorporate the disclosure by reference from their 2024 proxy statements containing other Item 402 disclosures.
A more detailed discussion of the new compensation clawback disclosure requirements can be found in the Sidley Update here.
For calendar-year-end companies, including the new cover page check boxes and filing the clawback policy as an exhibit will first be required in the 2023 Form 10-K filed in 2024.
Rule 10b5-1 Plan and Insider Trading Policy Disclosures
In December 2022, the SEC adopted final rules to require quarterly disclosure about the adoption or termination of Rule 10b5-1 plans by directors and officers. New Regulation S-K Item 408(a) requires a company to disclose whether, during its most recently completed fiscal quarter, any director or “officer” (as defined in Exchange Act Rule 16a-1(f)) has adopted or terminated (1) a contract, instruction, or written plan to purchase or sell company securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and/or (2) any written trading arrangement to purchase or sell company securities that meets the requirements of a non-Rule 10b5-1 trading arrangement as defined in Item 408(c). Companies must describe the material terms of the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement such as the name and title of the director or officer, the date of adoption or termination, the duration, and the aggregate number of securities to be purchased or sold pursuant to the arrangement but not the price at which the individual executing the trading arrangement is authorized to trade. With respect to any disclosed trading arrangement, the company must indicate whether it is a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement. New Item 408(a) also requires disclosure of certain modifications or changes to a Rule 10b5-1 plan by a director or officer that would constitute the termination of an existing plan and the adoption of a new plan. A more detailed discussion of the new disclosure requirements can be found in the Sidley Update here. Also see Questions 133A.01 and 133A.02 of the Compliance and Disclosure Interpretations issued by the SEC Division of Corporation Finance in August 2023 relating to Item 408(a) disclosures.
For calendar-year companies, the new Item 408(a) disclosures covering the fourth quarter of 2023 will first be required in new Part II, Item 9B (Other Information), of the 2023 Form 10-K filed in 2024.1
The December 2022 final rules also added new Regulation S-K Item 408(b) requiring a company to disclose whether it has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of company securities (and if not, an explanation of why not) and to file its insider trading policy as an exhibit to Form 10-K pursuant to new Regulation S-K Item 601(b)(19) beginning the first fiscal year after April 1, 2023. For calendar-year-end companies, the new insider trading disclosure requirements and the filing of the insider trading policy as an exhibit to the Form 10-K will first be required in the 2024 Form 10-K to be filed in 2025 (although we expect companies to incorporate the narrative disclosure by reference from their 2025 proxy statements).
Other Disclosure Considerations
The following are developments, trends, and disclosure considerations that companies should keep in mind when preparing their 2023 Form 10-Ks.
Status of the SEC’s Share Repurchase Disclosure Rule
In May 2023, the SEC adopted rule amendments to require more detailed disclosure about repurchases of a company’s registered equity securities. The rule requires companies to (1) include in periodic reports a table of daily quantitative share repurchase information in an exhibit, (2) provide a narrative disclosure about the company’s repurchase programs and practices, (3) disclose the company’s adoption or termination of Rule 10b5-1 plans, and (4) disclose whether any directors or officers traded within four business days before or after the announcement of such a plan or an increase of an existing plan, as discussed in more detail in the Sidley Update here. The rule was scheduled to take effect beginning with the Form 10-K or Form 10-Q filed for the first full fiscal quarter beginning on or after October 1, 2023, meaning for calendar-year companies, the disclosures would first be required in the 2023 Form 10-K filed in early 2024.
However, on December 19, 2023, the U.S. Court of Appeals for the Fifth Circuit (the Fifth Circuit) vacated the rule. In May 2023, the U.S. Chamber of Commerce and two business groups filed a lawsuit challenging the rule. On October 31, 2023, the Fifth Circuit found that the SEC acted arbitrarily and capriciously when adopting the rule, failed to adequately respond to the petitioners’ comments on the rule proposal, and failed to conduct a proper cost-benefit analysis. Instead of invalidating the rule, the Fifth Circuit gave the SEC 30 days “to remedy the deficiencies in the rule.” On November 22, 2023, the SEC announced the postponement of the effective date of the rule pending further SEC action. After its request for an extension was denied, in a December 1, 2023 filing, the SEC informed the court that it was unable to correct the deficiencies by the 30-day deadline. Subsequently, the Fifth Circuit granted the petitioners’ motion to vacate the rule. It is not yet known whether the SEC will appeal the decision or propose a new share repurchase disclosure rule.
Until there is further notice or action from the SEC, for 2023 Form 10-Ks filed in 2024, companies should continue to provide share repurchase disclosures as required under current rules (i.e., Regulation S-K Item 703 requirement to disclose information about share repurchases on a quarterly basis, aggregated at the monthly level). In addition, there is now no requirement for companies to disclose the company’s adoption or termination of Rule 10b5-1 plans as that proposed rule was vacated as well.
Companies should be mindful of any language in the Legal Proceedings section of their 2023 Form 10-Ks asserting that litigation against the company is “without merit.” In July 2023, a Massachusetts district court held that such a reassurance in a Form 10-K misled investors and was an actionable opinion statement because it suggested a denial of facts underlying the plaintiff’s claims.
Non-GAAP Financial Measures
Companies should carefully review any non-GAAP financial measures used in their Form 10-Ks for compliance with relevant rules and guidance, including the Compliance & Disclosure Interpretations (CDIs) issued by the SEC Division of Corporation Finance in December 2022. A summary of the CDIs can be found here. Those CDIs, SEC comment letters issued since their publication, and a March 2023 enforcement action illustrate the SEC’s continued scrutiny of non-GAAP reporting. Companies should ensure that they have adequate disclosure controls and procedures in place to comply with applicable SEC rules and guidance, particularly the requirements to disclose the most directly comparable GAAP measure with equal or greater prominence (as construed by the SEC) and to avoid adjustments that can cause a non-GAAP measure to be misleading.
The SEC proposed expansive new requirements for climate-related disclosures in March 2022 as discussed in the Sidley Update here. As proposed, the new disclosures would be required in a new, separately captioned “Climate-Related Disclosure” section of the Form 10-K. According to the SEC’s fall 2023 rulemaking agenda, the final rules are estimated to be adopted by April 2024. The SEC continued to issue climate-related comments on Form 10-Ks filed by some large public companies in 2023. The comments were similar to the sample comment letter that the SEC published in September 2021. If they have not yet done so, companies should perform a gap analysis that compares the requirements of the proposed rules with the current state of their climate-related disclosures, whether contained in SEC filings or an ESG or sustainability report. Whereas many public companies already publish voluntary climate-related disclosures in reports outside of SEC filings, the SEC rules, if adopted, will require public companies to disclose such information in SEC filings according to rigorous methods and standards prescribed by the SEC, and certain of this information would be subject to attestation or independent audit requirements. While the rules pertain only to disclosures, they will impact operations by indirectly requiring companies to act, to the extent they are not already doing so, to put monitoring, accounting, planning, and governance practices in place to enable them to satisfy the disclosure requirements.
Human Capital Management
In 2020, the SEC adopted amendments to Regulation S-K Item 101 requiring a company to describe its human capital resources, including any human capital measures or objectives the company focuses on in managing its business, to the extent material to an understanding of the company’s business taken as a whole (e.g., depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction, and retention of personnel). In response, companies have provided a range of quantitative and qualitative disclosures, including enhanced disclosures related to human capital management and diversity, equity, and inclusion (DEI), as well as labor relations. Common human capital measures disclosed include DEI with respect to the workplace, a breakdown of employees based on geographic location or type of position, and employee recruitment, turnover, retention, training, and engagement. Disclosures under Item 101 are required to appear in the Business section of Form 10-K, but many companies also choose to discuss human capital management in the Risk Factors section, especially in the context of their ESG initiatives. Companies should consider the unique aspects of their business when updating their principles-based disclosures about human capital management.
According to its fall 2023 rulemaking agenda, the SEC expects to propose new human capital management disclosure rules by April 2024. SEC Chair Gary Gensler has indicated that a rule proposal could include disclosure of information such as metrics, workforce turnover, skills and development training, compensation, benefits, and workforce demographics that include diversity, as well as health and safety.
Inflation and Interest Rate Concerns
The effects of sustained high inflation and interest rates may require additional disclosure in 2023 Form 10-Ks. While 2020 amendments to Regulation S-K Item 303 eliminated the requirement to discuss the impact of inflation and price changes, disclosure may be required in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section (MD&A) if inflation or changing prices have had a material impact on the company or are a known trend or uncertainty that is reasonably expected to have a material impact. Recent SEC comment letters have asked companies to provide more information about how record inflation is affecting their businesses (e.g., requesting details about how inflation has affected results of operations, sales, profits, capital expenditures, maintenance, business goals, and pricing strategies).
The same disclosure considerations apply to changes in interest rates, which may affect companies differently depending on specific business conditions. Companies should consider whether to expand disclosures in their MD&A, Risk Factors, or Forward-Looking Statements sections regarding inflation and/or interest rates.
Impact of Geopolitical Conflicts
Companies should consider whether Russia’s invasion of Ukraine, the Israel-Hamas conflict, or any other geopolitical conflicts have direct or indirect material effects on their business that should be disclosed in the 2023 Form 10-K. In May 2022, the SEC Division of Corporation Finance published a sample comment letter containing useful guidance to companies on their disclosure obligations related to the impact of Russia’s invasion of Ukraine and related supply chain issues. This letter sheds light on what the SEC deems insufficient disclosures and can be instructive when companies are crafting disclosures about the impacts of other geopolitical conflicts.
Crypto Assets Disclosure
Companies should evaluate whether recent developments in crypto assets may affect their business and update their disclosures accordingly. See the sample comment letter published by the SEC Division of Corporation Finance in December 2022.
Impact of AI Risk
Given the rise of artificial intelligence (AI) use in the last year and the SEC’s concerns about its risks, companies should expect that the SEC will increase its regulation and enforcement activities surrounding AI. Companies should consider disclosing the uses, impacts, or risks of AI applications that are material to their company’s business in their 2023 Form 10-Ks. See the Sidley resource here for more information.
The SEC Division of Corporation Finance published a sample comment letter in July 2023 providing examples of comments the Division staff may issue if it finds a company’s China-specific disclosures to be deficient, including requesting enhanced disclosures about risks related to the role of the Chinese government in the company’s operations. Companies based in or with a majority of their operations in China should review the sample comments and revise their disclosures accordingly.
In September 2023, the SEC Division of Corporation Finance published a sample comment letter providing examples of comments the Division staff may issue if it finds a company’s XBRL or Inline XBRL disclosures to be deficient, including the following: “The common shares outstanding reported on the cover page and on your balance sheet are tagged with materially different values. It appears that you present the same data using different scales (presenting the whole amount in one instance and the same amount in thousands in the second). Please confirm that you will present the information consistently in future filings.” Companies should consider these sample comments and other SEC guidance on Inline XBRL when preparing the XBRL and Inline XBRL disclosures for their 2023 Form 10-Ks.
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