Key considerations for 2023 fiscal year reporting season – Form 10-K updates

In this alert, DLA Piper’s Public Company Advisory group highlights new rules and key considerations for calendar year-end registrants preparing their 2023 Annual Reports on Form 10-K. The Securities and Exchange Commission (SEC) has introduced several new disclosure obligations, which registrants should consider carefully.

I. NEW DISCLOSURE REQUIREMENTS 

1. Cybersecurity and risk governance

As we discuss in more detail in this DLA Piper alert, on July 26, 2023, the SEC adopted final rules on cybersecurity disclosures and governance. These final rules became effective September 5, 2023, and all registrants are required to provide cybersecurity risk management, strategy and governance disclosure in Item 1C of Form 10-K, beginning with their first annual report for a fiscal year ended on or after December 15, 2023. 

Additional guidance on the final rules on cybersecurity and risk governance pertaining to Form 10-K, as well as guidance on updating risk factors related to cybersecurity in Form 10-K, may be found in this DLA Piper alert.

2. Compensation clawbacks

As we discuss in more detail in this DLA Piper alert, on October 26, 2022, the SEC directed national securities exchanges to establish listing standards requiring companies to adopt and enforce a policy for the recovery of erroneously awarded incentive-based compensation from current and former executive officers, often referred to as a “clawback” policy. Relatedly, the SEC also established disclosure requirements, obligating companies to: (i) file their clawback policy as Exhibit 97 to the Form 10-K, (ii) explain how they implement their clawback policy (which most companies will incorporate by reference in the 2024 proxy statement), and (iii) include two new checkboxes on the cover page of Form 10-K related to the recovery of erroneously awarded compensation.

On October 2, 2023, NYSE and Nasdaq listing standards took effect. Companies are now required to make the clawback-related disclosures in their SEC filings, which for calendar year-end companies would be their Form 10-K for the year ended December 31, 2023. Further, companies must have adopted compliant clawback policies by December 1, 2023, apply such policies to any incentive-based compensation received on or after October 2, 2023 and file these policies as Exhibit 97 to the 2023 Form 10-K.  

3. Insider trading by officers and directors

As we discuss in more detail in this DLA Piper alert, on December 14, 2022, the SEC created new disclosure requirements intended to address insider trading concerns. These requirements include disclosing information on (i) the use of Rule 10b5-1 trading plans and non-10b5-1 trading arrangements by directors and officers, (ii) insider trading policies and procedures adopted by the company, if any, and (iii) policies related to the grant of equity awards close in time to the release of material non-public information. Companies (except for smaller reporting companies (SRCs) must include such disclosures in their first filing that covers the first full fiscal period beginning on or after April 1, 2023, which for calendar year-end companies would be their Form 10-K for the year ending December 31, 2024. Similarly, calendar-year end companies (except for SRCs) will be required to file their insider trading policies and procedures, or amendments thereto, as Exhibit 19 to their Form 10-K for the year ending December 31, 2024.

While these annual disclosure rules will go into effect next year for calendar year-end registrants, quarterly disclosures under the new rule for all registrants (except for SRCs) went into effect in the first full fiscal period that began on or after April 1, 2023, which for calendar year-end companies was their Form 10-Q for the quarterly period ended June 30, 2023. 

SRCs are also subject to these quarterly disclosure requirements for the first full fiscal period that begins on or after October 1, 2023, which for calendar year-end SRCs will be the Form 10-K for 2023.  Therefore, a calendar year-end registrant’s Form 10-K for fiscal year 2023 would include, in Part II, Item 9B, (a) whether, in the fourth quarter of 2023, any director or officer adopted or terminated any contract, instruction or written plan for the purchase or sale of company securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and/or any non-Rule 10b5-1 trading arrangement and (b) a description of the material terms of such plan. A modification to such plan that includes a change to the amount, price or timing of the purchase or sale of securities or a substitution or removal of a broker executing trades under the plan is considered a “termination” of the plan that must be disclosed. 

4. Share repurchase modernization rule vacated

On December 19, 2023, the Fifth Circuit Court of Appeals vacated a purported SEC final rule that would have required new disclosure related to issuer repurchases of equity securities (the Share Repurchase Rule).  Adopted by the SEC on May 3, 2023, the Share Repurchase Rule would have required (i) quarterly disclosures of daily quantitative share repurchase information; (ii) filing (not furnishing) of daily quantitative data; (iii) a new checkbox indicating whether certain officers and directors traded securities within four business days before or after the announcement of the repurchase plan; and (iv) narrative disclosure of the objectives or rationales for the registrant’s repurchase plans. 

Because the Share Repurchase Rule has been vacated, none of these requirements will apply in the upcoming reporting season.  Registrants should continue to disclose aggregate monthly repurchase information, as they have in past years, in accordance with Item 703 of Regulation S-K. 

It is possible the SEC may appeal the ruling or, alternatively, introduce a new share repurchase rule in the future and, therefore, registrants should consider reviewing their procedures related to share repurchases to stay ahead of potential new repurchase rules in the future.

II. DISCLOSURE TRENDS AND UPDATES

1. Risk factors 

Registrants should thoroughly review and update their risk factors to accurately reflect significant changes encountered this year and anticipated in 2024. These changes include the potential adverse effects on the registrant due to the Ukraine war, developments in China, US political developments, stock market and US economic matters, interest rates, inflation, artificial intelligence, and the Israel-Hamas war.

See our DLA Piper alert for more information on updating risk factors.

2. Legal developments

While preparing to file a Form 10-K, registrants should review recent legal and regulatory updates relevant to their industry and operations. This ensures that the information disclosed is accurate and complete, compliant with the current legal landscape, and reflective of any regulations that could materially impact their business operations or financial situation. Legal updates that may require revisions to the Form 10-K include changes to statutes related to taxation, the federal government shutdown, the Corporate Transparency Act, public health, and state laws regarding privacy, environmental matters and reporting, employee non-compete provisions and minimum wages.

3. Human capital

Disclosure requirements related to human capital have evolved in recent years. Since 2021, registrants have been required to describe in their Form 10-K, to the extent material to an understanding of the company’s business taken as a whole, the registrant’s human capital resources, including the number of employees, and any human capital measures or objectives the registrant focuses on in managing its business, such as those that address the development, attraction and retention of personnel. Registrants are advised to update their human capital management disclosures to reflect developments within the company, and to consider market trends in human capital disclosure.

In September 2023, the SEC’s Investor Advisory Committee recommended that the SEC increase human capital management disclosure requirements, including disclosures related to persons employed by a registrant, turnover or comparable workforce stability metrics, costs of registrant’s workforce, workforce demographic data to allow investors to understand efforts to attract talent and evaluate those efforts, and a narrative disclosure of how the company’s labor and staffing practices and compensation incentives fit into the company’s overall strategy. While the SEC has not proposed, and may not propose, any rules related to such disclosures, registrants should consider whether these items may be material to the company or important to any of its key investors.  

4. Non-GAAP measures

Registrants should be mindful of the SEC’s continued focus on the improper use of non-GAAP measures. Since new Compliance and Disclosure Interpretations (Questions 100.01, 100.04-100.06 and 102.10(a)(b)(c)) were released in December 2022, the SEC has issued numerous staff comment letters on this topic. Recent comment letters have focused on ensuring that companies: 

• identify and clearly label non-GAAP measures 
  
  
• ensure that GAAP measures receive equal or greater prominence as the non-GAAP measure 
  
  
• provide an appropriate reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measure 
  
  
• disclose why the company believes that the non-GAAP measures are useful to investors
  
  
• disclose for what purposes management uses the non-GAAP measure and 
  
  
• ensure that the non-GAAP measures are not misleading. 

Companies that use non-GAAP measures should ensure they review these disclosures in light of the SEC’s rules and guidance.

5. Use of artificial intelligence 

Registrants should take note of SEC’s growing interest in companies’ use of and disclosures about artificial intelligence (AI). In July 2023, the chair of the SEC, Gary Gensler, stated that companies need to ensure that their material disclosures on AI opportunities and risks are “accurate and do not deceive investors.” Chair Gensler has also warned companies not to “AI-wash” or overstate AI initiatives at a time of investor excitement about the possibilities of AI.  

While there are currently no required AI disclosures, if a company is using or developing material AI, or spending material resources on AI, the company should provide appropriate, balanced disclosure.  For example, statements related to the use of AI may be appropriate in the Business, Risk Factors and/or MD&A sections of Form 10-K, as applicable. Based on the SEC’s increased focus on AI, companies should be mindful about the statements they make regarding AI, consider what material risks, if any, the use of AI presents to the company, and be on the lookout for future possible disclosure requirements. 

Please see our AI ChatRoom podcast AI + SEC for more information about reporting on the use of AI and our DLA Piper alert for information on updating AI-related risk factors. 

6. Climate

Although the proposed climate rules issued in March 2022 have not been adopted by the SEC, the SEC has been scrutinizing climate-related disclosures.  Companies should consider whether any of the following non-exclusive list of disclosures would be material to the business:

• How climate-related events and transition activities impact the line items of a registrant’s consolidated financial statements and related expenditures (under the proposed rules, this would be required to be reported if such amount exceeds 1 percent of the total line item for the relevant fiscal year)
  
  
• How severe weather events and other natural conditions and transitions activities impact financial estimates and assumptions reflected in the financial statements and 
  
  
• How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements.

Please see our prior client alert on the proposed rule and our new DLA Piper alert for more information on updating climate-related risk factors.

7. Cryptocurrency and digital asset disclosure 

Registrants should consider how they manage cryptocurrency and digital assets (crypto) disclosures. While there are no disclosure requirements specific to crypto, companies are required to disclose information related to investments, and to supplement those required disclosures with further material information to ensure that the statements are not misleading. 

The ongoing supplementation requirement is particularly important in relation to crypto, considering the volatility in the crypto market. In December 2022, recognizing the volatility in the market, the SEC published guidance on the topic. The SEC’s sample letter focuses on the need for clear disclosures about the material impacts of crypto market developments, risks related to the company’s liquidity and ability to acquire financing, and risks related to legal or regulatory impacts in the crypto market. 

8. China-based company disclosures 

Registrants should take note of the SEC’s continued guidance on disclosure obligations for companies that are based in or have a majority of their operations in China. In July 2023, the SEC issued a sample letter regarding China-specific disclosures. The letter had three focuses: (i) it reminded companies of disclosure obligations under the Holding Foreign Companies Accountable Act; (ii) it sought specific disclosures about material risks related to the role of the Chinese Government in the operation of China-based companies; and (iii) it noted that companies should determine whether they need to make disclosures relating to the material impact of certain statutes, such as the Uyghur Forced Labor Prevention Act. 

Return to our full set of alerts on key considerations for the 2023 fiscal year annual reporting season.  For more information, please contact the authors of this article or your DLA Piper relationship attorney.