DFIN experts stay on top of new SEC regulations and evolving financial reporting requirements. Whether it’s high-profile ESG regulations or more nuanced updates, our goal is to keep clients informed while providing the necessary level of guidance.
This commitment was apparent at our recent Activate Executive Summit, where SEC experts Christina Thomas and Nate Sisitsky took the stage to share updates on a variety of SEC topics and additional regulatory items, rules changes, new interpretations, and disclosure frameworks.
They discussed the following five key issues the SEC will focus on in the coming months that will impact how businesses file financial reports.
Comment Letters
Recent comment letters sent to businesses by the SEC should provide a reminder that reviews don’t begin and end with the annual report. The Commission conducts holistic reviews of other company materials, including websites, earnings call transcripts, press releases, analyst reports, and more. The goal is to determine how management is discussing their company results and trends outside of the SEC filing process and to assess whether the business is being accurate, complete, and consistent in its reporting.
DFIN Expert Guidance:
- If your reporting processes are disjointed, with different people writing and overseeing all of the materials touched on above, it’s time to change. Assign a single person to be the overall lead, and make sure one person reviews everything before it is published.
- Coordinate the review of all the content with a review of the corresponding periodic report before filing.
- For materials containing disclosures, these do not have to be identical throughout all documents, but they must be consistent, and the material information should be disclosed in both the earnings release and Form 10-K or 10-Q.
AI Washing/Talking about AI
The SEC reports that 59% of annual reports filed by large, accelerated filers in early 2024 made some mention of AI, up from 27% in 2023. Based on that steep increase, it should come as no surprise that the SEC is closely monitoring what businesses are saying for incidents of AI washing. This occurs when companies make exaggerated claims about their use of AI and how they are benefitting from it without substantiating that claim or including any risk factors in their Form10-Q.
DFIN Expert Guidance:
- If your business is not really using AI, don’t tell people you are.
- If your company uses AI, and it's an integral part of the business, disclose the risks and opportunities associated with it in all relevant SEC filings.
- Do not use boilerplate language when discussing these risks and opportunities. Make all language specific to the company and ensure that any claims about AI prospects have a reasonable basis that has been communicated with investors.
Shadow Trading
In April 2024, a jury in a California federal court delivered a verdict in favor of the SEC in a novel shadow trading case (Securities and Exchange Commission v. Matthew Panuwat) that has quickly generated increased attention to "shadow trading" as a potential form of insider trading. Shadow trading is a new concept that involves trading in the securities of one company based on material non-public information (MNPI) about a different, economically linked company.
For calendar year-end companies, the upcoming 10-K requires disclosing whether they have an insider trading policy. Today, most companies have clear insider trading policies, but fewer have language covering shadow trading. That makes this the perfect time to update these policies to include a statement covering shadow trading.
DFIN Expert Guidance:
- Review insider trading policies. If your business must file an insider trading policy as part of its Form 10-K, include guidance specific to shadow trading.
- One option is to make it a violation of the insider trading policy for an employee to trade in the issuer’s or any other company’s (e.g., competitors) stock on the basis of information learned in the course of the employee’s employment.
- A second option is to add a disclosure that warns employees that the SEC has sought enforcement of insider trading laws for trading based on information pertaining to the company's competitors and when to require 10b5-1 trading plan pre-approval.
Enhancing the Effectiveness of Audit Committee Meetings
Deloitte and the Center for Audit Quality recently released its Audit Committee Practices Report examining the top strategies for improving the audit committee, a subcommittee of a company's board. Since the audit committee is responsible for overseeing financial reporting, risk management, and compliance processes, these meetings are essential, and with time and availability in short supply, it’s vital to maximize what time you have.
DFIN Expert Guidance:
- Improve the quality of pre-read materials, focusing them on THE priority areas and making them comprehensive but not exhaustive. Based on Deloitte’s research, the top priority areas over the next 12 months include cybersecurity, enterprise risk management, finance and internal audit, compliance laws and regulations, finance transformation, ESG reporting, and AI governance. When in doubt, engage the general council and the committee chair for their recommendations.
- Provide a single point of contact to coordinate and answer questions about pre-read materials.
- Increase discussion and engagement from members during meetings by being candid and constructively challenging attendees with questions.
- To improve the quality of meeting presentations, limit the number of slides and the overall presentation length. Also, assume that all attendees have reviewed the materials before the meeting to keep things moving along.
Stock Repurchases
When companies opt for stock repurchases, most provide some detail on the effort in the capital allocation slide of their deck. However, more is needed. The SEC has made it clear that rote resolutions around stock repurchases are not acceptable. It’s imperative that companies plan and provide significant details and disclosures around the process.
DFIN Expert Guidance:
- Take time to review the positives and negatives of a stock repurchase thoroughly.
- Talk to your board and audit committee, delving into the objectives or rationales of repurchase, the impact the buyback will have on the company’s cash position, capital needs, EPS, significant shareholders, and more.
- Ensure that it passes the “Delaware Test,” which prohibits corporations from purchasing their shares when its capital is impaired or would be impaired as a result of such purchase.
- Ensure that you have the balance sheet to support this action.
- Secure resolutions that clearly document approvals that address the objectives of the repurchase, size, duration, method, and more.
- Ensure that all deliberations are consistent with the company’s later disclosure in its SEC periodic reports, earnings releases, and public statements regarding the objectives or rationales for each buyback program.
These are just some of the areas that SEC experts are watching closely. As always, there is much to digest, which makes assessing each area and what it means for your company a challenge. For those with questions on the above areas or looking for answers on other developments at the SEC, we encourage you to connect with our DFIN team, which is available around the clock to get you the expert support you need to start the year off right.
