Amendments to Regulation S-K Items 300. In 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to Items 301 (Selected Financial Data), Item 302 (Supplementary Financial Information), and Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)), which will be in effect for this year’s Annual Report on Form 10-K and for quarterly reports thereafter. The changes in mandated Item 300 disclosures were outlined in last Winter’s Corporate Communicator.

Climate Change Disclosure. Recently, the SEC has shown increasing interest in climate change disclosure. The SEC last provided significant guidance on climate change disclosure in its February 2010 Guidance Regarding Disclosure Relating to Climate Change (the “Guidance”). In an effort to refocus companies on compliance with the Guidance, in September 2021, the SEC issued its Sample Letter to Companies Regarding Climate Change Disclosures (the “Sample Letter”), which builds on the Guidance.

In the Sample Letter, the SEC reminds us that:

• depending on the particular facts and circumstances, climate change disclosure could be required in a company’s description of business, legal proceedings, risk factors, and MD&A;
• disclosure topics suggested in the Guidance
  • include the impact of pending or existing climate-change related legislation, regulations, and international accords;
  • the indirect consequences of climate-related regulation on business trends; and
  • the physical impacts of climate change; and

• in all cases, a company must disclose such further material information, if any, as may be necessary to make the required disclosures, in light of the circumstances under which they are made, not misleading.

The Sample Letter further provides sample comments that the Division of Corporation Finance may issue with respect to a company’s climate change disclosures or the absence of such disclosures, including the following:

• If a company provides more expansive disclosure in its corporate social responsibility report (CSR report) than in its SEC filings, what consideration was given to providing the same type of climate-related disclosure in its SEC filings as in its CSR report.
• Disclose the material effects of transition risks related to climate change that may affect a company’s business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes. Disclose also material litigation risks related to climate change.
• If a company has not disclosed significant developments in federal and state legislation and regulation and international accords regarding climate change, identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on the company’s business, financial condition, and results of operations.
• Identify any material past and/or future capital expenditures for climate-related projects and quantify such expenditures if material.
• To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:
  • decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
  • increased demand for goods that result in lower emissions than competing products;
  • increased competition to develop innovative new products that result in lower emissions;
  • increased demand for generation and transmission of energy from alternative energy sources; and
  • any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.
• If material, discuss the physical effects of climate change on a company’s operations and results. This disclosure may include the following:
  • severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality;
  • quantification of material weather-related damages to a company’s property or operations;
  • potential for indirect weather-related impacts that have affected or may affect a company’s major customers or suppliers;
  • decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
  • any weather-related impacts on the cost or availability of insurance.
• Quantify any material increased compliance costs related to climate change and if material, provide disclosure about the purchase or sale of carbon credits or offsets and any material effects on a company’s business, financial condition, and results of operations.

Earlier this year, SEC Chair Gary Gensler stated that he intends the SEC to propose a rule relating to climate change disclosure that would clarify certain issues raised by public companies, including the scope of reportable emissions and the appropriate reporting standards. Chair Gensler has provided some indication of what this new disclosure regime may look like. It is expected that there will be a combination of qualitative and quantitative climate disclosures including, for qualitative disclosure, how a company’s board and management manage climate-related risks and opportunities and how such matters impact the company’s strategy. For quantitative disclosures, we expect disclosure points may include Scope 1, Scope 2 and Scope 3 emissions (as categorized by a broadly utilized accounting tool, the Greenhouse Gas (GHG) Protocol), the financial impacts of climate change and, where a company chooses to make disclosures about “net zero” commitments, transparency as to what emissions are covered by that commitment and progress towards those commitments. In the meantime, in preparing its upcoming Form 10-K reports, registrants should consider giving fresh consideration to their climate change disclosures and how they would respond to SEC comments such as those above.

SEC Refocuses on Clawback Rules. On July 1, 2015, the SEC proposed rules (the “2015 Proposal”) to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), which requires the SEC to adopt rules directing the national securities exchanges to prohibit the listing of any security of an issuer that is not in compliance with rules to be adopted regarding the clawback of executive incentive pay in the event that the issuer is required to prepare an accounting restatement due to the issuer’s material noncompliance with any financial reporting requirement under the securities laws. Under the 2015 Proposal, an issuer would be required to recover from any of its current or former executive officers who received incentive-based compensation (including stock options awarded as compensation) during the three-year period preceding the date the issuer is required to prepare the accounting restatement, based on the erroneous data, the compensation in excess of what would have been received based on the restated results.

It was generally believed that there were numerous features of the 2015 Proposal that were unclear and ambiguous, controversial and likely to be subject to significant litigation in the event that an issuer attempted a clawback. These include that clawbacks apply to excess incentive compensation received during a three-year look back period from the date that the issuer is required to prepare an accounting restatement, which the 2015 Proposal defines in part as the date the proper decision makers of the issuer conclude or “reasonably should have concluded” that the issuer’s previously issued financial statements contain a material error. This standard gives rise to significant uncertainty in the start date for the look-back period.

In October 2021, the SEC issued a release reopening the comment period for the 2015 Proposal (the “Reopening Release”), indicating an intent to move forward on the clawback rules. In the Reopening Release, the SEC sought comment on 10 new considerations applicable to the final rules. These include whether to retain the “reasonably should have concluded” standard for determining a look-back period, and a potential expansion of the accounting restatements that would trigger a clawback. The SEC is considering whether the term “an accounting restatement due to material noncompliance” should be interpreted to include all required restatements made to correct an error in previously issued financial statements. The Reopening Release notes that this would include restatements required to correct errors that were not material to those previous issued financial statements, but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period.

Rule10b5-1 Revisions. Following Chair Gensler's expression of concern about potential abuses of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on December 15, 2021 the SEC announced proposed revisions to the rule. Rule 10b5-1 provides an affirmative defense to Rule 10b-5 insider trading liability for individuals and entities if the purchases and sales at issue are made pursuant to a written plan that satisfies certain conditions. Generally, the rule is intended to permit trading in circumstances where material nonpublic information is not a factor in the trading decision.

Following is a summary of the key changes reflected in the proposed rule:

• Cooling off Period: A 120-day cooling-off period when insiders adopt a 10b5-1 plan before the initial trade, including any modification to an existing plan (30-day cooling off period for issuers).
• Mandatory Disclosure Requirements: Disclosure of the adoption, modification, and select terms of a plan.
• Significantly enhanced disclosure requirements, including:
  • Must disclose in the annual report whether or not (and if not, why not) the issuer has adopted insider trading policies and procedures; also must disclose such insider trading policies and procedures;
  • Must disclose in the annual report the issuer’s option granting policies and provide tabular disclosure showing (a) grants made within 14 days of (i) the filing of a Form 10-Q or Form 10-K, (ii) an issuer share repurchase and (iii) the filing or furnishing of a Form 8-K that discloses material nonpublic information (including earnings information) and (b) the market price of the issuer’s stock on the trading day before and after the release of such information;
  • Must disclose in quarterly reports the adoption and termination of Rule 10b5-1 plans by directors, officers, and issuers, and the terms of such trading arrangements;
  • Must identify on Form 4 filings whether a reported transaction was made pursuant to a Rule 10b5-1 plan; and
  • Eliminate the deferred reporting option on Form 5 of gifts to now require such transactions be reported promptly on Form 4.
• Limitations on Number of Plans: Elimination of affirmative defense for multiple overlapping plans; and plans to execute a single trade are limited to one plan per 12 month period.

Share Purchase Disclosure Modernization. Also on December 15, 2021, the SEC proposed new rules regarding disclosure about repurchases of an issuer’s equity securities (e.g., stock buybacks). The proposed amendments would require the preparation and filing of a new form, Form SR, and would require issuers to report purchases of its equity securities for each day that it makes a share repurchase, which would need to be furnished before the end of the first business day follwing such share repurchase. The proposed rules would also enhance existing disclosures in Form 10-Q and Form 10-K filings about stock buybacks. The proposed enhance disclosures would require more detailed and more frequent disclosure about stock buybacks and would be required to be presented using a structured data language. Following is a summary of the key disclosure aspects of the proposed rule:

Proposed Form SR (Next Day Reporting)

• Date of repurchase; number of shares repurchased (whether or not pursuant to publicly announced plan or program); average price per share; number of shares purchased on the open market; number of shares purchased in reliance of the Rule 10b-18 safe harbor; and number of shares repurchased pursuant to a Rule 10b5-1 plan.

Proposed Enhanced Periodic Reporting (Forms 10-Q and 10-K)

• The issuer’s objective and rationale for its buybacks and the process or criteria used to determine the amount of buybacks;
• Any policies and procedures relating to purchases or sales by officers or directors during the existence of a buyback program, including any restrictions relating thereto;
• Whether the buybacks were made pursuant to a Rule 10b5-1 plan; and
• Whether the buybacks were made in reliance of the Rule 10b-18 safe harbor.

Human Capital Disclosure. The SEC amendments to Item 101, Description of the Business, which became effective November 9, 2021, included a requirement for a description of the registrant’s human capital resources to the extent material to an understanding of the registrant’s business taken as a whole. The description must include the number of persons employed by the registrant and any human capital measures or objectives that the registrant focuses on in managing its business such as measures or objectives that address the development, attraction or retention of personnel. In connection with such disclosures, the SEC advised that the exact measures and objectives to be included in the disclosure may depend on factors such as the registrant’s industry, regions of operation, general strategic posture, and macro-economic and similar conditions. Jay Clayton, the SEC Chair at the time, also stated that he expected to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.

In the first year of the new rule, practice varied widely in how companies implemented the new human capital disclosure principles, including the level of detail and the measures discussed or presented. For example, diversity, equity and inclusion was a frequent topic of discussion. However, the breadth of disclosure varied widely, with some companies addressing the topic in general and aspirational terms with others including specific quantitative metrics of various attributes and characteristics such as race, ethnicity, gender and gender identity, sexual orientation, disability, age and veteran-status.

The SEC and some activists have indicated publicly that they are not pleased with the manner in which many companies have implemented the new rule. In short, there is criticism that many companies have complied with the letter, but not the spirit, of the rule. And, although the new rule has only been effective for approximately one year, the SEC indicated in its spring 2021 regulatory agenda that it intends to propose amendments to enhance the new human capital disclosure aspect of Item 101. Such enhanced disclosure metrics could include: a breakdown of the company’s workforce by full time, part time, subcontractors and temporary employees; the total cost of the company’s workforce (e.g., wages, benefits and related expenses); turnover; and workforce diversity (e.g., gender and ethnic diversity across various seniority positions). ¹

The Holding Foreign Companies Accountable Act. New Item 9C of Form 10-K (Disclosure Regarding Foreign Jurisdictions that Prevent Inspections) was added under the Holding Foreign Companies Accountable Act (the “HFCAA”) enacted in December 2020. The HFCAA requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report on the financial statements in the Form 10-K, where both:

• the accounting firm has a branch or office that is located in a foreign jurisdiction; and
• which the Public Company Accounting and Oversight Board (“PCAOB”) has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.

These covered issuers are then required to provide certain information to the SEC. Under the HFCAA, if an issuer is determined to be a covered issuer for three consecutive years, the SEC must prohibit trading in its securities. A covered issuer that is also a foreign issuer must also make certain disclosures in new Item 9C of Form 10-K, under a caption “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.”

Electronic Signatures. On November 17, 2020, the SEC adopted amendments to Rule 302(b) of Regulation S-T providing for the use of electronic signatures in SEC filings. To sign electronically, the signing process must satisfy certain requirements laid out in the SEC EDGAR Filer Manual, including that:

• The signatory must present physical, logical or digital credentials that authenticates his or her identity.
• The signing process must reasonably provide for non-repudiation of the signature.
• The signature must be attached or logically associated with the signature page or document being signed so that the signer (a) has notice of the substance of the document, (b) an opportunity to review the document before signing it, and (c) an opportunity for subsequent confirmation of signing.
• The signature must include a timestamp recording the date and time of signing.

Prior to using an electronic signature, the filing person must manually sign a document agreeing to the use of his or her electronic signature in authentication documents under Rule 302(b) and attesting that such electronic signature will be legally equivalent to a manual signature. The electronic filer must maintain this document for a specified time per SEC rules and provide a copy to the SEC or its staff upon request.

Filing Fee Payment and Disclosure Modernization. On October 13, 2021, the SEC adopted amendments to update filing fee payment methods, filing fee table disclosure content and format, and the allocation and offsetting of filing fees.

• Under current SEC rules, the filing fee may be paid by wire transfer, paper check or money order. When the new rules become effective, the filing fee can be paid by wire transfer, Automated Clearing House (ACH) payments, and, subject to certain limitations, debit and credit cards.
• Under current rules, fees are laid out in a table generally on the cover page of the document submission requiring the fee. Under the new rules, a filing fee table must be included as an exhibit to the submitted document and will be in a required format containing information necessary for fee calculation. The amendments also require the tagging of the filing fee data in iXBRL, subject to a transition period.
• The amendments also revise certain fee allocation and offsetting rules and require additional disclosure regarding such actions.

The new payment methods will be effective on and after May 31, 2022. The iXBRL tagging requirements will be required for large accelerated filers beginning on July 31, 2024, and for other filers on July 31, 2025. The remainder of the amendments will be effective as of January 31, 2022.