Securities Snapshot: 4th Quarter 2024
As we bid farewell to 2024, we welcome not only another year but also several new disclosure requirements. In this Snapshot, we summarize several developments and best practices for public companies to consider as the 2024 annual reporting and 2025 proxy statement season begins. Further, we consider how the incoming presidential administration is likely to influence the SEC’s rulemaking priorities in the future. Finally, this Snapshot briefly reviews a recent decision concerning Nasdaq’s board diversity disclosure rules.
2025 Reporting Season – Key Considerations
Insider Trading Policy Disclosures
In December 2022, the SEC adopted several amendments aimed at curbing what it saw as an opportunity for potential misconduct associated with Rule 10b5-1 plans, options awards, and the gifting of securities. For more detail on the amendments, see our December 2022 alert. Beginning with the filing of their 2024 Annual Report on Form 10-K, public companies with a calendar year-end must comply with these new disclosure requirements.
Pursuant to Item 408(b) of Regulation S-K and Item 15 of Form 10-K, registrants must disclose whether they have adopted insider trading policies and procedures and, if so, include them as exhibits. Alternatively, if a company has not adopted such policies and procedures, they must explain why they have not done so. Companies may also make this disclosure by incorporating by reference from their definitive proxy statement. Item 408(b) further notes that if a company includes its insider trading policies and procedures in its Code of Ethics, the company can satisfy the exhibit filing requirement by filing the Code of Ethics as an exhibit.
Regardless of whether a company discloses its insider trading policies in its Annual Report or proxy statement, the information must also be submitted in Inline XBRL format.
Equity Grant Policy Disclosures
The December 2022 amendments also added Item 402(x) to Regulation S-K, which requires calendar year public companies to include in their 2025 proxy statements a discussion of their policies and practices surrounding awards of stock options and stock appreciation rights granted close in time to the release of material nonpublic information (“MNPI”).
In particular, companies must disclose:
- how their board or compensation committee determines when to grant such awards, such as on a fixed schedule;
- whether their board or compensation committee considers MNPI when determining the timing and terms of such awards and, if so, how; and
- whether the company timed the disclosure of MNPI to affect the value of executive compensation.
Additionally, if a company has awarded stock options or stock appreciation rights to a named executive officer during its previous fiscal year within four business days before or one business day after the filing of a Form 10-K, Form 10-Q, or a Form 8-K that disclosed MNPI, it must provide the following information in a tabular format in its proxy statement:
- the name of the named executive officer
- the date of the grant
- the number of securities underlying the award
- the per-share exercise price of the award
- the grant date fair value of the award, computed using the same methodology as used for the company’s financial statements under GAAP principles; and
- the percentage change in the market price of the securities underlying the award between the closing market price of the security one trading day before the disclosure and one trading day after the disclosure of the MNPI
Finally, like the insider trading policy disclosure, companies must also format their equity grant policy disclosure information in Inline XBRL.
Cybersecurity & AI Disclosures
The SEC’s cybersecurity disclosure rules, first effective with last year’s reporting season, require companies to disclose information about their cybersecurity risk management, strategy, and governance in their Annual Report on Form 10-K.
However, beginning with Annual Reports filed on or after December 15, 2024, companies must now be sure to provide this disclosure in Inline XBRL. In addition, disclosures of cybersecurity incidents made pursuant to Item 1.05 of Form 8-K (while not an annual reporting matter) must also be filed in Inline XBRL beginning December 18, 2024.
The SEC continues to aggressively police issuers’ cybersecurity disclosures, evidenced by an October 2024 enforcement action in which the agency charged four companies with making materially misleading disclosures. Relatedly, the SEC has also directed its focus on the use of artificial intelligence (“AI”). As discussed in last quarter’s Snapshot, regulators have cautioned against “AI-washing,” whereby companies make hyperbolic or unsubstantiated claims in disclosures about their use of AI. Moreover, fact patterns from recent SEC interpretations suggest companies should pay special attention to incidents involving ransomware as they prepare their cybersecurity and AI disclosures.
As companies prepare their Annual Reports and proxy statements, they should ensure their cybersecurity disclosures are accurate and adequately supported. Further, companies that employ AI in their business should sufficiently describe the use, impact, risks, and benefits of AI in their risk factor disclosures.
Climate Disclosures
As mentioned in last quarter’s Snapshot, the SEC’s climate-related disclosures are currently subject to an ongoing legal challenge in the Eighth Circuit Court of Appeals. As of December 27, 2024, the SEC has maintained its voluntary stay of the disclosure requirements pending an outcome in the case.
Although companies need not comply with the rules on their upcoming Annual Reports, they should consider how existing SEC rules may nevertheless require disclosure on climate-related topics, particularly in the risk factors and management’s discussion and analysis sections of the Form 10-K. Given the overall uncertainty of the litigation in the Eighth Circuit, companies should review and update their existing disclosures and stay abreast of any further guidance from the SEC going forward.
Director & Officer Questionnaire Updates
As companies begin preparing their 2025 proxy statements, they should consider several updates to their director and officer questionnaires.
In September 2024, the SEC settled charges against the former CEO and Chairman of the Board of Church & Dwight Co., Inc. for failing to disclose his “close personal friendship” with one of the company’s executive officers. In light of this enforcement action, companies should review their D&O Questionnaire and consider broadening the scope of questions to ask their directors and officers to identify any free or discounted events, travel, or other items of value they may have received from (or given to) any other director or officer apart from their duties as a director or officer. Though not all friendships will jeopardize a director’s independent status, an enlarged or reconfigured questionnaire could help companies analyze relationships that may otherwise go unnoticed and expose the company to regulatory risk.
Additionally, companies that grant stock options or stock appreciation rights could include questions designed to solicit the information needed to determine whether the disclosure under Item 402(x) (discussed above) is necessary.
Anticipated Priorities of the Trump SEC
With just over three weeks until President-elect Donald Trump’s second term commences, speculation is growing about what type of agenda his administration will pursue at the SEC.
Perhaps the most obvious change at the agency is its leadership: with current SEC Chair Gary Gensler set to depart on inauguration day, the President-elect has nominated former SEC Commissioner Paul Atkins to rejoin the agency at its helm. Atkins, a businessman and vocal supporter of cryptocurrency and innovation, is widely expected to take a less adversarial stance toward the securities industry.
Under the current administration, Gensler has expanded the role of the SEC—advancing an aggressive regulatory agenda that includes the proposed climate-related disclosures and environmental, social, and governance (“ESG”) disclosure rules. Moreover, the agency has focused closely on disclosures concerning cybersecurity and the use of AI. As the Republican Party—which generally prefers a reduced regulatory presence—has gained control of the White House and both chambers of Congress, many observers anticipate the SEC to prioritize traditional investor protection issues that characterized Trump’s first term, such as insider trading and fraudulent financial disclosures. Indeed, it seems likely that under Atkins’ leadership, the SEC will scale back its focus on ESG rulemaking and entirely abandon the current administration’s efforts to impose climate change disclosure obligations.
Additionally, the SEC will likely reverse course with respect to its enforcement of cryptocurrency actions. While Gensler has overseen efforts to crack down on the cryptocurrency industry, Atkins, who serves as co-chair of the Token Alliance of the Digital Chamber of Commerce, will likely pursue a softer approach. In previous statements, Atkins has noted that while the SEC should ensure markets are fair for everyone, he does not believe that cryptocurrency or related technologies are to blame for creating fraud. Instead, he has indicated his focus will be on specific bad actors, not the industry or technology itself.
While the precise actions of the incoming administration remain to be seen, we expect the SEC to return to a more traditional, pro-business agenda that emphasizes a reduced regulatory burden on public companies.
Nasdaq Board Diversity Case
As mentioned in our recent update, the U.S. Court of Appeals for the Fifth Circuit earlier this month struck down Nasdaq’s board diversity rules, which were aimed at increasing the representation of women and other demographic minorities on corporate boards.
Following the court’s decision, Nasdaq-listed companies no longer have to comply with the rules, which required at least one woman, minority, or LGBTQ+ member on corporate boards as well as an annual report of director diversity information.
This decision, together with the priorities of the incoming Trump administration, which is roundly expected to deemphasize diversity initiatives, marks a clear reversal of the trends in reporting obligations over the last four years. Going forward, Nasdaq-listed companies and other public issuers alike can expect fewer disclosure requirements with respect to board diversity.
Should you have any questions or need assistance, please contact us.
F. Mark Reuter
513.579.6469
freuter@kmklaw.com
Allison A. Westfall
513.579.6987
awestfall@kmklaw.com
Olivia M. King
513.579.6988
oking@kmklaw.com
Christopher T. Colloton
513.579.6959
ccolloton@kmklaw.com
