On June 24, 2024, Erik Gerding the Director of the SEC’s Division of Corporation Finance made a statement regarding the SEC’s state of disclosure review. In fiscal year 2023 and continuing into 2024, the top areas of review and comment by the SEC were China-related matters, artificial intelligence, non-GAAP disclosures, management’s discussion and analysis, revenue recognition and financial statement presentation. In addition, disruptions in the banking industry, cybersecurity risks, the impact of inflation and disclosure related to or as a result of newly adopted rules (such as pay versus performance) are gaining attention by SEC review teams.
The director’s statement gives some insight into the SEC’s focus and serves as a reminder to our clients and us practitioners alike to be sure we are staying abreast of the ever-changing capital markets environment.
China Related Disclosures
A few years ago, the SEC enacted the Holding Foreign Companies Accountable Act and approved rules implementing same (see HERE). The SEC continues to monitor disclosures required by the Holding Foreign Companies Accountable Act, as well as all disclosures by China based companies. Last year the SEC published a general letter with sample comments to help guide a companies thinking when making China related disclosures (see HERE).
Artificial Intelligence
Unsurprisingly, artificial intelligence (AI) is a focus of SEC review. Anytime that a new industry, technology or fad erupts in the capital markets (the “green rush,” crypto, AI), public companies look to add a spin to their disclosures to capture the rage. Over the last year, the SEC has observed a significant increase in the number of companies that mention AI in their annual reports.
Moreover, even companies that are not entering the AI industry, can be impacted and accordingly should consider disclosure about the risks related to its use, including disclosure in the description of business section, risk factors, MD&A, the financial statements, and the board’s role in risk oversight. The SEC staff will be focused on these disclosures, including whether or not the company: (i) clearly defines what it means by AI and how the technology could improve the company’s results of operations, financial condition, and future prospects; (ii) provides tailored, rather than boilerplate, disclosures, about material risks and the impact the technology is reasonably likely to have on its business and financial results; (iii) focuses on the company’s current or proposed use of AI technology rather than generic buzz not relating to its business; and (iv) has a reasonable basis for its claims when discussing AI prospects.
Commercial Real Estate
Both banks with significant real estate exposure and real estate developers are subject to several increased risks in today’s economy including heightened vacancy rates, elevated interest rates, extended loan maturities and increased loan delinquencies. The SEC staff will be focusing on how banks are disclosing disaggregation of loan portfolio characteristics, geographic and other concentrations, loan to value ratios, loan modifications, nonaccrual loan policies, policies around timing, frequency and sources of appraisals, and risk management.
Likewise, for developers and REITs the SEC will be monitoring descriptions of default risks or liquidity issues and any mitigating efforts, debt maturity and lease term schedules, trends in lease renewals, major tenant rollovers, financial viability of tenants, property dispositions, asset impairments, and tenant receivables.
Recently Adopted Rules
As is always the case when new rules are adopted, the SEC will review filings for compliance with the new disclosures and provide comments to guide registrants through compliance.
Cybersecurity
On July 26, 2023 the SEC adopted the new cybersecurity disclosure rules – see HERE and imbedded links). The SEC will be reviewing both 8-K filings and annual reports for compliance with the new rules.
Clawbacks
In October 2022, the SEC adopted rules requiring national exchanges to adopt listing standards requiring listed companies to maintain Clawback Policies). See HERE. All the listing rules have been finalized and listed companies must adopt a policy and file such policy with its periodic reports. The SEC will be sweeping to ensure compliance.
Pay vs. Performance
In August 2022 the SEC adopted final Pay vs. Performance disclosure rules (see HERE). The SEC is committed to continue monitoring appropriate disclosures under the rules.
Universal Proxy
In November 2021 the SEC adopted rules requiring parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting – see HERE. The recent 2023 proxy season marked the first season implementing the new rules. The SEC will continue to carefully review proxy filings this season to ensure compliance with the new rules.
Beneficial Ownership Reporting
In October 2023, the SEC adopted new beneficial ownership reporting rules, including as to timing and substance – see my two part blog on the changes HERE and HERE.
The SEC will be carefully monitoring for compliance with these rules.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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