Baker & Hostetler LLP

01/09/2025 | Press release | Distributed by Public on 01/09/2025 13:40

Preparing for the 2025 Proxy and Annual Reporting Season: Key Issues and Considerations

01/09/2025|37 minute read
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For the 2025 proxy and annual reporting season, there are a number of key issues to consider and keep an eye on for further developments as preparations commence. This alert provides an overview of these issues and updates in several key areas, including Securities and Exchange Commission (SEC) disclosure and filing requirements, executive compensation matters, and corporate governance trends.

In This Issue:

EXECUTIVE COMPENSATION - EQUITY GRANTS AND BENEFICIAL OWNERSHIP DISCLOSURES

Equity Grants (Authors: Susanne K. Hanselman and Stefan P. Smith)

Equity Grant Timing and Related Disclosure Requirements

Proxy statements filed in 2025 will include new disclosure designed to provide more transparency on an issuer's practices on the granting of options, stock appreciation rights (SARs) and other option-like awards. Under Item 402(x)(2) of Regulation S-K, issuers must make tabular disclosure on a grant-by-grant basis of each option, SAR or similar award to the CEO and each named executive officer (NEO) granted within the period beginning four days before the filing of a periodic report by an issuer or of the filing or furnishing of a Form 10-K, Form 10-Q or Form 8-K disclosing material nonpublic information, and ending one day after the applicable filing or furnishing. The new disclosure does not apply to equity awards that do not have an exercise price, such as time- or performance-based restricted shares or units.

The applicable fiscal year of grants covered by the new disclosure rules is the first full fiscal year beginning on or after April 1, 2023. For calendar year-end companies, this covers awards of options and SARs granted in 2024 to NEOs, and the disclosure must be included in proxy statements or Forms 10-K filed in 2025.

The table must include, for each NEO (as applicable) and on an award-by-award basis, (i) the grant date, number of shares and exercise price of the option award, (ii) the grant date fair value of each award computed using the same methodology as used for the issuer's financial statements under GAAP, and (iii) the percentage change in the market price of the underlying securities from the closing market price of the security one trading day before and one trading day after the disclosure of material nonpublic information.

In addition, Item 401(x)(1) of Regulation S-K requires issuers to disclose their "policies and practices" regarding the timing of awards of stock options in relation to the release of material nonpublic information, and whether and how they take material nonpublic information into account when making such awards. The purpose of the narrative disclosure is to provide insight regarding the issuer's practices regarding grants of options and option-like awards. This new narrative disclosure is required regardless of whether grants of stock options or SARs were made within the time periods triggering the tabular disclosure.

The new option grant disclosure follows SEC Staff Legal Bulletin No. 120, issued in November 2021 (SAB 120), which provides guidance for companies as to how they should recognize and disclose the cost of providing "spring-loaded" awards to executives. As defined in SAB 120, a spring-loaded award refers to a "share-based payment award granted when a company is in possession of material nonpublic information to which the market is likely to react positively when the information is announced." The guidance cautions that if the grant date fair value does not reflect the impact of material nonpublic information, it may not be in compliance with GAAP, which could require a restatement.

Internal Policy and Governance Considerations

Issuers should consider taking the following actions in preparing the 2025 proxy statement:

  • Review the timing of options and SARs grants to NEOs during fiscal year 2024 to determine if any fall within the time period that would require the tabular disclosure.
  • Review and revise equity grant practices disclosure to be included in the proxy statement. Many companies already disclose equity granting practices in the Compensation Discussion & Analysis section of their proxy statements in response to Item 402(b)(2), which requires disclosure of material information about compensation practices that may include "[h]ow the determination is made as to when awards are granted, including awards of equity-based compensation such as options." Issuers should determine if current disclosure needs to be revised to be responsive to the new requirements of Item 402(x) or to reflect any changes to equity granting practices (described above) in light of the new rules.

Issuers may want to reconsider option and SAR granting practices to avoid or minimize the tabular disclosure by taking the following actions:

  • Establish a grant date for annual awards that is no earlier than the second business day after the release of the Form 10-K or a Form 10-Q.
  • For new hires, have a quarterly grant date that is tied to the date of release of material nonpublic information, especially for executive officers.
  • Be very careful about the timing of off-cycle or special grants.

Even careful planning may not avoid the need for disclosure. Although issuers can generally control the timing of periodic reports on Form 10-K or Form 10-Q, there may be times when a Form 8-K filing is required and the issuer does not control the timing, such as in the case of the resignation of an executive officer or director.

13D and 13G Filings (Author: Samuel F. Toth)

Accelerated Filing Deadlines

Last year, the SEC adopted amendments to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act) to, among other things, accelerate the filing deadlines for Schedules 13D and 13G. Each of those accelerated deadlines became effective in 2024.

Recent Enforcement Actions

Over the past year, the SEC has intensified its enforcement relating to delinquent Schedules 13D and 13G reports and Forms 3, 4 and 5. In September, the SEC announced that it had settled enforcement proceedings against 23 entities and individuals for failing to timely report their beneficial ownership and transactions of public company stock on applicable Section 13(d), Section 13(g) and/or Section 16(a) filings.

The violations ranged from one-time failures (e.g., filing a single Schedule 13D approximately six weeks late) to repeated failures over years of noncompliance. Each entity and individual agreed to cease and desist from future violations and to pay civil monetary penalties that ranged from $10,000 to $750,000. The SEC has publicly stated that one of its initiatives will be to focus on the timely reporting of beneficial ownership filings. This recent enforcement activity shows that these stated goals are more than just talk. These priorities are being backed by meaningful enforcement efforts.

INSIDER TRADING

Insider Trading Policy Filing Requirements and Shadow Trading (Authors: Janet A. Spreen and Macy T. Munz)

On Dec. 14, 2022, the SEC adopted new Item 408(b) of Regulation S-K, which requires public companies to disclose whether they have adopted insider trading policies and file these policies as an exhibit to their annual report on Form 10-K beginning with the 2024 Form 10-K. Companies that have not established such policies must explain their reasoning for not doing so. Insider trading policies have long been a recommended practice to mitigate risks and protect both the company and its insiders. These policies typically include provisions such as blackout periods during which insiders cannot trade, requirements for preclearance of trades, and restrictions on practices like short sales, hedging and the use of margin accounts.

While the contents of insider trading policies will vary from company to company depending on access to material information, market coverage, etc., many companies have already made their policies publicly available and these policies confirm that certain trends continue to persist regarding key terms. In addition, this has provided insight into how companies are addressing the notion of shadow trading (which is discussed in more detail below), as well as gift transactions after the SEC included commentary in a rule release indicating that gifts could give rise to insider trading liability despite a long-standing position that gifts do not constitute a sale.

  • Material Nonpublic Information (MNPI) - With respect to when MNPI is considered "public," companies are largely aligned in considering such information to be public within one to two full trading days after release.
  • Blackout Periods - A majority of companies provide for quarterly blackout periods beginning approximately two weeks before quarter-end, and ending one to two full trading days after earnings are released. Instead of imposing quarterly blackouts on all insiders across the board, the vast majority of companies limit imposition of quarterly blackouts to Section 16 officers and executive officers, as well as other employees who have access to quarterly financial information.
  • Preclearance Requirements - Most companies impose requirements for preclearance of trades, and these procedures typically apply to insiders who are subject to quarterly blackouts.
  • Hedging - Most companies impose restrictions on hedging, and these restrictions typically apply to all insiders with no exceptions.
  • Gifts - Emerging approaches include many policies imposing some form of explicit restriction on gifts, with a large portion of those policies prohibiting gifts when an insider subject to the policy is in possession of MNPI and/or is subject to a blackout period or unless approved through preclearance procedures. A smaller percentage of policies restrict gifts only if the insider has reason to believe that the gift recipient will sell while the insider has MNPI.
  • Shadow Trading - A relatively smaller percentage of companies specifically prohibit "shadow trading" by insiders, but this is likely to become a more prominent feature in insider trading policies following the Panuwat decision.

The SEC continued its trend of expanding regulation through enforcement in 2024 with the novel shadow trading enforcement landmark case, Securities and Exchange Commission v. Panuwat. Shadow trading is a type of insider trading where an individual uses MNPI from one company to make trading decisions in a different, but economically linked, company. In this case, the jury found that an executive had breached a duty of "trust, confidence or confidentiality" by purchasing stock in a competitor company based on MNPI about his company's upcoming acquisition. This represents an extension of the misappropriation theory of insider trading, which traditionally has been that a violation occurs when an individual exploits confidential information, breaching a duty of trust or confidence to the information's source. Panuwat extends this premise to find a breach of such duty occurred when the trader acted on information learned from one company that materially affects another company in the same industry but to which the trader had no connection. The SEC focused on the language of the insider trading policy and confidentiality agreement that Panuwat entered into with his employer. The policy prohibited trading in the employer's securities while in possession of its inside information, but also in other publicly traded securities in which the company's inside information would provide material insight. With respect to the confidentiality agreement, the SEC argued that Panuwat breached the contractual obligation not to use the company's information for personal gain, and in any event, the court indicated that an inherent duty of trust and confidence exists under the employment relationship even without an agreement.

The Panuwat case underscores the SEC's proactive approach to combating unconventional insider trading behaviors that go beyond the traditional boundaries of trading in the securities of the company directly associated with MNPI. By mandating the disclosure and filing of insider trading policies, the SEC aims to ensure that companies address such emerging risks. For additional information on the Panuwat ruling, see our alert "The SEC Secures Major Trial Victory in Its First 'Shadow Trading' Insider Trading Enforcement Action - Securities and Exchange Commission v. Panuwat," dated April 16.

SEC CYBERSECURITY RULES

Updates, Insights and Metrics (Authors: Craig Hoffman, Eric Gyasi and Janet Spreen)

The SEC created two new obligations that became effective in December 2023: (1) file a Form 8-K under new Item 1.05 within four days of determining that the impact of a cybersecurity incident is material, and (2) in a new Item 1C of Form 10-K, describe (a) the company's cybersecurity strategy and processes, (b) how the board oversees and management assesses and manages cybersecurity risks, and (c) "whether any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the registrant, including its business strategy, results of operations, or financial condition and if so, how."

Heading into 2024, there was concern about the ability to comply with these rules, mainly focused on the new Form 8-K disclosure obligation for material cybersecurity incidents, but also as to whether more detailed disclosure on cybersecurity risk management strategy would lead to increased regulatory scrutiny and litigation when the company disclosed a security incident.

The first year of these obligations reflected an absence of regulatory enforcement actions as regulators took the typical approach of first observing compliance efforts and challenges, offering guidance and looking for outliers. The SEC provided guidance about halfway into the year, enforcement actions that were resolved related to conduct that occurred before the rules were effective, and the concern about post-incident regulatory/litigation risk did not materialize. Our alert "2024 SEC Cybersecurity Rule Updates," dated January 7, reviews these trends in detail, including Form 8-K statistics, notable proceedings and resolution agreements (including dissenting opinions of commissioners on high-profile cases that may be a good forecast of the SEC's approach under a new administration), and offers insights to help navigate the evolving landscape of SEC cybersecurity regulations effectively.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE MATTERS

Reexamining DE&I Initiatives (Authors: Tess N. Wafelbakker and Caroline H. Mills-Haddad)

Corporate Retreat from DE&I Efforts

In recent years, calls for greater diversity in organizations led to a significant increase in board engagement with diversity, equity and inclusion (DE&I) issues and implementation of robust DE&I policies. However, the U.S. Supreme Court's landmark affirmative action ruling in Students for Fair Admissions v. Harvard, sustained pressure from shareholder activists and politicians, and private litigation challenges catalyzed a large-scale corporate retreat from DE&I initiatives. Examples of actions taken to curb these efforts include eliminating DE&I training programs, retiring goals for achieving diversity in senior leadership, no longer giving priority treatment to women- and minority-owned suppliers, and suspending participation in the Human Rights Campaign Corporate Equality Index, which measures workplace inclusion for LGBTQ+ employees. Some companies are redirecting the focus from DE&I efforts to operational efficiency. Beyond the corporate sector, DE&I initiatives are also being scaled back in educational institutions. Several states, including Utah, Alabama, Iowa, Florida and Texas, have banned DE&I offices in their public universities, and several private universities, including Massachusetts Institute of Technology and Harvard University's Faculty of Arts and Sciences, have eliminated their faculty diversity requirements.

Allan Schweyer, principal researcher at the Human Capital Center at the Conference Board, explained that the primary driver behind companies making these changes is a reassessment of their legal risk exposure, which began after the Students for Fair Admissions case. Since then, conservative organizations have leveraged the arguments made in Students for Fair Admissions to successfully challenge diversity programs in other sectors, including government contracting. Efforts to reverse DE&I initiatives will likely intensify under the new administration, as President-elect Trump promised to eliminate federal spending on DE&I practices.

Despite the recent retreat from DE&I initiatives by many corporations, it is unlikely that these efforts will disappear entirely. DE&I policies have become deeply embedded in and valued by corporate culture over the past decade, and their complete removal could alienate key stakeholders, including employees, consumers and investors who view these initiatives as essential to fostering equitable workplaces and broader social responsibility. Certain stakeholders, particularly those aligned with environmental, social and governance (ESG) priorities, may redirect their investments elsewhere. At the same time, this must be balanced against the legal landscape in light of the Students for Fair Admissions decision, which may expose companies to heightened legal risk if their diversity initiatives are perceived as discriminatory. While some companies may adjust their DE&I strategies to navigate both social and legal pressures, maintaining at least a baseline commitment to inclusivity and equity will likely persist moving forward.

Nasdaq Diversity Rules Struck Down

On December 11, the U.S. Court of Appeals for the Fifth Circuit struck down the diversity disclosure rules proposed by Nasdaq and approved by the SEC.[1] The Nasdaq rules required most companies listed on the Nasdaq exchanges first to disclose board-level diversity statistics in their company's proxy statement (or if companies did not file a proxy, on Form 10-K or 20-F) or on their website and second, achieve an aspirational target of at least two diverse board members (female and minority or LGBTQ+) or to explain the company's reason for not meeting the diversity objective. The court ultimately determined that the SEC exceeded its authority under the Exchange Act by approving the rules in 2021. Nasdaq announced that it does not intend to appeal the court's decision, and it is unlikely that the SEC will pursue an appeal in light of the incoming administration and anticipated changes in SEC leadership.

Despite the court's ruling, many other parties remain focused on enhanced board diversity, including state lawmaking agencies, proxy advisory firms, and institutional investors. In addition, shareholders may submit proposals requesting that companies increase their board diversity efforts even beyond the Nasdaq requirements, such as by embedding a commitment to diversity in governance documents. We have seen such proposals submitted by state-sponsored retirement or scholarship funds, often citing studies and guidelines from large institutional investors. In light of the sustained focus on this element of board composition, we expect many public companies will voluntarily disclose some form of board diversity information moving forward.

Navigating Uncertainty Surrounding Climate Disclosure Rules (Authors: Jeffrey S. Spindler and Matthew Sferrazza)

On April 4, the SEC voluntarily stayed its final rules on climate-related disclosure pending challenges to such rules being resolved by the U.S. Court of Appeals for the Eighth Circuit. The new rules would generally require registrants to provide the disclosures listed below, with the degree of disclosure and phase-in period commensurate with the size-based filing status of the registrant:

  • In the footnotes to financial statements, information regarding (1) effects of severe weather events and other natural conditions, (2) carbon offsets and renewable energy certificates, and (3) material impacts on financial estimates and assumptions related to severe weather events, other natural conditions, or disclosed climate-related targets or transitions plans.
  • Outside of the financial statements, material information regarding:
    • Scope 1 and Scope 2 greenhouse gas (GHG) emissions, subject to assurance requirements as they are phased in
    • Governance and oversight of material climate-related risks
    • Impact of climate risks on strategy, business models and outlook
    • Risk management processes for climate-related risks
    • Climate targets and goals

If the rules survive challenge as drafted, the stated phase-in periods noted in the SEC's related fact sheet would begin after that time. Phase-in would continue for up to eight years thereafter, when large accelerated filers would be subject to providing reasonable assurance of their GHG emissions disclosures. For additional information on these final rules, see our alert "SEC Adopts Final Rules for Climate-Related Disclosures," dated April 1.

If former Commissioner Paul Atkins is confirmed as chairman of the SEC, the trajectory of the rules may be impacted. Atkins wrote in a comment letter to the proposed rules in June 2022 that he believes the rules represent an "unprecedented and unjustified" effort that "endangers [the SEC's] mission." Atkins reiterated this sentiment on a July 2023 podcast, in which he stated that the proposed rules "exceed [the] authority of the SEC" and further noted his belief that such rules will not survive being challenged in court. If the rules are withdrawn, the Eighth Circuit appeal could become moot, and if they are not withdrawn, the rules' survival will be decided by the court. In the meantime, issuers face uncertainty as to what, if any, actions to undertake to be prepared for any requirements as they await more clarity on the fate of these rules.

Some issuers may nonetheless be subject to new state and international rules requiring transparency on climate-related matters. For large companies operating in California, its emissions disclosure rules are scheduled to take effect in 2026 subject to an ongoing legal challenge. In addition, companies with a sufficient presence in Europe may have to comply with the EU's emissions reporting requirements as these rules begin to take effect with a phase-in through 2029. These requirements are coupled with continued investor pressure, even if scaled back compared with prior years, to inform the market regarding climate-related risks, opportunities and initiatives in accordance with prevailing voluntary standards.

For a snapshot regarding the prevalence and quality of voluntary disclosures, a recent report by EY, titled "Nature Risk Barometer,"[2] evaluated the broader nature-related disclosures by over 300 companies across 10 SICS sectors in the U.S., Canada and Latin America compared with the Taskforce on Nature-related Financial Disclosure (TNFD) recommendations in the areas of Governance, Strategy, Risk and Impact Management, and Metrics & Targets. Findings from this study include:

  • 66% of U.S. companies, 72% of Canadian companies and 89% of Latin American companies have provided some level of nature-related disclosure associated with one or more of the 14 TNFD recommended items. Companies in the extractives and minerals processing category had the highest level of disclosure (at 91%), food and beverage companies were second (at 88%) and financial companies had the least (at 48%).
  • Assessing the quality of a company's disclosures in relation to the TNFD recommendations (based on the degree of alignment with the standards, considering the level of detail and how well the disclosures meet the recommendations), once again extractives and minerals processing companies scored the highest and financial companies scored the lowest.
  • In the area of Governance, only 5% of companies go beyond ESG and sustainability as areas specified for direct board oversight, such as by noting responsibilities relating to nature or biodiversity. Companies with the strongest TNFD coverage and alignment tended to have dedicated cross-functional working groups focused on specific issues such as biodiversity, water stewardship, deforestation and ecosystem restoration.
  • In the area of Strategy, 27% of companies specifically address biodiversity as part of their sustainability agenda.
  • In the area of Risk and Impact Management, integration of nature-related risks into companies' broader enterprise risk management frameworks is still relatively rare and disclosures are limited regarding the financial impact of nature-related dependencies and effects.
  • Nearly half of companies provided nature-related metrics, mostly related to water use, discharge and withdrawal as well as afforestation, deforestation, and identification of key species and threatened habitats. A smaller number are setting targets in key areas, for example, to:
    • Reduce water use by set percentages on specific timelines.
    • Halt deforestation entirely by a given date, or set clear reduction targets for deforestation overall.
    • Commit to sourcing 100% certified fiber paper, with a focus on creating a deforestation-free future.
    • Avoid sourcing beef products from geographic areas with high risks of deforestation.
    • Avoid conversion of natural ecosystems attributed to company activities or sourcing.

The coming year will likely hold interesting developments for the degree to which climate-related and nature-related disclosures are provided - either due to regulations that come into effect or are instead invalidated, or due to these disclosures being part of what investors expect companies to provide.

RISK FACTORS

Artificial Intelligence Disclosures (Author: Brittany Stevenson)

In recent years, the use of artificial intelligence (AI), which has the capacity to provide new capabilities by imitating human intelligence, performance and comprehension, has increased drastically. AI is being used by companies across various sectors in many ways, including to improve operations, research and development, and data analytics, among other areas. As a result, AI potentially will impact and advance a company's business, but its use also comes with inherent risks that companies must carefully consider, manage and disclose.

While companies are increasingly including AI-related risk factors in their disclosures, regulators and stakeholders are focusing on the type and quality of this disclosure as well. This year the SEC brought its first enforcement actions related to AI disclosures, while shareholders have also brought lawsuits directed at AI disclosures. Moreover, the SEC has recently indicated that it intends to increase its focus on AI-related disclosure and has warned against the practice of "AI washing," which occurs when companies exaggerate or make false claims with respect to their AI capabilities or use, and the SEC cautioned companies to avoid "boilerplate" AI-related risk disclosure.

When preparing risk factors related to AI, companies should take proactive measures to (1) be sure they have a broad understanding of the specific ways they currently use or intend to use AI, (2) clearly define and describe the AI disclosed and how such AI will be of use, (3) carefully tailor AI-related disclosure and risk factors in accordance with material risks that may impact the company and its particular business, while avoiding boilerplate or generic risks, and (4) have a reasonable basis for the prospective risks or claims described.

International Conflicts; China (Authors: Scott Kilian-Clark and Alexander M. Davis)

Companies should consider whether the continuation of international conflicts, including the war between Russia and Ukraine, the conflict in the Middle East, and rising tensions between China and Taiwan, and related sanctions and escalations should be discussed in their risk factors. In May 2022, the SEC published a sample comment letter regarding potential disclosure obligations that companies may have under federal securities laws relating to the direct or indirect impact that Russia's invasion of Ukraine and the related international response have had or may have on a company's business. The sample comment letter and guidance advised that companies should provide detailed disclosure regarding any direct or indirect exposure to Russia or Ukraine through, among other things, the company's operations, employee base, investments, sanctions or legal or regulatory uncertainties, and any actual or potential disruptions to the company's supply chains.

While the SEC has not issued official guidance or a sample comment letter concerning the conflict between Israel and Hamas in the Middle East or other recent international conflicts as of the date of this alert, the May 2022 sample comment letter can be used as guidance as to how the SEC will likely view disclosure obligations relating to such conflicts. Recent comments issued by the SEC on registration statements relating to the conflict in the Middle East and the resulting impact on a company's business are similar to comments it has previously issued concerning the impact of the war in Ukraine. Consequently, companies that have any direct or indirect exposure to the conflict in Israel or in the Middle East more broadly, or such other areas located within war zones or at risk for hostilities, should consider providing risk factor disclosure of the potential or actual impact on its business and related risks stemming from the continuation and escalation of such conflicts. For example, companies with assets and operations in a region with conflict have disclosed as a risk their vulnerability to property damage, inventory loss, business disruption and expropriation resulting from the conflict, while other companies have disclosed the risk of certain company personnel being obligated to serve as reserves or in the military in these regions and the impact this would have on business operations. It is also important that companies take a fresh look at their prior risk factor disclosures regarding the impact of international conflicts, if any, in light of recent developments and consider whether updates are warranted.

Similarly, companies should consider providing detailed disclosure relating to specific risks to their businesses resulting from their business exposure to China. In July 2023, the SEC provided guidance and a sample comment letter regarding the disclosure obligations of companies based in or with a majority of their operations in China, including the SEC's continued focus and request for specific disclosure about material risks relating to the role of the government of China in the operations of China-based companies. The risk factors and disclosure obligations for China-based companies detailed in the July 2023 sample comment letter should be reviewed and considered by any company with business exposure to China, regardless of whether it is based in China. Non-China-based companies with operations in China should also consider the impact of recent developments in the region when preparing their risk factor disclosure. China's economy is facing a variety of economic challenges that may impact companies with business exposure to the region, particularly with regard to supply chains and sales activities in the region. In addition to these economic uncertainties, companies should consider the actual or potential impacts of rising geopolitical and trade tensions between the U.S. and China, including the ongoing dispute over the fate of Taiwan and tariffs and export controls proposed by the incoming Trump administration. Similar to the analysis described above relating to international conflicts in Ukraine and the Middle East, companies with direct or indirect exposure to China should carefully consider any actual or potential impact these recent developments in China may have on the company's operations, investments, sales activities, manufacturing activities and supply chains when determining whether updates are needed to their risk factor disclosures and Management's Discussion and Analysis (MD&A).

Evolving U.S. Legal and Political Landscape (Authors: Scott Kilian-Clark and Alexander M. Davis)

The election of former President Trump to the presidency and the incoming Republican majorities in the U.S. Senate and House of Representatives promise to bring substantial change to policy across a variety of economic sectors. As President-elect Trump and his team plan their transition back to power, several themes have emerged that will interest public companies providing disclosure to their shareholders.

On trade, Trump has indicated that he intends to use tariffs, or at least the threat of tariffs, to help achieve national policy goals like border security and redress trade imbalances. Public companies whose businesses depend on international trade, particularly trade with China, have disclosed that trade wars, tariffs and turmoil in international trade agreements could reduce demand for products and services, increase costs, reduce profitability or adversely impact supply chains that may be material to their businesses. They should consider updating their risk factors to keep abreast of public statements from Trump and his team to best reflect the emerging risks to global trade, even with long-standing allies and trading partners like Canada and Mexico, which have recently engaged in discussions with Trump following his salvo on Truth Social promising to impose tariffs on each country upon his inauguration.

A number of companies in highly regulated industries, like the healthcare or pharmaceutical industries, have already included risk factors to note that Loper Bright and other related Supreme Court cases, such as Corner Post, Inc. v. Board of Governors of the Federal Reserve System and Securities and Exchange Commission v. Jarkesy,may introduce additional uncertainty into the regulatory process and may result in additional legal challenges to actions taken by federal regulatory agencies. While it remains to be seen what legal authority DOGE will possess, public companies in regulated industries should consider building out their risk factors to take into account the stated intentions of the incoming Trump administration to use Supreme Court precedent and other legal tools to disrupt or disband government agencies, reduce head count in the federal government, reduce government regulation and find efficiencies in government spending wherever possible.

DIRECTORS' AND OFFICERS' QUESTIONNAIRE

Questionnaire Updates for Consideration (Author: Brittany Stevenson)

Directors' and Officers' Questionnaires are important for both compliance and risk management, providing a means to collect and verify information related to leadership that a company may not be able to determine otherwise. When preparing for the 2025 proxy and annual reporting season, companies should consider the following potential updates to their form of Directors' and Officers' Questionnaire:

  • Material Relationships: Broaden the question in the director independence section to include social ties or close friendships with management as material relationships, given the recent SEC enforcement action against a director for failing to disclose a close personal friendship with a company executive to whom he leaked confidential information. In his Directors' and Officers' Questionnaire, the director responded that he had no undisclosed relationships with management, failing to disclose his relationship with the executive and resulting in the company's misleading disclosure that the director was independent.
  • Cybersecurity: Request information about a director's background or expertise related to cybersecurity, in light of the increasing concerns over cybersecurity risks and data breaches.
  • Beneficial Ownership: Emphasize the importance of disclosing margin loans or other pledges of company securities, given the recent SEC settlement with Carl Icahn for failing to disclose his pledge of company securities that represented a majority of outstanding units.
  • Beneficial Ownership Reports: Highlight the need to timely report transactions on Schedules 13D and 13G and Forms 3, 4, 5 and 13F, and report late or missed transactions, considering recent SEC enforcement actions related to delinquent filings.
  • Rule 10b5-1 Plans:Request confirmation that directors and officers have not entered into, terminated or modified any "Rule 10b5-1 trading arrangement" or any "non-Rule 10b5-1 trading arrangement" (each as defined in Item 408 of Regulation S-K). While most companies require preapproval of Rule 10b5-1 plans pursuant to their insider trading policies and should be aware of them, this helps ensure that all required disclosures are identified.

SHAREHOLDER PROPOSAL AND PROXY VOTING TRENDS

Shareholder Proposal Trends (Authors: JR Lanis, Macy T. Munz and Brittany A. Schwabe)

The 2024 shareholder proposal landscape reflects the dynamic and evolving priorities of investors, with a continued emphasis on ESG issues. As anticipated, climate change, DE&I, political spending and shareholder rights dominated the ESG proposal space. However, new areas such as AI, workers' rights and board governance also emerged as focal points. While support for environmental and social proposals declined compared with 2023, commonsense governance proposals, such as board declassification and the adoption of simple-majority voting requirements, saw increased backing. A surge in "anti-ESG" proposals, which advocate against certain ESG priorities, marked another trend in 2024. These proposals, often polarizing, have grown in number, exceeding 100 submissions for the first time, though they generally garnered less than 2% of shareholder votes. The proxy season also saw a record number of Rule 14a-8 proposals, surpassing 850 among S&P Composite 1500 companies, with unions and anti-ESG proponents contributing significantly to this increase.

Executive compensation proposals also featured prominently, maintaining strong shareholder support for say-on-pay plans and director nominations, albeit with isolated instances of dissent. The volume of compensation proposals, which surged by 60% in 2023, rose another 5% in 2024, although none secured passage. Support for management's say-on-pay proposals remained robust, averaging around 90%, while the number of failed votes reached a 10-year low across the S&P 500 and Russell 3000. Severance continued to be a leading topic within compensation proposals, reflecting ongoing scrutiny of executive exit packages. Notably, in the first proxy season after companies were mandated to adopt and disclose clawback policies, the number of clawback-related proposals tripled, signaling heightened attention to accountability in executive compensation. The overall decline in institutional investor support and the expansion of voter choice programs were significant trends in 2024. State and federal scrutiny of institutional investors and proxy advisory firms like Institutional Shareholder Services (ISS), Glass Lewis and the "Big 3" intensified, with these entities facing subpoenas and lawsuits tied to their ESG-related policies and activities. This environment reflects a growing debate over the role of institutional investors in shaping corporate governance and their influence on shareholder decision-making. These developments underscore an increasingly complex proxy season, shaped by diverse investor priorities and heightened regulatory attention.

Proxy Advisory Firms (Authors: Suzanne K. Hanselman and Sean D. Cheatle)

ISS/Glass Lewis

On December 17, ISS released its 2025 benchmark voting policies, which will be generally applicable for shareholder meetings taking place on or after Feb. 1, 2025.

Poison Pills

For 2025, ISS will maintain its current recommendation to vote against poison pill provisions with "deadhand" or "slowhand" features and has further clarified the factors to be considered in evaluating whether the board's actions in adopting a short-term poison pill are reasonable. The factors for consideration include the trigger threshold, the board's rationale, the context in which the poison pill was adopted, whether the board will put renewal to a shareholder vote, and the company's overall track record on corporate governance and responsiveness to shareholders.

Environmental Shareholder Proposals and Community Impact Assessments

Noting the increase in shareholder proposals relating to environmental matters, ISS released a new policy titled "Natural Capital-Related and/or Community Impact Assessment Proposals." Under the new guideline, ISS will consider, among other things:

  • The alignment of a company's current disclosure of applicable company policies, risk assessment report(s) and risk management procedures with any relevant, broadly accepted reporting frameworks; and
  • The impact of regulatory noncompliance, litigation, remediation or reputational loss that may be associated with failure to manage the company's operations in question, including the management of relevant community and stakeholder relations.

Compensation

For 2025, ISS also updated the benchmark policy for qualitative review of performance-vesting equity awards. Design or disclosure concerns in performance equity will weigh more heavily in quantitative analysis, and significant concerns will be more likely to lead to an adverse say-on-pay recommendation for companies exhibiting quantitative pay-for-performance misalignment.

Glass Lewis U.S. Benchmark Policy Guidelines for 2025

On November 14, Glass Lewis released its U.S. Benchmark Policy Guidelines for 2025 (the Benchmark Policy).

Artificial Intelligence

The Benchmark Policy includes new recommendations on board oversight of AI. If the board's oversight, response or disclosure regarding AI-related incidents is insufficient, Glass Lewis may recommend against appropriate directors. Glass Lewis will not, however, make voting recommendations in the absence of any AI-related incidents.

Board Responsiveness

Glass Lewis provided further clarification on its expectations for boards' responses to shareholder proposals, stating that (i) a board should engage with shareholders on issues presented in shareholder proposals if the proposal receives significant support (generally over 30% but less than the majority of the votes cast), and (ii) for shareholder proposals receiving support from a majority of votes cast, a company should either implement the proposal or provide sufficient disclosure on responsive shareholder engagement. The Benchmark Policy continues to call for board responsiveness when more than 20% of shareholders withhold votes or vote against director nominees or management proposals.

Management Proposals for Reincorporation

For management proposals to reincorporate the corporation in a different state or country, Glass Lewis will evaluate such proposals on a case-by-case basis with attention to, among other factors, (i) material differences in corporate statutes and legal precedents, and (ii) financial benefits resulting from the reincorporation.

Compensation

Glass Lewis added clarifying language in its Benchmark Policy on say-on-pay to provide for committee discretion regarding unvested awards in the event of a change in control. Further, the board should commit to including future disclosure on committee reasoning for the treatment of unvested awards. Concerning Glass Lewis' overall approach to executive compensation, the Benchmark Policy includes clarifying statements to reiterate Glass Lewis' holistic approach to, among other factors, review of quantitative analyses, best practice policies, disclosure quality and pay versus performance. Absent "egregious" decisions and practices regarding compensation, no single factor will lead to a negative vote recommendation.

CORPORATE GOVERNANCE

Advance Notice Bylaws (Authors: John J. Harrington, Teresa Goody Guillén and Brittany Stevenson)

Advance notice bylaws, which are provisions in a public company's bylaws that guide the process for stockholders to provide advance notice of proposals or director nominations to be voted on at an annual meeting, generally benefit both companies and stockholders. They require a nominating stockholder to provide certain information about themselves, certain related parties, nominees and any proposals within a stated period of time prior to the annual meeting, which allows the company to consider this information and make informed decisions when responding. However, advance notice bylaws that are overly restrictive or burdensome, or that are applied inequitably, may have the effect of disenfranchising stockholders, as was found in Kellner v. AIM Immunotech, Inc., et al., Case No. 2023-0879. A cross-office team of our firm's litigators, including Teresa Goody Guillén and Richard Raile,represented the nominating stockholder in this landmark case both at the trial level and on appeal.

In Kellner, the company adopted amended bylaws that added arduous advance notice provisions prior to an expected proxy contest. The nominating stockholder submitted his nomination notice, which was rejected by the company upon a claim that the nomination notice failed to comply with the amended advance notice bylaws. The nominating stockholder filed suit against the company alleging that the amended advance notice bylaws were both invalid and applied inequitably. On appeal, the Delaware Supreme Court found that the amended advance notice bylaws were unenforceable, as they were adopted on a "cloudy" day, with the threat of a proxy contest imminent, and primarily adopted to "interfere with [the nominating stockholder's] nomination notice, reject his nominees, and maintain control." The Delaware Supreme Court further found that the amended bylaws were the "product of an improper motive and purpose, which constitutes a breach of the duty of loyalty."

Following Kellner, companies should be cautious with respect to adopting or amending advance notice bylaws on a "cloudy" day or when expecting a proxy contest. Moreover, while advance notice bylaws still serve a constructive purpose and remain beneficial to both the company and stockholders, advance notice bylaws should not be drafted in a manner that makes compliance overly burdensome. Instead, companies should review their advance notice bylaws to make sure they are clear to follow, reasonable and solicit necessary information from nominating stockholders.

For additional information on the Kellner ruling, see our alert "The Delaware Supreme Court Provides Clarity for Advance Notice Bylaws," dated November 4.

Board Practices & Potential Enhancements (Author: Janet A. Spreen)

Nasdaq's recent 2024 Global Governance Pulse survey of board members, executives and governance professionals from public, private and nonprofit organizations provided some helpful insights into governance practices and areas of opportunity. The survey responses were primarily related to organizations based in the Americas (at 76%, with the remainder representing 12% in Europe, 7% in Asia-Pacific, and 5% in the Middle East and Africa), and 51% are public companies, 25% are private companies and 24% are not-for-profit or nongovernmental agencies.

Questions addressed these areas, with the following notable findings:

  • Board Composition and Culture:The survey considered how boards address these best practices for establishing and maintaining appropriate board composition and functioning: (1) developing a structured succession planning process for ongoing board refreshment, (2) proactively planning for board leadership transitions (including among committee chairs), (3) prioritizing skill sets, backgrounds and leadership styles that facilitate effective oversight and strategic decision-making in key areas for the company, and (4) utilizing an onboarding process that not only provides substantive background but integrates new members into board culture.
    • 42% of respondents use a formal board succession plan that is reviewed at least annually, 40% of respondents use a skills matrix that is reviewed periodically or when a vacancy arises, and 15% had no succession plan.
    • When asked which steps would best enhance their succession planning, the top option selected was to develop prioritized characteristics and competencies (skills, background or experience) (selected by 71%), followed by establishing a formal board onboarding plan (selected by 46%). 20% of respondents indicated that board member renomination should be informed by peer evaluation results. In practice, in-depth individual evaluations still remain relatively rare, despite most directors standing for reelection each year, providing an opportunity to thoughtfully consider whether the seat is appropriately filled by that individual.
    • When asked which skills and experiences would most enhance board composition and ensure alignment to the organization's strategy, the most common responses were AI and machine learning and cybersecurity and data privacy. Other top choices included industry experience, strategic development and execution, technology and innovation, and executive leadership experience.
    • The top response regarding the changes directors could make to improve board culture and dynamics was to provide more active and constructive challenge to management (with 41% selecting this option). This is notable given this key element of the board's role. Other top responses (with about equal prominence) included building deeper relationships with other board members, increasing participation in board discussions, asking informed and productive questions, appropriately preparing for meetings, and sharing perspectives more concisely.
  • Board Evaluations: Board evaluations can be conducted in a variety of ways but generally seek to achieve the following objectives: (1) assessing the quality and effectiveness of the board's oversight and execution of governance responsibilities, (2) soliciting candid feedback and constructive suggestions for actions to be considered and tracked to improve overall board functioning, and (3) considering individual contributions and collective skills and experience to inform renomination decisions and succession planning.
    • Approximately 70% of respondents use a questionnaire, while around 30% utilize interviews (either alone or along with a questionnaire). 60% facilitate board evaluations internally, 34% use a third party to facilitate the process and 10% include interviews with management.
    • When asked whether the board develops and executes an action plan to address key opportunities and risks and increase the board's effectiveness based on evaluation results, only 29% strongly agreed that such actions were taken, 60% agreed and the remainder disagreed. This suggests that boards have some room to take the evaluation feedback to heart and make appropriate changes as a result.
  • CEO Evaluations and Management Oversight:The board's most critical role is ensuring the organization has the right management in place. Effective ongoing evaluation and succession planning entails (1) utilizing a CEO evaluation process that gains a broad view of performance and includes measurable objectives and characteristics that the board believes are key to organizational success, (2) conducting frequent independent board sessions with feedback timely communicated to the CEO, (3) maintaining an evolving CEO succession plan for both emergency and planned transitions, and (4) maintaining an understanding of the broader plan for management succession and candidate pipelines for key roles.
    • Most respondents (78%) indicated that performance reviews focus on the achievement of performance goals defined in the compensation plan. 59% collect feedback from board members, and only 24% seek feedback from the CEO's direct reports.
    • Only 50% indicated that the board has regular, ongoing discussions about CEO performance. An effective way to provide more ongoing feedback can be to include a meeting with the CEO at the end of an independent director session (or have the chair hold a one-on-one meeting).
    • Approximately two-thirds of respondents had an established succession plan (for planned transitions and/or emergencies).
    • Most boards engage in direct oversight of CEO succession-planning, either alone or together with a committee, while a small proportion have sole responsibility with a committee.
    • More than half of respondents indicated that the board regularly interacts with management below the C-suite level and that the board holds social or informal interactions between the board and management.
  • Governance, Practices, Processes and Tools: The basic governance processes a board follows can have a significant impact on effectiveness and organizational outcomes, so this requires careful consideration of the best meeting structure, length, mechanisms for agenda-setting, committee participation and information distribution, among other areas. While following benchmarking here may not provide the right fit for an organization, the survey findings around these practices can suggest alternatives to consider.
    • Around 75% of boards hold meetings both in person and virtually (hybrid structure).
    • Nearly half hold director-only executive sessions at each board meeting.
    • Around 70% prefer that committee meetings be held separately from full board meetings.27% allow non-committee members to attend committee meetings.
    • The most popular changes identified to improve the efficiency and impact of board meetings related to meeting materials: providing more concise and dynamic board meeting materials, organizing board materials to clearly prioritize topics for discussion, and distributing board materials further in advance of meetings.
    • Regarding the means to keep directors in tune with operations and relevant topics, 34% of respondents schedule site visits to observe operations, 32% hold board education sessions, 28% have annual board retreats, 25% have a budget for board education and 10% set individual board member education requirements.
    • 42% of respondents felt that utilizing operational performance data or strategic dashboards would enable software to add to meeting efficiency.
  • Strategic and Risk Topics on the Horizon:Boards must work together with management to identify and understand the key risk and opportunity areas for the organization. In order for directors to be effectively engaged in strategic decision-making and providing oversight as these areas evolve with changing business and economic conditions, (1) strategic planning must be timely included on board agendas, with adequate time for both the presentation of information and in-depth discussion (such as regarding capital needs and allocation, economic conditions, competitive landscape, etc.), (2) the board should receive or seek out sufficient background on these topics (including through external resources as helpful) and understand the organization's related legal/regulatory obligations and internal resources for addressing the business needs, and (3) the input sought from the board should be well-defined and connected to the organization's broader business, industry and capacity.
    • 60% of respondents indicated that the board has an annual strategic planning meeting or day, and 51% use a strategic review framework with KPIs.
    • Respondents identified cybersecurity, data privacy and information security as the most important board continuing education topics.
    • When asked "What are the top areas that will impact your organization's success in the next 12 months?," respondents identified the categories below. It is interesting to see how this ranking differs from the areas chosen for skill enhancement and education, perhaps reflecting the perception that boards already possess the skills needed to address the most impactful matters. Also, given that the corporate governance topic du jour is AI, this may be further down the list than expected. ESG matters are also near the bottom, which may be attributable to anti-ESG sentiment or the fact that organizations have already taken considerable strides to build these considerations into their strategy over the past several year;
      • Access to capital, resource allocation and cost controls (44%)
      • Economic conditions (43%)
      • Clearly defined and articulated strategy and goals (39%)
      • Competitive landscape (38%)
      • Human capital management (28%)
      • Emerging legal and regulatory requirements (25%)
      • Technology and innovation (24%)
      • Mergers and acquisitions (21%)
      • Cybersecurity, data privacy and information security (20%)
      • AI and machine learning (19%)
      • Political landscape (17%)
      • A well-composed, strategically focused board (15%)
      • Risk management program (15%)
      • Reputation with stakeholders (13%)
      • Environment, sustainability and climate matters (10%)
      • Investor relations (including shareholder activism) (10%)
      • Supply chain (9%)
      • Well-defined and implemented corporate governance structure and practices (7%)
      • Social matters (3%)
      • Other (1%)
    • Two categories were selected by just over half of respondents as the changes that would drive greater value from their board - "deeper understanding of business conditions, industry trends, competitive landscape, and legal or regulatory environments" and "increased constructive discussion and debate in meetings on strategic topics between the board and management." This latter point corresponds to the high percentage that ranked "providing more active and constructive challenge to management" as a key change directors could make to improve board culture and dynamics.

Knowing the common practices and areas of focus for other boards can allow for reflection on how one's own organization approaches corporate governance, and provide additional mechanisms for consideration. This survey also highlights the importance of a strong board self-evaluation process - to identify the concerns and opportunities specific to that organization and, more importantly, to determine what the board can and will do in response to that feedback to enhance its effectiveness.

GENERAL CONSIDERATIONS

Preparing for "EDGAR Next" (Author: Samuel F. Toth)

On September 27, the SEC adopted amendments to improve the security of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) filing system. The updated system - known as "EDGAR Next" - will significantly alter the use of and access to the existing account management and filing process. Enrollment in EDGAR Next will go live on March 24, 2025, and each existing filer, whether an individual or entity, will need to fully transition to the new platform by Sept. 15, 2025.

Under the current system, each filer has a single set of EDGAR codes (CIK, CCC, password, passphrase and PMAC), and any person with access to these codes is able to submit filings on that filer's behalf or otherwise manage their EDGAR account. Under EDGAR Next, each filer will need to designate the administrators and users who are authorized to take certain actions on their behalf, and in order to access the new platform, each person will need to sign in with their own Login.gov credentials and complete multifactor authentication.

To enroll in EDGAR Next:

  • Existing filers will be able to enroll on the dashboard through the new EDGAR Filer Management website. To do so, an authorized individual will need to (i) sign in using their Login.gov credentials, (ii) enter the filer's existing CIK, CCC and passphrase, and (iii) identify the initial account administrators. Entities must identify at least two account administrators, and individuals must identify at least one account administrator, in each case up to a maximum of 20.
  • New filers will need to apply for access by submitting an amended Form ID that reflects the EDGAR Next changes, including a new section for the applicant to appoint prospective account administrators. If any such administrators are not employed by the applicant (e.g., filing agents, attorneys and other third parties), the Form ID must include a notarized power of attorney clearly indicating that such person is authorized to act as the applicant's account administrator and to manage the applicant's EDGAR account.

Once enrolled, the account administrators may log in to the dashboard to manage the filer's EDGAR account, including to appoint additional account administrators, add "users" who are authorized to submit filings (but not to otherwise manage the account) or edit the filer's contact information. However, filers will continue to submit filings on the existing EDGAR filing websites using the current process through Sept. 12, 2025.

Effective Sept. 15, 2025:

  • All filings will be required to be made through the EDGAR Next platform.
  • A filer's CIK and CCC will be the only legacy EDGAR codes that will continue to be used. (However, note that the filer's existing CCC will automatically reset upon enrolling in EDGAR Next.)

Other legacy codes (password, passphrase and PMAC) will be deactivated for filing purposes but will remain active through Dec. 19, 2025, to allow filers to reset codes as needed to enroll in EDGAR Next. If an existing filer has not enrolled by Dec. 19, 2025, that filer will need to apply for access by submitting an amended Form ID.

Overview of SEC 2025 Priorities (Authors: Johnathan R. Barr, Teresa Goody Guillén, Jimmy Fokas, John J. Carney, Janet A. Spreen and Brittany Stevenson)

On November 22, the SEC announced the results of its enforcement program for 2024, which we'd previously addressed in our alert "The SEC Speaks - Key Enforcement Priorities for 2024," dated April 15. The SEC's priorities for 2024 included efforts to promote a culture of proactive compliance with a focus on effective penalties and gatekeeper accountability and an emphasis on cooperation with the Division of Enforcement (the Division) Staff in investigations and preventing whistleblower retaliation, among other things, while also focusing on emerging technologies and emerging risks.

The SEC's specific enforcement priorities for 2025 are not yet certain, and both its enforcement and regulatory approach will be impacted by the change in administration. Specifically, on December 4, President-elect Trump announced that he will be nominating former SEC Commissioner Paul Atkins to serve as chair. In addition to a new chair, there will be a new enforcement director for the Division. Atkins' views are generally well-known based on his tenure with the SEC from 2002 to 2008, as well as his prolific speaking and writing. The two current Republican commissioners, Hester Peirce and Mark Uyeda, also have a track record of their views, mainly by way of scathing dissents. Interestingly, Commissioners Peirce and Uyeda previously served together as Commissioner Atkins' counsel (along with former Commissioner Daniel Gallagher).

Atkins is expected to lead the SEC with a general approach of reducing regulatory burdens, fostering capital formation and innovation, and enhancing competition in the markets. He is expected to prioritize restoring trust and credibility to the agency at a time when the SEC has faced multiple decisions overturning its rules for exceeding its statutory authority or failing to comply with the Administrative Procedure Act, alongside an unprecedented number of lawsuits against the agency. Incoming Chair Atkins as well as Commissioners Peirce and Uyeda have been steadfast critics of regulation by enforcement and novel cases. Instead, Trump's SEC is expected to focus on the core mission of the agency and tackling fraud and to rely on principles-based rather than prescriptive regulation.

The following are likely to be areas of focus, among others, given the election outcomes, recent trends and the scope of rulemaking undertaken by the SEC under the Biden administration:

  • Enforcement Activity: The Division may focus less on a statistics-based enforcement program that ties into Division Staff evaluations and promotions, in favor of an enforcement approach that instead prioritizes investigations and actions that further the mission of the SEC. As a result, evaluations of Division Staff will likely be based more on the quality and complexity of work rather than volume, which may in turn reduce enforcement actions. In addition, Atkins has been critical of certain enforcement tactics, and this may cause a shift in how investigations and evidence are handled in these proceedings.
  • Corporate Penalties: Under Chair Gary Gensler, the SEC obtained record-high corporate disgorgements and penalties. Atkins has maintained a view that high corporate penalties are counter to the SEC's mission of investor protection and instead burden shareholders without holding the appropriate parties accountable for wrongdoing. Therefore, Atkins is likely to approach financial penalties as a balance between deterring individual wrongdoing and protecting investors at the same time.
  • Digital Assets and Cryptocurrency: The Division is expected to rein in its efforts to regulate in the area of digital assets, cryptocurrency markets and exchanges. Trump campaigned on a crypto-friendly platform, promising that the SEC's enforcement-heavy approach to the industry would change. It is likely that the Division will limit its enforcement activities under Atkins and a new enforcement director. Regulation may instead seek to establish a more predictable and flexible framework for these markets to operate.
  • ESG and Climate Disclosure Regulations: While the SEC's climate disclosure rules are currently stayed pending appellate review, it is widely expected that a Republican-led SEC may abandon these rules entirely and shift its enforcement focus away from this controversial topic.
  • AI and Emerging Technologies: The use of AI and other related emerging financial technologies by companies will also likely continue to be an area of focus for the Division. In July 2023, the SEC proposed rules that would regulate conflicts of interest arising from the use of predictive data analytics and AI by broker-dealers. While the proposed rules have not yet been adopted, it is possible the Division will withdraw the proposed rule.
  • Cybersecurity: The Division will also likely both continue to focus on cybersecurity and review the actions taken by the SEC under the Biden administration in this area. For example, the rules requiring registrants to disclose on Form 8-K material cybersecurity incidents and certain related information within four business days of determining the incident's materiality may be rescinded.
  • Shareholder Activism: The Division may seek reforms directed at shareholder activism, which has generally increased over recent years and become more divisive with respect to ESG issues. Atkins has consistently voiced concerns of a "tyranny of the minority" under the current process that is often burdensome and costly to companies. Reforms may involve reducing SEC enforcement investigations of proxy fights or making it easier for a company to exclude shareholder proposals.

As the new appointments to the SEC take effect, the Division's priorities will evolve to align with the incoming presidential administration's priorities.

Public Company Compliance with the Corporate Transparency Act (Author: Samuel F. Toth)

The Corporate Transparency Act (CTA) is a new law that would require all entities formed or registered to do business in the U.S. to file a beneficial ownership information report (BOIR) with the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), unless an exemption applies. However, the implementation of the CTA is currently on hold due to a nationwide preliminary injunction. To recap what has been a chaotic month of December for the CTA:

  • On Dec. 3, a federal district court in Texas issued a preliminary nationwide injunction that temporarily halted the implementation of the CTA. The government filed for an immediate stay of this injunction pending appeal.
  • On Dec. 17, it was widely reported that the initial filing deadline for preexisting companies would be extended to Jan. 1, 2026, through an amendment that would have been attached to a funding bill that would need to pass to avoid a government shutdown. However, due to last-minute disagreements, Congress ended up passing a slimmer version of the funding bill that removed various non-spending provisions, including the CTA amendment.
  • On Dec. 23, the motions panel of the U.S. Court of Appeals for the Fifth Circuit granted the government's motion for an immediate stay, which meant the CTA was back in effect pending appeal. On the same day, FinCEN issued a public statement extending the initial reporting deadline by 12 days to Jan. 13, 2025.
  • On Dec. 26, the merits panel of the Fifth Circuit vacated that emergency stay. As a result, the nationwide preliminary injunction is back in effect, meaning that no reporting company currently has any reporting obligations under the CTA - unless and until the injunction is stayed, narrowed or overturned on further appeal.
  • On Dec. 31, the government filed an application with the U.S. Supreme Court requesting an immediate stay of the injunction. If the stay is granted, the CTA will again be in effect. If the stay is denied, the injunction will remain in place as the appeal is heard on its merits by the Fifth Circuit, which would take months to complete.

Even if the CTA again becomes enforceable, public companies will have minimal compliance considerations. The "securities reporting issuer" exemption applies to issuers of a class of securities registered under Section 12 of the Exchange Act (e.g., NYSE- and Nasdaq-listed companies), and the "subsidiary" exemption applies to each entity that is wholly owned, directly or indirectly, by certain exempt entities, including securities reporting issuers. As a result, public company issuers and each of their wholly owned subsidiaries will generally be exempt from the CTA's reporting obligations. No filing is required to indicate or confirm their exempt status under the CTA.

However, the "subsidiary" exemption generally applies only to entities that are directly or indirectly wholly owned by one or more exempt entities. Therefore, if a public company has an interest in a joint venture or has any other partially owned subsidiaries (even 99.9%-owned subsidiaries) that are either formed or registered to do business in the U.S., that entity would need to file a BOIR, unless (i) all other owners of that entity meet an applicable exemption or (ii) that entity directly meets its own exemption. If such joint venture or other entity is required to file a BOIR, any employee of the public company who is deemed to exercise substantial control over the reporting company (either directly as a senior officer of the reporting company or indirectly through the public company or one or more of its subsidiaries that control such reporting company) will need to be disclosed as a beneficial owner on the BOIR.

In addition, directors, officers and employees of public companies should be aware that if they have any personal or family LLCs (e.g., to hold real estate or other investments), those entities will likely have their own filing obligation under the CTA. Failure to comply with the CTA can result in substantial civil and criminal penalties, including up to two years' imprisonment.

Please feel free to contact any of the authors or our other experienced team members if you need assistance with your Form 10-K and proxy statement preparations or have questions about these topics.

Authorship Credit:

Edited by Janet A. Spreen, Tess N. Wafelbakker and Brittany Stevenson

Contributing authors: Janet A. Spreen, John J. Harrington, Suzanne K. Hanselman, Teresa Goody Guillén, Eric B. Gyasi, Jeffrey S. Spindler, Stefan P. Smith, JR Lanis, Samuel F. Toth, Tess N. Wafelbakker, Brittany Stevenson, Brittany A. Schwabe, Matthew Sferrazza, Sean D. Cheatle, Macy T. Munz, Caroline H. Mills-Haddad, Michael W. Gunther, Scott Kilian-Clark and Alexander M. Davis.

[1] See Alliance for Fair Board Recruitment v. SEC, 5th Cir. en banc, No. 21-60626, opinion issued 12/11/24.

[2] https://www.ey.com/en_us/insights/climate-change-sustainability-services/ey-nature-risk-barometer

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