The U.S. Securities and Exchange Commission (the “SEC”) has adopted amendments and updated disclosure requirements that are to be included in a reporting company’s annual report on Form 10-K or 20-F. The SEC has also proposed new rules that, while not officially enacted, should be considered by filers as they craft their disclosure. It should also be noted that proposed SEC rules reflect specific disclosure topics that the SEC is focused on and that are often the subject of SEC comment to particular filings. As result, issuers should consider whether such topics are material to their business and include appropriate disclosures, even where not yet required by final SEC rules. In this client alert, we summarize these updated disclosure considerations that will impact a company’s Form 10-K or Form 20-F filings for the year ended 2022.

I. General Disclosure Topics

Russia-Ukraine Conflict: The SEC has requested that each filer disclose whether Russia’s invasion of Ukraine has materially affected its business, including indirectly through, for example, material heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities, regardless of whether the issuer has direct or indirect operations in Russia, Belarus, or Ukraine. The SEC expressed that a company should make the following disclosures surrounding the Russia-Ukraine conflict. For more information, please see the sample letter that the SEC released in May 2022.

Per the SEC guidance, companies should consider how these matters affect:

1. management’s evaluation of disclosure controls and procedures;
2. management’s assessment of the effectiveness of internal control over financial reporting; and
3. the role of the board in risk oversight of any action or inaction related to Russia’s invasion of Ukraine, including consideration of whether to continue or to halt operations or investments in Russia and/or Belarus.

As a reminder, the SEC guidance indicates that, to the extent material or otherwise required, public companies should include detailed disclosures in periodic reports regarding:

1. direct or indirect exposure to Russia, Belarus, or Ukraine (e.g. operations and employees in those countries; investments and securities traded in those countries; dealings with sanctioned parties; and legal or regulatory uncertainties resulting from recent events, such as patent maintenance or other issues associated with operating in or exiting those countries);
2. direct or indirect reliance on goods or services sourced in those countries;
3. actual or potential disruptions in the company’s supply chain; and
4. other business relationships, connections to, or assets in, Russia, Belarus, or Ukraine.

Climate Change and ESG: While the SEC does not currently require line-item environmental and sustainability disclosures for a company’s annual report, it has indicated information related to climate change-related risks and opportunities may be required in disclosures related to a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations. In March 2022, an SEC release proposed requiring U.S. public companies and foreign private issuers to expand the breadth and magnitude of climate-related disclosure in their periodic reports. These proposed rules have not yet been enacted but may be acted upon in 2023. Under the rules, a company would be required to disclose:

• the oversight and governance of climate-related risks by the registrant’s board and management;
• how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
• how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;
• the registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;
• the impact of climate-related events (severe weather events and other natural conditions as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.
• Scopes 1 and 2 GHG emissions metrics, separately disclosed, expressed:
  • Both by disaggregated constituent greenhouse gases and in the aggregate, and
  • In absolute and intensity terms;
• Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and
• the registrant’s climate-related targets or goals, and transition plan, if any.

Companies are to assess the climate-related and other ESG disclosure made outside of its SEC filings (including information contained in their sustainability reports) to determine whether any such information is material and therefore required to be included in its Form 10-K or Form 20-F. Companies are to also ensure accuracy of and consistency among its ESG disclosures

Inflation, Interest Rate Risk and Supply Chain Issues: Companies should consider disclosing (i) how these trends have affected results of operations, sales, profits, capital expenditures and maintenance, (ii) how inflation affects business goals and pricing strategies (e.g., is the company able to pass along increased costs to customers or forced to absorb those costs); and (iii) the specific factors behind rising costs and supply chain disruption and specific actions the registrant has taken or intends to take to mitigate these risks, including any evolutions in business goals, pricing strategies or interest rate hedging. Further, if the company has historically included any language in their filings that refers to the possibility of inflation, interest rate risk and/or supply chain issues, and the company is now experiencing inflation, interest rate risk and/or supply chain issues, this language should be updated in new filings to reflect the current status. Finally, companies should consider whether any provisions of the Inflation Reduction Act of 2022 will have an impact on financial conditions and results of operations.

Cybersecurity: In March 2022, the SEC proposed new rules for registrants to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and cybersecurity incident reporting by public companies. The SEC’s amendments would require a registrant to disclose material cybersecurity incidents as well as its policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk. The proposed rules would require registrants to provide updates about previously reported cybersecurity incidents in their periodic reports. Further, the proposed rules would require the cybersecurity disclosures to be presented in Inline eXtensible Business Reporting Language. The proposed amendments are intended to better inform investors about a registrant’s risk management, strategy, and governance and to provide timely notification of material cybersecurity incidents.

Human Capital: Item 101(c)(2)(ii) of Regulation S-K requires, to the extent material, a description of the registrant’s human capital resources to be included in a company’s Form 10-K within the “Business” section, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel). As certain industries continue to be impacted by ongoing labor shortages and others are experiencing increased reductions in force, registrants should consider the impact of these conditions, whether they affect compensatory practices, workplace culture, severance or other costs, litigation exposure, and ensure their disclosure remains current.

COVID-19: As the COVID-19 pandemic continues, companies should provide company-specific COVID-19 discussions, rather than general economic and societal impacts. Companies should discuss the current impacts of the pandemic in a continually changing environment. Potential items of discussion to include are: information on liquidity; operational adjustments; supply chain logistics; health and safety of employees; vaccine requirements; any material changes in the company’s debt, loans and credit; any material changes to equity investments; impairment of assets; rent concessions; and government assistance related to COVID-19.

NASDAQ Diversity Rules

Listing Policy: In August 2021, the SEC approved NASDAQ’s board diversity rules, which apply to all listed companies, including foreign private issuers. Pursuant to the newly revised rules:

• All listed companies must have at least two board members who are female or have (i) one female director and (ii) one director who is LGBTQ+ or an “underrepresented individual” in their home country jurisdiction or explain why they do not have the requisite number of “diverse” board directors;
• Companies with five of fewer board members must have at least one member who is diverse; and
• Companies will also be required to publicly disclose information on the directors’ voluntary self-identified gender, racial characteristics and LBGTQ+ status in a prescribed matrix.

Compliance Phase in Period:

• Board Diversity Matrix Disclosure: A Nasdaq listed company must disclose the diversity of its directors in matrix form in either (a) its 2023 proxy statement (or if not a proxy filer, its Form 10-K or Form 20-F filed in 2023) or (b) on its website, concurrently with the proxy filing, followed by notice to Nasdaq one business day later.
• One Diverse Director: Each Nasdaq listed company must have one diverse director, or must explain why it does not have one diverse director, by December 31, 2023.
• Two Diverse Directors: Each Nasdaq listed company must have two diverse directors, or must explain why it does not have two diverse directors, by December 31, 2025 (with companies listed on the smaller cap Nasdaq Capital Market having a deadline of December 31, 2026).

As of the date hereof, the New York Stock Exchange (“NYSE”) has not proposed similar rules that would be applicable to NYSE-listed companies.

II. Pending Disclosure Requirements

“Clawback” Policy: In October 2022, the SEC adopted a final rule that directs national securities exchanges to establish listing standards requiring issuers to adopt and comply with a “clawback” policy and provide disclosure on the policy and its implementation.

• Issuers’ policies must provide for “clawback” of compensation following any accounting restatement, including both “Big R” restatements and “little r” restatements.
  • Big R: restatements that correct errors that are material to previously issued financial statements.
  • little r: restatements that correct errors that are not material to previously issued financial statements but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period.
• If a restatement occurs, issuer must recover the incentive based compensation erroneously paid to current/former executive officer(s) based on misstated financial reporting measure.
• Foreign private issuers have not been exempted from the rule.
• Effectiveness is based on the date the rule is officially published to the federal register, which has not yet occurred. Accordingly, it is unlikely that the exchanges will require any disclosure for a Form 10-K or Form 20-F filed for the year ended 2022 or require any compliance for the year ended 2023. However, filers should monitor developments closely.
• If the “clawback” rules do become effective for 2023, registrants would need to disclose their “clawback” policies, whether their financial statements reflect a correction to statements previously issued, whether any financial statement corrections are restatements that require analysis under their “clawback” policy and information about any actions taken pursuant to a policy.

Share Repurchase Disclosure Modernization: In December 2021, the SEC issued proposed amendments to its rules regarding disclosure about purchases of a company’s equity securities registered under the Securities Exchange Act.

• The amendments would require companies to provide more timely disclosure (on a new Form SR) regarding purchases of its equity securities for each day that the company (or an affiliated purchaser) makes a share repurchase), as well as enhance the existing periodic disclosure requirements.
• The comment period for this proposed rule ended April 1, 2022, and was re-opened in December 2022 to allow comments to take into consideration certain tax changes included in the Inflation Reduction Act of 2022 that would impact share repurchases by certain companies, and it is not known what the effective date of the final rule will be and whether a transition period will be implemented.
  • It is recommended companies monitor this proposed rule to determine if it will be applicable to the upcoming annual reports.

III. Formatting Requirements

“Glossy” Electronic Filing: Effective January 11, 2023, companies will be required to furnish their “glossy” annual reports to shareholders to the SEC electronically in PDF format.

• Companies were formerly able to satisfy this requirement by posting an electronic version of the glossy annual report to shareholders on their website or submitting a paper copy to the SEC.
• Foreign private issuers that furnish glossy annual reports in response to Form 6-Ks requirements will also have to do so via EDGAR.
• The glossy PDFs should not be re-formatted, re-sized, or otherwise re-designed for purposes of the EDGAR submission.

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If you have any questions regarding this client alert, please contact Keith J. Billotti at (212) 574-1274 or Edward S. Horton at (212) 574-1265.