Preparing for Proxy and Annual Report Season: Key Considerations for Companies

As the proxy and annual report season approaches, companies must navigate a complex landscape of regulatory requirements, evolving risks, and stakeholder expectations. This article outlines critical items for companies to consider as they prepare their disclosures, ensuring compliance and transparency while addressing the concerns of investors and regulators alike.

Updates to Risk Factors

One of the most significant areas for companies to review is their risk factors. Given the rapidly changing business environment, companies should assess whether any material updates are necessary. Here are some key considerations:

1. Artificial Intelligence (AI) Risks

The use of artificial intelligence is becoming increasingly prevalent across industries. Companies should evaluate the potential risks associated with AI, including the phenomenon of "AI-washing," where companies may exaggerate their AI capabilities. Clear and accurate disclosures about AI’s impact on operations and financial results are essential.

2. Cybersecurity Risks

Recent enforcement actions, such as the SEC’s lawsuit against SolarWinds, highlight the importance of robust cybersecurity disclosures. Companies must ensure that their risk factors align with their 10-K disclosures regarding risk management and governance, particularly in light of recent regulatory developments.

3. Climate Change and Extreme Weather

With growing regulatory scrutiny on climate-related risks, companies should assess the physical, financial, and regulatory implications of climate change. This includes considering developments in the European Union, California, and the SEC, as well as potential legal challenges.

4. International Conflicts

Ongoing international conflicts, such as the war in Ukraine and tensions between China and Taiwan, can have direct and indirect effects on businesses. Companies should evaluate their exposure to these risks, including supply chain disruptions and regulatory uncertainties.

5. Commercial Real Estate Exposure

For companies with significant investments in commercial real estate, heightened vacancy rates and increased loan delinquencies necessitate a thorough review of risk factors related to this sector.

Review Reasonableness and Support for Claims

Companies must ensure that their disclosures are accurate and supported by reasonable evidence. Recent SEC enforcement actions against companies for making unsupported claims serve as a reminder of the importance of substantiating disclosures. Companies should carefully evaluate their public statements, particularly regarding prospects and product claims, to avoid potential penalties.

Temper Disclosures About Artificial Intelligence

As AI continues to be a hot topic, companies should exercise caution in their disclosures. The SEC emphasizes the need for clear definitions of AI and tailored disclosures that accurately reflect the technology’s impact on business operations. Companies should avoid generic language and ensure that claims about AI prospects are well-founded.

Cybersecurity Comments from the SEC

The SEC has recently focused on cybersecurity disclosures, particularly regarding the use of third-party vendors. Companies should clarify their relationships with external assessors and ensure that disclosures adequately describe the expertise of individuals involved in cybersecurity risk management.

Annual Insider Trading Policy Exhibit Filing and Disclosures

Starting in 2025, companies must disclose their insider trading policies in their Form 10-Ks. This includes detailing whether such policies exist and filing them as exhibits. Companies should review their policies in light of recent DOJ prosecutions and consider whether updates are necessary to address new regulatory requirements.

New Equity Grant Policy Disclosures

Beginning in 2025, companies will need to disclose their equity grant policies and practices in their Form 10-Ks and proxy statements. This includes providing details about grants made to Named Executive Officers (NEOs) around the release of material non-public information. Companies must ensure compliance with these new requirements to maintain transparency.

Continue to Address D&O 10b5-1 or Non-10b5-1 Trading Arrangements

Companies must provide quarterly disclosures regarding Rule 10b5-1 trading arrangements. This requirement emphasizes the need for transparency in insider trading practices and highlights the importance of compliance with SEC regulations.

Legal Proceeding Disclosures

Companies should exercise caution when describing legal proceedings in their disclosures. Recent cases have shown that characterizing lawsuits as "without merit" can lead to scrutiny. Companies should ensure that their disclosures accurately reflect the nature of ongoing litigation and adhere to best practices in disclosure controls.

Keep Track of Related Party Transactions

The SEC has increased its focus on related party transactions and perquisites. Companies should ensure that they have robust controls in place to identify and disclose any transactions involving executives or their family members, as failure to do so can result in enforcement actions.

Review D&O Questionnaires for Hot Topics

Companies should review their Directors and Officers (D&O) questionnaires to ensure they address current regulatory concerns. This includes expanding definitions of material relationships, assessing board expertise in cybersecurity, and clarifying the need to disclose margin loans or pledges of issuer securities.

Nasdaq Rule Changes for Independent Director and Corporate Governance Phase-In

Recent Nasdaq rule changes have clarified phase-in schedules for independent director and corporate governance requirements. Companies should familiarize themselves with these updates to ensure compliance with the new regulations.

Filing Status and Public Float Day

The filing status of public companies for 2025 10-Ks and 10-Qs will be determined by their public float as of the last business day of the most recent second fiscal quarter. Companies should monitor their status to ensure compliance with SEC regulations.

Prepare Now for Edgar Next

The SEC has announced new security requirements for Edgar filers, set to take effect in September 2025. Companies should prepare for these changes, which include individual account credentials and multifactor authentication. Participation in beta testing for the new system is also encouraged to familiarize companies with the updated platform.

Conclusion

As companies gear up for the proxy and annual report season, careful consideration of these key items is essential. By proactively addressing risk factors, ensuring the accuracy of disclosures, and complying with evolving regulations, companies can enhance transparency and build trust with investors and stakeholders. Preparing now will not only facilitate a smoother reporting process but also position companies for success in an increasingly complex regulatory environment.