Webinar | January 15, 2024
Register here.

During this session, Mayer Brown panelists, Brian Hirshberg, Jason W. Parsont, Thomas Kollar, and Gilat Abraham Zaefen will discuss US SEC disclosure priorities and other recent developments for foreign private issuers (FPIs) that should be priorities as they draft their annual reports.  Topics will include:

  • Artificial Intelligence
  • Cybersecurity and climate change disclosure trends
  • The SEC staff’s comments on clawback and pay versus performance issues
  • Insider trading and beneficial ownership rules
  • Financial reporting issues, including non-GAAP disclosures, critical accounting estimates in MD&A and segment reporting
  • China-related matters, including the HFCAA and potential tariff risk factors
  • Considerations related to risk factor disclosures
  • Areas of likely SEC focus in the coming months
United States
8:00 a.m. – 9:00 a.m. EDT
7:00 a.m. – 8:00 a.m. CDT
6:00 a.m. – 7:00 p.m. MDT
5:00 a.m. – 6:00 a.m. PDT		Europe
1:00 p.m. – 2:00 p.m. GMT
2:00 p.m. – 3:00 p.m. CET		Asia
9:00 p.m. – 10:00 p.m. HKT
9:00 p.m. – 10:00 p.m. SGT
10:00 p.m. – 11:00 p.m. JST

On December 23, 2024, the US Court of Appeals for the Fifth Circuit granted an emergency motion by the federal government to stay the nationwide preliminary injunction that had suspended enforcement of the Corporate Transparency Act (CTA) and stayed its compliance deadlines, including the January 1, 2025, compliance deadline for reporting companies formed prior to January 1, 2024. 

This Legal Update explains the extended deadlines that the US Financial Crimes Enforcement Network (FinCEN) issued within hours of the ruling, notes how the plaintiffs have responded and the Fifth Circuit might further respond, and provides takeaways for companies that may be subject to the CTA’s reporting obligations. 

Read our Legal Update.

This past Saturday, the US Financial Crimes Enforcement Network (FinCEN) confirmed that reporting companies—i.e., companies that would be required to report their beneficial ownership information to FinCEN under the Corporate Transparency Act (CTA) and its implementing regulations—are not required to file beneficial ownership reports for as long as the current, nationwide injunction of the CTA remains in effect. Further, FinCEN noted that reporting companies will have no liability for failing to file required beneficial ownership reports during the pendency of the injunction. FinCEN will continue to accept beneficial ownership reports from reporting companies on a voluntary basis.

Continue reading this Legal Update.

On December 3, 2024, the US District Court for the Eastern District of Texas entered a preliminary injunction suspending enforcement of the Corporate Transparency Act (CTA) and its implementing regulations nationwide, concluding that the CTA is likely unconstitutional as it is outside Congress’s power. Although not the first court to reach such a conclusion, the breadth of the relief provided by the court—applying nationwide, rather than to the specific plaintiffs—reflects a significant development, given the rapidly approaching compliance deadlines for many existing companies under the CTA.

In this Legal Update, we discuss the Texas case and its immediate implications for the 32 million reporting companies facing a year-end deadline to report beneficial ownership information to the government. Read our Legal Update.

Webinar | Wednesday, December 11, 2024
1:00 p.m. – 2:00 p.m. EST
Register here.

Join experts from Mayer Brown and Georgeson as they discuss key issues companies should consider while preparing for the 2025 proxy and annual report season during this time of regulatory uncertainty. Topics will include new and evolving disclosure requirements, as well as a discussion of the 2024 proxy season and what may be on the horizon for the upcoming season.

Agenda

  • Recent proxy statement and annual report developments, including new insider trading policy disclosures
  • Executive compensation disclosure requirements, clawbacks, and pay versus performance
  • Proxy voting matters and trends in shareholder proposals
  • Changing focus on environmental and social matters, and more

During the Practising Law Institute’s 56th Annual Institute on Securities Regulation, Securities and Exchange Commission’s Division of Corporation Finance (the “Division”) Deputy Director for Disclosure Operations Cicely Lamothe shared valuable insights on implementation of the SEC’s pay versus performance (PvP) rules.  The SEC adopted these rules in 2022, which require disclosure of five years of PvP data in proxy and information statements in which executive compensation information is required to be included.  Read our Legal Update on the PvP rules.  

The Division took a pragmatic approach in the first year, issuing forward-looking comments on filings with a focus on essential disclosures and identifying compliance issues.  The Division again conducted reviews of PvP disclosures made during the 2024 proxy season, in some cases seeking additional information from registrants with respect to their disclosures. Key takeaways from the two years of reviews include:

  1. Relationship Disclosures.  Many companies in the first year of the rule’s effectiveness failed to adequately disclose the connection between executive compensation and company performance.  While disclosures improved in the second year, the staff stressed that meaningful insights are crucial, rather than just reiterating numbers.
  2. Net Income Reporting.  Filers are required to disclose GAAP net income in their PvP tables.  While there has been improvement since the first year, some companies continued to incorrectly report figures that excluded non-controlling interests.
  3. Non-GAAP Measures.  Although there is no requirement to provide a numeric reconciliation to a GAAP measure, companies using non-GAAP measures must clearly define how these figures are calculated from audited financial statements. The staff cautioned that clarity with respect to the adjustments is essential, and to avoid inconsistencies in how a measure is calculated from year to year.
  4. “Compensation Actually Paid” Calculation.  Adherence to the terminology and steps outlined in the rules is essential when calculating and presenting compensation actually paid.

With the third year of PvP rules’ implementation now underway, these observations aim to guide companies in enhancing their disclosures.  A recent study by Pay Governance, reporting on PvP disclosure in 2024, noted that 96% of the companies surveyed retained the same Company-Selected Measure as in 2023 with changes occurring only in cases of significant shifts in incentive programs.  Further, 86% of surveyed companies used the same peer group or index for total shareholder return (TSR) comparisons.  Companies using custom peer groups accounted for most changes, typically due to changes in peer group composition.

With regard to tabular list — a unranked list of the three to seven most important financial performance measures used by a company to link executive compensation actually paid company performance (Important Financial Metrics)–  87% of the surveyed companies reported the same number of Important Financial Metrics as in 2023, while 6% increased and 7% decreased the number of metrics.  Of the companies that kept the same number of Important Financial Metrics, 93% used the exact same metrics year-over-year, while the remainder changed their metrics. 

A study by Meridian Compensation Partners discussed the format of PvP disclosure.  Of Meridian’s study group, 81% of surveyed companies compared TSR against an industry-specific index, while 19% opted for a custom peer group.  Graphic disclosures were preferred over narrative disclosures with 92% of companies favoring graphic representations to illustrate the relationship between “Compensation Actually Paid” and performance.

Most companies listed three to five metrics in the tabular list, with 30% reporting three metrics, 22% reporting four metrics, and 23% reporting five metrics.  Only 13% of companies supplemented SEC-required disclosures with voluntary reporting.  Among these, 50% of surveyed companies defined pay as Realized or Realizable Pay, 31% defined pay using Summary Compensation Table Pay, excluding certain components, 27% used Target Pay, and 15% used Total Compensation from the Summary Compensation Table.

Overall, companies are embedding these requirements into long-term compensation strategies, reinforcing transparency and alignment between pay and performance.

On November 13, 2024, at the Practicing Law Institute’s 56th Annual Institute on Securities Regulation, panelists shared key updates from this year’s proxy season and highlighted emerging trends to watch in 2025.  Public companies experienced favorable voting outcomes across compensation, activism, shareholder proposals, and director elections in 2024. 

Activism and the Impact of the Universal Proxy Card

There was an increase in board-related campaigns, a trend anticipated in the second year of the Universal Proxy Card (UPC).  While the UPC has lowered barriers for proxy contests, it appears to favor settlements.  Nevertheless, the bar remains high for both activists and companies: activists must make compelling cases for change, while companies must demonstrate that their board composition and strategic plans align with investor expectations.

Shareholder Proposals: Evolving Trends and SEC Oversight

Shareholder proposals increased significantly in 2024, with key trends including a sharp increase in anti-ESG proposals and a growing interest in AI governance topics.  There was also a significant increase in no-action requests to the SEC, which granted no-action relief in 68% of cases, up from 56% in 2023.  This increase was largely attributable to companies’ confidence in their arguments and the overall increase in shareholder proposals.

  • Anti-ESG Proposals:  While anti-ESG proposals surged, they received minimal investor support, with none reaching double-digit approval rates.  Companies may find that contesting these proposals is not always cost-effective.
  • AI Governance:  The SEC has rejected attempts to exclude AI-related proposals on the grounds of ordinary business matters, citing that these risks transcend routine business issues.  While no AI governance proposals have secured majority support, the SEC’s stance signals growing regulatory recognition of AI-related risks.
  • Environmental and Social (E&S) Proposals:  Investor support for E&S proposals continued to decline, as governance-related proposals, such as those addressing board diversity or succession planning, gained traction.  Governance proposals are often prioritized by investors for their tangible impact, while E&S topics are harder to settle and less likely to achieve consensus.
  • Micromanagement Exclusions:  The success rate for micromanagement arguments surged to 66%, more than doubling the 31% success rate in 2023.  This reflects the SEC’s increasing willingness to grant exclusions for proposals deemed overly prescriptive, particularly on environmental and climate-related issues.
  • Looking Ahead:  In 2025, governance-focused proposals aimed at enhancing board diversity and renewal are expected to increase. For example, a panelist from the NYC Comptroller’s office noted a plan to focus on “board refreshment,” targeting companies with high director tenure, poor performance, and inadequate disclosure of board evaluations. 
Say-on-Pay Votes and Executive Compensation Trends

Strong market performance and total shareholder return (TSR) helped drive higher average support for say-on-pay votes in 2024.  Median CEO pay also increased, reflecting a broader market trend of rising executive compensation.  Companies aligned their pay structures with investor policies, achieving the highest Institutional Shareholder Services (ISS) support rates in five years.  As scrutiny over CEO pay intensifies, companies should ensure that compensation narratives clearly link pay to performance to sustain favorable voting outcomes in 2025.

Director Votes and Policy Impacts on Leadership Roles

Director support remained strong as companies adapted to investor policies addressing issues like overboarding and board diversity.  However, leadership roles, such as lead independent directors, faced increased scrutiny amid heightened expectations for accountability and governance quality.

Emerging Complexity in Proxy Voting

The rise of pass-through voting has introduced significant complexity and opacity into proxy outcomes.  Large institutional investors are increasingly allowing clients to vote directly or follow custom policies, leading to unprecedented vote splits.  Additionally, a lack of data on how much voting authority has been outsourced complicates companies’ ability to interpret investor intentions.  Regulatory pressures, particularly in industries with potential conflicts of interest, are further adding to the challenge.

Looking Ahead to 2025: Expectations in Activism, M&A, and Transparency

Activism is expected to remain strong, driven by new UPC strategies and favorable M&A conditions.  Transparency will take center stage as stakeholders demand clarity on proxy voting processes, stewardship programs, and conflict-of-interest management.  Companies should prioritize tailored engagement strategies and align governance practices with stakeholder expectations to navigate the increasingly complex proxy environment.

On November 13, 2024, during the Practising Law Institute’s 56th Annual Institute on Securities Regulation, a panel discussed critical updates in accounting and auditing, emphasizing the evolving landscape shaped by the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB), including the below.

  1. Segment Reporting (ASU 2023-02).  This update mandates new disclosures, including the identification of the Chief Operating Decision Maker (CODM) and significant segment expenses.  The lack of a clear definition for “significant” presents challenges for companies in determining what to disclose, particularly for those with a single reportable segment.  Legal professionals should ensure that significant segment items are included in the Management Discussion and Analysis (MD&A), that single-segment companies report new details, and that the CODM is clearly identified.  Additionally, they should focus on prior period comparisons and ensure compliance with Securities and Exchange Commission (SEC) guidance for any non-GAAP measures presented, including necessary reconciliations and prominence of GAAP figures.
  2. Enhanced Income Tax Disclosures.  Effective in 2025, public business entities must disclose detailed income tax information, including total taxes paid to federal, state and foreign authorities, along with reconciliations of reported tax expenses with statutory rates.  This initiative aims to improve transparency relating to tax obligations, helping investors understand effective tax rates and their impact on cash flow.  However, the complexity of these disclosures may lead to “disclosure overload,” so companies should prepare in advance to ensure clarity and compliance while maintaining comparability with prior disclosures.
  3. Disaggregation of Expense Categories.  Beginning in 2027, public companies must provide detailed disclosures of specific expense categories in their income statements, such as inventory purchases, employee compensation and depreciation.  This requirement aims to enhance transparency and provide investors with clearer insights into financial performance.  Legal professionals should help clients prepare to break down aggregate expenses in their MD&A to comply with these new standards effectively.
  4. Broadening Focus on Controls and Procedures.  Recent SEC enforcement actions highlight the urgent need for robust internal control over financial reporting and disclosure controls and procedures (DCP), revealing issues such as inadequate controls over stock buybacks, failures in timely workplace misconduct disclosures, and deficiencies in managing non-GAAP financial measures.  Additionally, the SEC’s scrutiny of shortcomings in cybersecurity controls emphasizes the importance of strong procedures to protect sensitive information.  Key takeaways include the need for companies to review regularly and enhance their DCP processes, assess the effectiveness of disclosure committees, foster collaboration between finance and legal teams, and ensure thorough documentation of DCPs to improve compliance and overall disclosure quality.
  5. PCAOB Oversight of Audit Profession.  While the impact of a change in administration is unclear, the PCAOB may still be planning to finalize standards on Non-Compliance with Laws and Regulations (NOCLAR), which will require auditors to assess a company’s compliance with laws and regulations in the jurisdictions in which it operates that could materially impact financial statements.  This would broaden the scope of auditors’ responsibilities significantly.  Additionally, the PCAOB’s inspection process emphasizes the need for thorough documentation and timely responses to identified deficiencies, as failure to obtain sufficient evidence can lead to significant audit deficiencies.  Legal professionals should ensure close cooperation with auditors during inspections, as auditors may hesitate to sign off on their reviews or the company’s Form 10-Qs until they have completed any necessary follow-up work on prior audits.  This proactive approach is crucial for the timely filing of periodic reports.

In light of the upcoming reporting season and a new administration, companies should establish a dedicated disclosure committee for the Form 10-K to promote collaboration between accountants and lawyers, facilitating educational sessions on relevant changes.  

In this MB Sounding Board, Ozzie Gromada Meza, President and CEO of the Latino Corporate Directors Association (LCDA) joins partner Anna Pinedo for a discussion about diversity on corporate boards. Ozzie discusses identifying talent for boards, education for new board members, and tips for individuals looking to serve on boards.

Watch the Sounding Board MicroTalk.

Mayer Brown is pleased to sponsor the LCDA and also the LCDA’s 9th Annual Board Leaders Convening, which brings together board-proven and board-aspiring members, CEOs, diversity allies, and corporate partners.

On September 27, 2024, the Securities and Exchange Commission (“SEC”) adopted final amendments to Rules 10 and 11 of Regulation S-T (17 CFR 232.10 and 232.11) and Form ID to improve access to, and management of, accounts on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.  Known as “EDGAR Next,” these enhancements are designed to bolster security, streamline access, and improve account management on EDGAR.  EDGAR has long served as the SEC’s central online repository for electronic filings providing free, easy access to corporate information.  SEC Chair Gary Gensler noted that these amendments represent an “important next step for EDGAR account access protocols.”

Key Changes to EDGAR Access and Management

Individual Account Credentials and Login.gov Integration.  Currently, filers have one set of EDGAR access codes that are shared by individuals making EDGAR filings on the filer’s behalf.  Under the new rules, individuals accessing EDGAR on behalf of filers must create personal credentials through Login.gov, which employs encryption, multi-factor authentication and additional safeguards.  This enhances the security of EDGAR accounts by requiring any person seeking to make a submission on EDGAR on behalf of the filer to sign in using their individual account credentials, providing for individual accountability.  Filers must authorize and maintain at least two (and up to 20) designated individuals as account administrators responsible for managing the filer’s EDGAR account.  Such designations can be made using the new dashboard discussed below.  Account administrators can designate additional account administrators as well as provide “user” access to up to 500 individuals. Users will have the ability to make EDGAR submissions on the filer’s behalf, but, unlike account administrators, will not be able to add or remove individuals from the dashboard.

Form ID Modernization.  Form ID, the initial application for EDGAR access, is being redesigned to be more user-friendly and streamlined.

API Integration for Improved Efficiency.  EDGAR Next will offer optional APIs, allowing filers to automate submissions, retrieve information, and perform account management tasks without significant manual interaction.  This will enhance operational efficiency for firms with high submission volumes, supporting machine-to-machine interactions that reduce errors and increase speed.

Account Management Dashboard.  A new dashboard will allow filers to designate account administrators, manage user access, update information, and track submissions in real-time. This self-service portal aims to make managing EDGAR accounts simpler and more transparent. The dashboard will be available during EDGAR operating hours, 6:00 a.m. to 10:00 p.m. (ET), daily except weekends and Federal holidays.  Account administrators will be required to confirm annually that the information on the dashboard remains accurate.

Important Deadlines and Transition Periods

The SEC has established a timeline for compliance:

  • Beta Testing Opens (September 30, 2024): The SEC is offering a public Beta version called “Adopting Beta” to allow users to test new features and provide feedback.  Until September 12, 2025, filers will continue to make live EDGAR submissions according to the current EDGAR process.
  • Mandatory Use of New Form ID (March 24, 2025): Enrollment for existing filers opens and the dashboard will go live. All new prospective filers must submit the revised Form ID from this date in order to obtain EDGAR access. Existing filers have until December 19, 2025 (“Enrollment End Date”) to enroll, but will not be able to make filings on EDGAR after September 15, 2025 until they have enrolled.
  • Full Compliance (September 15, 2025): Filers must fully comply with all EDGAR Next rules and amendments by this date, including using the new access protocols and designated account administrators. Legacy EDGAR access codes (password, passphrase, and PMAC) will be deactivated for filing purposes, but will remain available until the Enrollment End Date.
  • Enrollment End Date (10:00 p.m. (ET) on December 19, 2025): After this date, filers who have not transitioned to EDGAR Next will need to submit a new Form ID to regain EDGAR access.

Read the SEC’s press release, fact sheet, and final rule.