Key Takeaways from the ABA Federal Regulation of Securities Committee Winter Meeting

I recently attended the American Bar Association’s Federal Regulation of Securities Committee Winter Meeting in Washington, D.C. on behalf of HSE. The Federal Regulation of Securities Committee is the largest group of securities law practitioners in the country. Its Winter Meeting is the committee’s premier annual event featuring senior members of the Securities and Exchange Commission (the “SEC”) and FINRA, including SEC Chair Gary Gensler. As Chair Gensler said during his remarks, “good corporate governance is good for issuers and investors alike,” and that was a recurring theme throughout the Winter Meeting.  

Here are my key takeaways from the Winter Meeting:

1. Risk Profile

Be sure to regularly and consistently analyze your risk profile. Assess what risks you are trying to mitigate and ensure that your policies and procedures are appropriately communicated, tailored, updated, and enforced. For example, do you conduct training and, if so, how often? How often do you review your policies and procedures? These and similar hypotheticals were discussed throughout the Winter Meeting and are particularly relevant for companies bringing forward their historical disclosure into the new year.

A senior SEC official put it nicely: “Do what you say and say what you do.”

2. Cybersecurity

Not surprisingly, cybersecurity is and remains a priority for the SEC. Among the issues discussed at the Winter Meeting was what “reasonable” means for making a materiality determination in the aftermath of a cybersecurity incident. Having a written procedure in place can be helpful in ensuring compliance with the SEC’s rules and for supporting the actions taken in response to a cybersecurity incident, which will always be viewed with 20/20 hindsight. Keep in mind that what is material changes over time and is a facts and circumstances determination. In that regard, assessing a cybersecurity risk will feel similar to assessing other long-standing risks like the risk of litigation or environmental risks (and may be similarly frustrating when the lawyers say “it depends”).

3. Pay versus Performance

SEC officials acknowledged that the first year of its new pay versus performance rules was, generally, a success. However, absolute compliance with the new rules during the first year was far from perfect, and the SEC anticipates being more strict with respect to adherence during this next cycle. We anticipate close review of pay versus performance disclosure to confirm compliance with the rules and guidance issued by the SEC this Fall.

4. Non-GAAP Measures

Non-GAAP financial measures are numerical measures of performance, financial position, or cash flows that are not calculated in accordance with generally accepted accounting principles (“GAAP”). In December 2022, the SEC released updated guidance on non-GAAP financial measures. The CDIs were focused on the highest areas of non-compliance, which appear to continue to be potential issues for many public companies. Issuers should carefully examine each non-GAAP financial measure used in its SEC filings, earnings releases and investor presentations to verify compliance with the non-GAAP rules.

Additional information about the SEC’s December 2022 guidance updates can be found in our LEGALcurrents, SEC Releases Updated Guidance on Non-GAAP Measures.

5. Consistent and Clear Disclosure

When performing its regular review of a public company, the SEC looks to all publicly available information – a company’s website, its social media accounts, press releases– not just its SEC filings. Ensure that all information disseminated through these various channels is consistent and that it is compliant with the applicable rules.

The SEC is also continuing its focus on eliminating boilerplate disclosure, with one senior SEC official noting, “boilerplate is the investors’ enemy.” Avoid using boilerplate disclosure that, while arguably rule-compliant, may be of little to no value to investors.

6. Proposed Climate Change Rules

The SEC received over 16,000 comment letters (multiples of what it normally receives for proposed rules) for its proposed climate change rules. In the backdrop of the Fifth Circuit’s decision vacating the SEC’s share repurchase rules the SEC is being particularly cautious with the proposed climate change rules and they remain a work in progress.

Additional information about the proposed climate change rules can be found in our LEGALcurrents, The Climate May be Changing for Public Company Disclosure.

If you have any questions about any of these key takeaways, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Employee Benefits and Executive Compensation groups.

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