U.S. SEC Transactions and Compliance (“STAC”) Group

Climate disclosure may soon become mandatory 

The U.S. Securities and Exchange Commission (the “SEC”) has finally released its climate disclosure proposal, which would require climate-related disclosures in issuer’s registration statements, annual reports and associated financial statements. As proposed, the requirements would apply to U.S. domestic and foreign private issuer registrants and would require accelerated and large accelerated filers to obtain an independent attestation report covering, at a minimum, Scope 1 and 2 greenhouse gas emissions disclosure. 

• Key takeaway – As proposed, these changes present a major expansion of the U.S. public company reporting regime, and we advise that you examine your climate-related risks, governance and strategy, with the proposed rules in mind. If adopted, large accelerated filers would need to make their first climate-related disclosures in their annual reports for fiscal year 2023. We will soon be issuing a more detailed note comparing the SEC’s proposal to UK and EU developments on climate-related disclosure.

Cybersecurity reporting on the horizon 

The SEC is considering mandating, for the first time, cybersecurity disclosure. Under the SEC’s proposal, U.S. public companies (including foreign private issuers) would have to disclose material cybersecurity incidents on Form 8-K or Form 6-K (as applicable) and updates on these incidents in their annual and quarterly reports. They would also have to disclose cybersecurity risk management, strategy, and governance in their annual reports. 

• Key takeaway – The proposed rules would require the disclosure of material cybersecurity incidents within four days on Form 8-K, but Form 6-K reports would still be based on the foreign private issuer’s home jurisdiction disclosure rules. If adopted, the rules would require the disclosure of whether the company has a cybersecurity expert on its board.

What’s happening with Russia sanctions? 

As the war in Ukraine has developed, so has the package of sanctions imposed by governments across the world targeting the Russian regime. However, the situation is constantly changing and not all sanctions are moving in parallel.

• Key takeaway – Rapid and complex developments across multiple jurisdictions combined with severe legal and reputational consequences for violations means it is critical to get accurate, up-to-date advice, particularly for businesses with international operations involving parties that may now be subject to economic restrictions. At Linklaters we have sanctions experts working across the UK, EU and U.S. Our cross-jurisdictional practice means we are able to advise on how the legal requirements of different sanctions overlap – and how they differ. Please contact us if you have questions about the various sanctions being imposed against Russia.

Next-day disclosure of share repurchases may soon be required 

The SEC has proposed amendments to its share repurchase rules, which would require issuers to make next-day disclosures of any repurchases they make of their equity securities, and also to disclose the objective or rationale for the share repurchases and the process or criteria used to determine the amount of repurchases. The SEC would also require the information to be tagged using XBRL.

• Key takeaway – You may soon be required to make more disclosures, on a much more frequent basis, than you currently do regarding repurchases of your equity securities.

More information, more quickly about share ownership 

The SEC is proposing to shorten the filing deadlines for shareholders to report their beneficial ownership positions in companies listed in the United States. The most significant change is to shorten the reporting time for the filing of Schedule 13D beneficial ownership reports by certain persons with control intent who acquire more than 5% of certain classes of registered equity securities from 10 days to five days. Crucially, the proposals also seek to expand the scope of the beneficial ownership reporting requirements to cover cash-settled derivatives, and clarify when a “group” is formed for the purposes of reporting a jointly-held position. The SEC has also separately proposed requiring institutional investment managers holding short positions of at least US$10m (or the equivalent of at least 2.5% of an issuer’s total outstanding shares) to report specified short position data and short activity data for equity securities, on a monthly basis.

• Key takeaway – If adopted, these changes would mean that listed companies will have more information, more often and more quickly, regarding their shareholder base, include short sale information.

Do you need to amend your 10b5-1 plans? 

The SEC is considering imposing new conditions on trading arrangements established in reliance on Rule 10b5-1 as a defense to insider trading charges. The SEC’s potential amendments include: cooling-off periods before trades, officer and director certifications that they are not aware of material non-public information, a prohibition on multiple overlapping 10b5-1 trading plans for open market trades, a prohibition on more than one 10b5-1 trading arrangement every 12 months and a requirement that arrangements be adopted in “good faith”. The proposal would also require, for the first time, specific disclosures regarding Rule 10b5-1 arrangements and insider trading plans. In terms of disclosure, foreign private issuers would only be subject to the requirement to disclose insider trading plans in their annual reports on Form 20-F.

• Key takeaway – Changes do not need to be made immediately, but you should be aware that new conditions may be imposed on Rule 10b5-1 plans within the next year or so and there may be new disclosure requirements for insider trading policies in your annual reports.

New “shadow trading” theory of insider trading looms 

In January 2022, a California federal district court allowed the SEC’s novel “shadow trading” theory to proceed in SEC v. Panuwat by denying defendant Matthew Panuwat’s motion to dismiss. The SEC brought the case against Panuwat, a former employee of the pharmaceutical company Medivation, based on his purchase of stock options in Incyte Corporation, a similar company, shortly before an announcement that Pfizer would acquire Medivation. Panuwat allegedly knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation, and he anticipated that Medivation’s acquisition would likely lead to an increase in Incyte’s stock price. The case is the first in which the SEC has argued that information about one company could be considered material to investors of another company because of their similarity.

Among other things, the court held that Panuwat breached his duty to Medivation because the plain language of the company’s insider trading policy covers the securities of another publicly traded company.

• Key takeaway – To discourage this kind of trading activity, you should review your insider trading policies to ensure that the language covers trading in the securities of other listed companies.

What else is coming soon? 

The SEC has a packed rulemaking agenda. Here are other key proposals that the SEC has already taken some action on: 

• Compensation clawbacks – The SEC has reopened the comment period on the Dodd-Frank Act-mandated compensation clawback rules that it originally proposed in 2015. If adopted as proposed, the rules would require U.S.-listed companies – including foreign private issuers and emerging growth companies – to adopt policies providing for compensation clawbacks in connection with restatements.
• Pay vs performance disclosure – The SEC has also reopened the comment period on another set of Dodd-Frank era compensation rules: proposed rules to require issuers to disclose information that shows the relationship between executive compensation actually paid and the financial performance of the issuer. As proposed in 2015, however, the disclosure rules would not apply to foreign private issuers.

Observations on Proposed Cybersecurity Disclosure Rules 

The SEC’s proposed cybersecurity disclosure rules are a part of the cybersecurity strategy set out in President Biden’s Executive Order 14028, which makes cybersecurity a top priority of his administration. It has only become more important following Russia’s invasion of Ukraine. 

Although the proposed rules are not yet final, companies should draft their cybersecurity disclosures with this backdrop in mind. The proposed rules seek to enhance and standardize cybersecurity disclosures, which the Commission describes as currently being insufficient, inconsistent, untimely and difficult to locate in spite of improvements in practice following the 2011 Staff Guidance and 2018 Interpretive Release. Companies should bear this in mind in determining how to develop and refine their existing disclosures. 

We also advise companies to take note of two specific disclosure proposals that may prove difficult to comply with in practice. Notably, the proposed rules prioritize reporting cybersecurity incidents over delaying disclosure because of ongoing internal or external (civil or criminal) investigations. The proposed rules also require disclosure about a company’s selection and oversight of third-party service providers, and cybersecurity incidents affecting information resources used by a company but owned by a third-party provider. 

— Linklaters STAC Group