Is Your Board Preparing for SEC Changes for 2024?

Board Directors understand how vital Finance, Audit and Risk Committees are to business performance. Paul Munter, SEC Chief Accountant notes: “Audit committees serve as gatekeepers for investor protection and the financial reporting process and have an important role in facilitating high-quality audits critical to the proper functional of our capital markets.”

This year holds more work ahead to address new rules and reporting the Securities Exchange Commission (SEC) has on the agenda, with a robust set of priorities, including transparency, adaption of regulations in burgeoning markets, technologies and need investor needs.

Proposed Rules Ahead

Human Capital Management

The SEC is preparing a proposal on human capital management disclosure expected by April 2024, although timing depends on an SEC review of the impact of a 2020 human capital disclosure rule which requires disclosure of material human capital management measures used to manage the business. The proposed change would require more depth of disclosures as few companies provide information about labor costs and details while it is clear many of them derive high value from their human capital.

Disclosure Rules

The goal of the disclosure rulemaking is to increase the types of information available to meet evolving investor needs as well as to increase transparency and comparability. The investor community largely welcomes this generally. Still, many raise concerns related to the extent, costs, feasibility of the proposals and the process of the SEC to propose and incorporate feedback from the public on rule proposals, including “too-short” comment periods. Some also note concern about overlapping rule proposals issued at different times, making it hard to provide input on the collective impact of the proposals. The Commission is working on a plan to provide at least 45 days for market stakeholders to provide comments on rule proposals and reopening comment periods for any rule proposals and developments that may for commenters to offer views about potential changes.

Shareholder Proposals

The SEC has a growing focus on enforcement, as its program last year brought actions against market participants and imposed financial penalties much higher than recent years.

The SEC is considering a rule to amend Exchange Act Rule 14a-8, which requires companies to include shareholder proposals in their proxy statements absent a basis for exclusion. The proposed amendments would clarify and narrow certain substantive bases within the rule that permit companies to exclude shareholder proposals from proxy statements. The investor and issuer communities hold divided views on the proposal due to be presented in April 2024.

Potential Rules Impacting Private Companies

SEC and other stakeholders are debating the current exemptions private companies have from most current disclosure requirements. The securities laws provide exemptions from most disclosure requirements to companies if they meet certain thresholds relating to the number and financial sophistication of their shareholders. The intent of the exemptions is to help smaller, higher-risk companies raise capital from parties that can understand and bear that risk.

The volume and size of companies taking advantage of these exemptions has increased, and the money flowing into private capital markets now exceeds that going into public markets. The question raised is whether the exemptions appropriately balance the investor protections and transparency available in the public capital market vs. the potential for higher investment returns and innovation in the private capital market.

Two rule proposals are on the SEC agenda which would affect private companies by changing the thresholds for companies to qualify for exemptions from registration with the SEC and its disclosure rules, based on definitions of “accredited investor” and “held of record” (now defined in Regulation D and the Securities Exchange Act of 1932).  SEC officials have not provided recent views on what these rules could look like, although they are studying public feedback on possible changes to help with drafting a proposal to present to the Commission.   

Enforcement

Commission enforcement filing in 2023 increased by 3%, with 784 enforcement actions, from the prior year. Further, nearly $5 billion in financial remedies was ordered by the SEC last year, including civil penalties and disgorgement — the second highest amount in SEC history, after the record-setting amount ordered in FY22. The SEC also obtained orders barring 133 individuals from serving as officers and directors of public companies, the highest number of officer and director bars obtained in a decade.

Corporate Diversity

A rule proposal on corporate board diversity disclosures is also on the SEC’s regulatory agenda for consideration by October 2024. Details are not available to date.

Yet, There is More

Additionally, stay tuned for the work underway as the SEC addresses rules related to:

• Rule amendments of rules on safeguarding advisory client assets, addressing crypto assets, expected in April, 2024.
• Approaches to AI risks with scrutiny on accuracy in disclosures related to the use of AI.
• New disclosure rule requirements for climate-related topics for investment advisers and funds; new cybersecurity risk management requirements for broker-dealers, investment advisers and funds and other SEC-registered entities; and changes to various market structure rules.

Sources: Dan Goelzer Update No 88, February 2024; EY, Inc. https://www .ey.com/en_us

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