Federal securities laws and SEC rules require reporting companies (or companies making public offerings) to disclose a wide variety of information in annual and quarterly reports, as well as in proxy statements and public offering prospectuses. In general, a company must disclose all information that would be material to investors. This includes:
- a business description;
- a description of material legal proceedings;
- detailed disclosure of the risks associated with the business and market risk;
- related person transaction disclosure;
- the number of shareholders of each class of common equity;
- management’s discussion and analysis of the company’s financial condition and results of operations (MD&A);
- a statement as to whether the company has had any disagreements with its accountants;
- disclosure regarding the effectiveness of disclosure controls and procedures, and changes in and the effectiveness of internal control over financial reporting;
- financial information;
- executive and director compensation; and
- a signed opinion of the company’s auditors with respect to the accuracy of the financial information. This report will also need to discuss any critical audit matters or state that the auditor determined that there were no critical audit matters; this requirement will apply beginning with audits of fiscal years ending on or after 30 June 2019 for large filers and ending on or after 15 December 2019 for other companies to which the requirements apply.
Corporations are expected to keep all this public information current by filing ‘current’ reports whenever certain specified events occur, as well as issuing press releases and providing website disclosure.
Since the passage of the Sarbanes-Oxley Act and its accompanying SEC implementing rules, reporting companies are also required to disclose all material off-balance-sheet transactions, arrangements, obligations (including contingent obligations) and certain other relationships of the company with unconsolidated entities or other persons. In addition, the Sarbanes-Oxley Act requires that a reporting company’s financial reports reflect ‘all material correcting adjustments’ identified by outside auditors.
Section 404 of the Sarbanes-Oxley Act requires that a reporting company’s annual report include an internal control report from management containing a statement of the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting and an assessment at the end of the company’s most recent fiscal year of the effectiveness of the company’s internal control structure and procedures for financial reporting. The company’s registered public accounting firm must also attest to, and report on, the effectiveness of the company’s internal control over financial reporting.
Reporting companies are also required to disclose the ‘total compensation’ received by the corporation’s CEO, its CFO and its three most highly compensated executive officers other than the CEO and CFO (together, the named executive officers) and directors. The information is required to be presented in the form of a summary compensation table listing the name of the employee, the year, salary, bonus, other annual compensation, stock and option awards, changes in pension value and non-qualified deferred compensation earnings, all other forms of compensation and total compensation, as well as several other tables relating to grants of plan-based awards, outstanding equity awards, option exercises and vested stock, pension benefits, non-qualified deferred compensation and director compensation. In addition, reporting companies are required to include a ‘compensation discussion and analysis’ section in their disclosure documents that explains all material elements of the company’s compensation of the named executive officers, and includes a description of the company’s compensation philosophy and objectives.
The JOBS Act affords ‘emerging growth companies’ (companies that conducted an IPO after 8 December 2011 and have total annual revenues of less than US$1 billion) the flexibility to provide reduced disclosures relating to financials, MD&A and compensation for a maximum period of five years.
SEC regulations also require the disclosure of certain information concerning any beneficial owner known to the company to possess more than 5 per cent of any class of the corporation’s voting securities, including the amount of ownership and percentage and title of the class of stock owned. Note that any person acquiring more than 5 per cent of the equity of a reporting company also must publicly disclose its intentions with respect to such acquisition. In addition, the Exchange Act requires that officers, directors and beneficial owners of 10 per cent or more of a company’s equity securities file a statement of ownership each time there has been a change in that person’s beneficial ownership of the company’s securities.
In addition, special attention is given to corporate governance. Reporting companies must include a copy of the audit committee report in their annual proxy statements. This report must disclose, inter alia, whether the committee has reviewed the audited financial statements with management, recommended that the audited statements be included in the corporation’s annual report to the board, and discussed certain matters with independent auditors to assess their views on the auditors’ independence, the quality of the corporation’s financial reporting and the name of the committee member with financial expertise (if any). Under section 406 of the Sarbanes-Oxley Act, companies are required to disclose whether they have adopted a code of ethics for their senior financial officers. If a company has not adopted such a code it must explain why it has not done so. Certain changes to or waivers of any provision of the code must also be disclosed.
Under the Sarbanes-Oxley Act, the reliability and accuracy of the financial and non-financial information disclosed in a company’s periodic reports has to be certified by the company’s CEO and CFO. In each quarterly report both officers must certify, among other things, that:
- they reviewed the report;
- to their knowledge the report does not contain a material misstatement or omission and that the financial statements and other financial information in the report fairly present, in all material respects, the financial condition of the company, results of its operations and cash flows for the periods covered in the report;
- they are primarily responsible for the company’s controls and procedures governing the preparation of all SEC filings and submissions, not just the periodic reports subject to certification; and
- they evaluated the ‘effectiveness’ of these controls and procedures and reported to the audit committee any significant deficiencies or material weaknesses in the company’s financial reporting controls, together with any corrective actions taken or to be taken. Their conclusions must be disclosed in the certified report.
NYSE-listed companies are required to disclose their corporate governance guidelines. Committee charters (if any) must be disclosed as described in question 27.
In 2003, the SEC adopted rules that require reporting companies to disclose in their proxy statements or annual reports certain information regarding the director nomination process, including:
- whether the company has a nominating committee and, if not, how director nominees are chosen;
- whether the members of the nominating committee are independent;
- the process by which director nominees are identified and evaluated;
- whether third parties are retained to assist in the identification and evaluation of director nominees;
- minimum qualifications and standards used in identifying potential nominees;
- whether nominees suggested by shareholders are considered; and
- whether nominees suggested by large, long-term shareholders have been rejected.
These rules also require reporting companies to disclose certain information regarding shareholder communications with directors, including:
- the process by which shareholders can communicate with directors (and, if the company does not have an established process, why it does not);
- whether communications are screened and, if so, how;
- any policies regarding the attendance of directors at AGMs; and
- the number of directors that attended the preceding year’s AGM.
In 2006, the SEC adopted rules that require reporting companies to disclose in their proxy statements or annual reports certain information regarding the corporate governance structure that is in place for considering and determining executive and director compensation, including:
- the scope of authority of the compensation committee;
- the extent to which the compensation committee may delegate any authority to other persons, specifying what authority may be so delegated and to whom;
- any role of executive officers in determining or recommending the amount or form of executive and director compensation; and
- any role of compensation consultants in determining or recommending the amount or form of executive and director compensation, identifying such consultants, stating whether such consultants are engaged directly by the compensation committee or any other person, describing the nature and scope of their assignment and the material elements of the instructions or directions given to the consultants with respect to the performance of their duties under the engagement.
Moreover, in 2009, the SEC adopted rules requiring companies to provide the following enhanced proxy statement disclosures:
- for each director and nominee, the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company;
- other directorships held by each director or nominee at any public company during the previous five years (rather than only current directorships);
- expanded legal proceedings disclosure relating to the past 10 years (rather than five years);
- whether and, if so, how the nominating committee considers diversity in identifying nominees for director (also see the discussion in question 23);
- if the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy;
- the board’s leadership structure and why the company believes it is the best structure for the company;
- whether and why the board has chosen to combine or separate the CEO and board chair positions;
- where these positions are combined, whether and why the company has a lead independent director and the specific role the lead independent director plays in the leadership of the company;
- the board’s role in the oversight of risk management and the effect, if any, that this has on the company’s leadership structure;
- the company’s overall compensation policies or practices for all employees generally, not just executive officers, ‘if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company’; and
- fees paid to and services provided by compensation consultants and their affiliates if the consultants provide consulting services related to director or executive compensation and also provide other services to the company in an amount valued in excess of US$120,000 during the company’s last fiscal year.
In 2010, the SEC also issued an interpretive release on disclosure relating to climate change, which is intended to provide guidance to reporting companies on the application of existing disclosure requirements to climate change and other matters. Also in 2010, the SEC issued an interpretive release relating to disclosure of liquidity and funding risks posed by short-term borrowing practices.
The SEC issued disclosure guidance relating to cybersecurity (2011, which was updated in 2018 as described below) and European sovereign debt exposure (2012), among other matters.
In 2011, the SEC approved final rules relating to advisory votes on executive compensation (say-on-pay) pursuant to the Dodd-Frank Act, which also require companies to include a discussion in the proxy statement as to whether and, if so, how the company has considered the results of the most recent say-on-pay vote in determining compensation policies and decisions and, if so, how that consideration has affected the company’s executive compensation decisions and policies.
In 2012, the SEC approved final rules mandated by the Dodd-Frank Act requiring proxy statement disclosure regarding compensation consultant conflicts of interest. Such disclosure became required to be included in proxy statements for annual meetings occurring on or after 1 January 2013.
In 2012, the Exchange Act was amended by the Iran Threat Reduction and Syria Human Rights Act of 2012 to require public companies to provide disclosure if the company or any of its affiliates (including its directors and officers) has knowingly engaged in certain enumerated activities subject to US trade sanctions involving Iran or specified Iranian entities or nationals as well as certain other non-Iranian persons or entities deemed to promote terrorist activities or the proliferation of weapons of mass destruction. Such disclosure became required to be included in quarterly and annual reports beginning in February 2013.
The Dodd-Frank Act amended the Exchange Act to require disclosure relating to conflict minerals (gold, tantalum, tin and tungsten) originating from the Democratic Republic of Congo or an adjoining country. Since May 2014, public companies have been required to make various disclosures where conflict minerals are necessary to the functionality or production of a product that is either manufactured by the company or by a third party with which the company contracts for such manufacture. A group of business groups filed litigation challenging the conflict minerals rule on several grounds, including that the required disclosure would violate the First Amendment to the US Constitution. In April 2014, the US Court of Appeals for the District of Columbia Circuit found that one disclosure provision of the conflict minerals rule violated the First Amendment but upheld the remainder of the rule. The Court reaffirmed its original ruling in August 2015 and final judgment in the case was entered in April 2017. In January 2017, the acting chair of the SEC had requested comments on the rule and related guidance through March 2017. In April 2017, the staff of the SEC’s Division of Corporation Finance announced that it will not recommend enforcement action if a company fails to comply with certain aspects of the rule relating to due diligence on the source and chain of custody of conflict minerals and an independent private sector audit. The acting chair of the SEC released a statement on the same day announcing that this relief is appropriate because the primary purpose of those requirements is to enable companies to make the disclosure that was found to violate the First Amendment. He directed the SEC Staff to develop a recommendation for future SEC action on the rule after taking into consideration the public comments received.
In addition, the Dodd-Frank Act amended the Exchange Act to require ‘resource extraction issuers’ to disclose specified information regarding payments made to a foreign government or the US federal government for the purpose of commercial development of oil, natural gas or minerals. The SEC adopted a resource extraction disclosure rule in August 2012 that was vacated by the US District Court for the District of Columbia in July 2013. In September 2013, the SEC announced that it would redraft the resource extraction rule rather than appeal the ruling. The SEC reproposed the resource extraction rule in December 2015. The SEC rule was repealed in February 2017, but the underlying Dodd-Frank Act mandate for SEC rule-making remains intact.
The Dodd-Frank Act requires several new disclosures requiring SEC rule-making, including in relation to ‘pay versus performance’, ‘CEO pay ratio’ (requiring disclosure of the median of the annual total compensation of all company employees except the CEO, the CEO’s total annual compensation and the ratio of the former to the latter), ‘clawback’ policies requiring the recovery of excess compensation paid to executives and corporate policies on hedging of company stock by directors and employees. The SEC has adopted rules relating to the CEO pay ratio disclosure requirements (see question 41) and corporate hedging policies (see below) and has proposed rules relating to the pay versus performance disclosure requirements and clawback policies. In September 2017, the SEC published guidance to assist US public companies as they prepare for compliance with the CEO pay ratio disclosure rule. Taken as a whole, the guidance makes clear that companies have substantial flexibility in developing their response to the new disclosure requirement.
In February 2018, the SEC issued new interpretive guidance on cybersecurity disclosure that reinforced and expanded upon the 2011 guidance issued by the SEC’s Division of Corporation Finance. The guidance illustrates the SEC’s increased expectations with respect to how US public companies monitor and disclose cybersecurity risks and incidents.
Since early 2014, the SEC has engaged in a ‘disclosure effectiveness project’. The goal of the project is to review existing disclosure requirements to determine whether modifications should be made to reduce the costs and burdens on public companies while also promoting the disclosure of material information to investors and eliminating duplicative disclosures. In September 2015, the SEC requested comment on the form and content of financial statement disclosures required under Regulation S-X. In April 2016, the SEC issued a concept release seeking public comment on modernising certain business and financial disclosures required by Regulation S-K to be included in public companies’ periodic reports. In August 2016, the SEC requested public comment on the compensation and corporate governance information to be included in US public companies’ proxy statements. In August 2016, the SEC proposed rules intended to update and simplify certain disclosure requirements by eliminating redundant, overlapping, outdated and superseded requirements due to changes in disclosure rules, accounting principles and technology. In March 2017, the SEC approved rules that will require US public companies to provide hyperlinks to the exhibits to their SEC filings, which became effective for the largest category of filers in September 2017. In August 2018, the SEC adopted rule amendments to eliminate or update certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded as a result of more recently updated SEC or GAAP requirements or changes in the information environment. The amendments became effective in November 2018. The SEC adopted rule amendments in March 2019 intended to streamline and improve disclosure requirements applicable to US public companies. The key rule amendments, which became effective in April and May 2019, streamline MD&A disclosure in annual reports, reduce the need to submit confidential treatment requests to the SEC and simplify exhibit filing requirements.
In December 2018, the SEC adopted a rule that will require a US public company to disclose whether it has adopted practices or policies regarding the ability of its directors and employees (including officers) to hedge the company’s equity securities. Most US public companies must comply with the new disclosure requirement in their 2020 annual meeting proxy statements.
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