Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 67 | SEC Rulemaking Roundup New governance disclosures were also mandated for all public companies (except MJDS filers) covering board oversight and management's role in cybersecurity matters. On an annual basis, companies will be required to describe: • how management assesses and manages material risks from cybersecurity threats, • how the board oversees these risks, • who within management is responsible for managing cybersecurity risks and their relevant expertise, and • the processes used by management to become informed about and monitor various aspects of cybersecurity incidents. We suggest that companies consider whether they should adopt a cyber incident response plan. If a company has a plan or intends to adopt one, the plan should establish clear reporting lines to the appropriate individuals responsible for making materiality and disclosure determinations. Companies are reminded that they need to continue to ensure their disclosure controls are equipped to make the necessary materiality determinations and disclosures in a timely manner. The new Form 8-K requirement makes this even more important. Beneficial Ownership Reporting 6 In October 2023, the SEC made long-expected changes to the rules that govern reporting beneficial ownership of public equity securities under Section 13(d) and 13(g) of the Exchange Act. The most significant change was the acceleration of deadlines by which Schedules 13D and 13G and associated amendments must be filed. The SEC ultimately chose not to adopt new rules it had proposed to address beneficial ownership of cash-settled derivatives and group formation, but it did issue new guidance on these topics. Investors who hold public equity securities should assess their processes and procedures to ensure they are ready to comply with the accelerated filings deadlines, particularly those reporting on Schedules 13G who are now required to report material changes in their beneficial ownership on a quarterly basis, rather than only once annually. Filers, or potential filers, should familiarize themselves with the new published guidance on cash-settled derivatives and group formation, which are summarized in our client memorandum. Stock Buyback Disclosures 7 The SEC issued a final rule in May 2023 that added new disclosure requirements applicable to stock buybacks. Under this rule, companies will be required to report on a quarterly basis daily share repurchase activity, including for the first time, the number of shares purchased pursuant to the Rule 10b-18 safe harbor and/or Rule 10b5-1 trading plan. This includes FPIs, who will be required to report daily share repurchase activity on a quarterly basis using new Form F-SR. Narrative disclosures regarding the company's objective for its share repurchases, the process or criteria used to determine their amount and details about any publicly announced share repurchase program, and any policies and procedures relating to trading by officers and directors during the pendency of a company's repurchase program must be disclosed quarterly by domestic companies and annually by FPIs. Disclosures of this nature will increase the transparency of stock buyback activities. As a result, companies will need to re-examine their buyback procedures and use of the Rule 10b-18 and Rule 10b5-1 safe harbors. In addition, we would also expect that the private securities litigation bar and the SEC could use this additional data to more readily construct allegations of misconduct and develop facts that may serve as the basis of investigations into a company's repurchase activities. On November 22, 2023, the SEC issued an order postponing the effective date of this rule. This order followed a decision by the U.S. Court of Appeals for the Fifth Circuit on October 31, 2023, in response to a petition for review filed by the U.S. Chamber of Commerce, that found that the SEC had failed to respond to petitioners' comments and failed to conduct a proper cost-benefit analysis in violation of federal law. The court granted the petition for judicial review of the rule and directed the SEC to correct the defects it had identified by November 30, 2023. Under the rule as adopted, a domestic company with a December 31 fiscal year end is required to begin reporting share repurchase activity and making other required disclosures in its upcoming annual report on Form 10-K filed in early 2024, and an FPI is required to begin reporting repurchase activity following the second quarter of 2024 and to include narrative disclosures in its annual report on Form 20-F thereafter. Given the timing of the court's decision and the SEC's order postponing the effectiveness of the rule, we expect that. More importantly, as the judicial review 6 See Shearman & Sterling LLP, "SEC Accelerates Schedule 13D/G Filing Deadlines and Issues Guidance on Derivatives and Group Formation," https://www.shearman.com/en/perspectives/2023/10/ sec-accelerates-schedule-13d-g-filing-deadlines-and-issues-guidance (October 17, 2023). 7 See Shearman & Sterling LLP, "New Stock Buyback Disclosure Requirements," https://www.shearman.com/en/perspectives/2023/05/ new-stock-buyback-disclosure-requirements (May 16, 2023); see also Shearman & Sterling LLP, "SEC Postpones Effective Date of New Stock Buyback Disclosure Requirements," https://www.shearman. com/en/perspectives/2023/11/sec-postpones-effective-date-of-new- stock-buyback-disclosure-requirements (November 22, 2023).