Hot topics to consider for 2024 D&O questionnaires

In light of new disclosure rules as well as investor interest, companies may wish to modify their D&O Questionnaires for the 2024 proxy season to address certain hot topics:

Cybersecurity Expertise – Beginning with Form 10-Ks and 20-Fs for fiscal years ending on or after December 15, 2023, all companies will be required to disclose certain information regarding cybersecurity, including their processes for assessing, identifying, and managing material risks from cybersecurity threats, the board’s oversight of risk from cybersecurity threats, and management’s role in assessing and managing the registrant’s material risks from cybersecurity threats.  In discussing management’s role, companies are required to discuss management’s relevant expertise in reasonable detail.  While the final rules eliminated any requirement to disclose board-level cybersecurity expertise, companies should consider whether they want to collect information sufficient to assess the adequacy of the board’s skill set, regardless of any view as to disclosure.

Section 16 Reporting - On September 27, 2023, the SEC announced charges against six officers, directors and major shareholders for failure to timely report their holdings and transactions on Form 4s and Schedules 13D and G.  Additionally, the SEC charged five companies for contributing to the filing failures by insiders for failing to report their insiders’ filing delinquencies.  The SEC charged those companies with causing those disclosure violations by taking on the responsibility for making insiders’ filings, but acting negligently in performing such function.  The SEC further stated that the “enforcement actions should serve to remind SEC filers that reporting obligations under the securities laws are not optional, and there are consequences for failing to file required forms in a timely manner.”

The SEC enforcement actions underscore the importance of companies monitoring whether there are any transactions that have not been previously reported, and that all other filings have been made during the prior calendar year.  Companies should also ensure that insiders are aware that gifts must now be reported on a Form 4 within two business days (rather than being eligible for timely reporting on Form 5 within 45 days after the end of the issuer’s fiscal year, as was permitted before February 27, 2023).  Additionally, companies should keep in mind the significance of reporting delinquent filings pursuant to Reg. S-K Item 405 and therefore should review all insiders’ Form 3s, 4s and 5s to ensure timely reporting.

Rule 10b5-1 Plans – Beginning with the quarter ended June 30, 2023, fiscal year-end filers (other than smaller reporting companies, for which the reporting obligation became effective beginning with the quarter ended December 31, 2023) became obligated to report each quarter the adoption or termination of a “Rule 10b5-1 trading arrangement” and any “non-Rule 10b-5-1 trading arrangement” (as defined in Reg. S-K Item 408) by its directors and executive officers.  As part of its insider trading policy, companies may receive information that is relevant to quarterly disclosure of trading arrangements.  Companies may also wish to include a question in the D&O Questionnaire requiring confirmation that insiders have either not entered into, or terminated, any such trading arrangements during the preceding fiscal year.[1] 

Universal Proxy Card – Under the new universal proxy card rules that became effective in 2023, a company may be required to include a dissident’s nominees on its proxy card and, in turn, the dissident may be required to include the company’s nominees on the dissident’s card.  In light of this possibility, companies should review the consent language in their D&O questionnaires to ensure it includes the consent of the director or nominee to be included in the company’s proxy materials, as well as a nominee in a dissident’s proxy materials, should that become applicable.

Human Capital Management – New human capital disclosure was included on the SEC’s Spring 2023 RegFlex Agenda.  The SEC had targeted October 2023 to release proposed rules, which did not occur.  However, it is worth noting that on September 21, 2023, the SEC’s Investor Advisory Committee (“IAC”)[2] voted to approve a subcommittee recommendation to specifically require certain human capital management disclosures in a company’s filings, so as to standardize disclosure and provide investors with additional important information. 

The IAC recommendation suggests disclosure of additional statistical information about the company:

• number of employees, broken down by full-time, part-time and contingent worker status,
• turnover or comparable workforce stability metrics,
• total cost of the issuer’s workforce, broken down into major components of compensation, and
• workforce demographic data sufficient to provide investors an understanding of an issuer’s efforts to access and develop new sources of talent and to evaluate the effectiveness of such efforts.

Additionally, the IAC recommended that the SEC consider narrative disclosure in the Management’s Discussion and Analysis of how the company’s labor practices, compensation incentives, and staffing fit within the broader firm strategy.  These proposals were set forth in the IAC’s draft recommendation regarding human capital management disclosure, available here.

While the IAC’s recommendation does not call for disclosure of board expertise with respect to human capital matters, companies may wish to consider adding questions regarding relevant experience and expertise in their D&O Questionnaires, so that they have such information should they wish to make voluntary disclosure, depending on investor interest or significance of human capital management matters. 

Diversity – The SEC’s spring 2023 RegFlex Agenda contemplates the proposal of board diversity rules in April 2024.  In anticipation thereof, or in response to investor interest, companies that do not currently include diversity information questions in their D&O Questionnaires may wish to request such information.  Companies should consider including a request for the director’s consent to disclosure of such information, in light of privacy laws. 

We note that companies traded on the NASDAQ Stock Market are already required to publish board diversity information pursuant to Listing Rule 5606.  To assist companies with this disclosure obligation, NASDAQ has provided sample D&O questions to elicit relevant information.  These questions may be helpful to companies seeking to include diversity questions in their D&O Questionnaires for the first time, even if not traded on the NASDAQ Stock Market.

[1]           For purposes of ensuring that information is timely received each quarter to disclose any adoption or termination of Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements, companies may wish to send a quarterly reminder of such disclosure obligation to insiders, and/or require approval of any such action by the officer that approves insider trades, to the extent applicable.

[2]           The IAC was created by the Dodd Frank Act, for the purpose of, among other things, advising the SEC on the effectiveness of disclosure and on initiatives to protect investor interests and to promote investor confidence.