On June 24, 2024, Erik Gerding, the Director of the SEC’s Division of Corporation Finance, made a significant statement about the SEC's state of disclosure review. This provides valuable insights into the SEC's focus areas and serves as a crucial reminder for practitioners to stay informed about the ever-evolving capital markets environment. Here's a detailed look at the SEC's top areas of review and comment, highlighting the key points mentioned by Director Gerding.

Top Areas of Review and Comment by the SEC

China-Related Disclosures

In recent years, the SEC enacted the Holding Foreign Companies Accountable Act, implementing rules to ensure transparency and accountability for China-based companies. The SEC continues to monitor disclosures required by this Act and other China-related disclosures. Last year, the SEC published a general letter with sample comments to guide companies in making accurate and comprehensive China-related disclosures.

Artificial Intelligence

With the rapid rise of artificial intelligence (AI) in the capital markets, the SEC has observed a significant increase in the number of companies mentioning AI in their annual reports. The SEC focuses on ensuring that companies provide clear, tailored disclosures about their use of AI, its impact on operations, and related risks. Key areas of scrutiny include:

• Clear definitions and explanations of AI technology and its potential benefits.
• Material risks and impacts on business and financial results.
• Specific use cases of AI technology, avoiding generic statements.
• Reasonable basis for claims about AI prospects.

Commercial Real Estate

The SEC is paying close attention to banks with significant real estate exposure and real estate developers, given the increased risks in today's economy. Disclosure areas under review include:

• Loan portfolio characteristics and concentrations.
• Loan-to-value ratios and loan modifications.
• Policies on nonaccrual loans and appraisals.
• Risk management practices.
• Default risks, liquidity issues, debt maturity, lease term schedules, and tenant viability.

Recently Adopted Rules

As always, the SEC reviews filings for compliance with newly adopted rules, providing comments to guide registrants. Key areas of focus include:

Cybersecurity

The SEC adopted new cybersecurity disclosure rules on July 26, 2023. The SEC reviews both 8-K filings and annual reports for compliance with these rules, emphasizing the importance of robust cybersecurity disclosures.

Clawbacks

In October 2022, the SEC adopted rules requiring listed companies to maintain Clawback Policies. The SEC ensures that companies adopt and file these policies with their periodic reports, monitoring compliance closely.

Pay vs. Performance

The SEC adopted final Pay vs. Performance disclosure rules in August 2022. The SEC remains committed to monitoring appropriate disclosures under these rules.

Universal Proxy

In November 2021, the SEC adopted rules requiring the use of universal proxy cards in contested elections. The SEC carefully reviews proxy filings to ensure compliance with these new rules, especially following the recent 2023 proxy season.

Beneficial Ownership Reporting

In October 2023, the SEC adopted new beneficial ownership reporting rules. The SEC monitors compliance with these rules, ensuring timely and accurate disclosures.

Conclusion

Director Erik Gerding's statement underscores the SEC's ongoing commitment to transparency and accountability in the capital markets. By focusing on these key areas of disclosure, the SEC aims to protect investors and maintain market integrity. Practitioners and clients must stay informed and comply with these evolving disclosure requirements to navigate the complex regulatory landscape effectively.