Chapter 1 — Before the Details: Trends and Priorities

1.1 Overview

The global business landscape has been changing rapidly, with higher interest rates, tightening credit, inflation, supply-chain and labor issues, geopolitical conflicts, and concerns about the real estate and banking sectors affecting markets worldwide over the past few years. As these trends persist, the transformative effects of generative artificial intelligence (often referred to as “gen AI”) may also have a significant impact on financial markets.

The SEC continues to undertake rulemaking and provide registrants with proactive guidance as needed to respond to recent market developments while conducting ongoing reviews and oversight to protect investors. Under the leadership of Chair Gary Gensler, who took office in April 2021, the Commission has pursued a comprehensive rulemaking agenda embodying three key themes: efficiency and competition, integrity and disclosure, and resiliency of the markets. The first theme, efficiency and competition, focuses on cost-conscious rulemaking aimed at prioritizing investor returns and promoting capital formation. The second theme, integrity and disclosure, centers around protecting investors and building trust in the capital markets. Rulemaking associated with this pillar, which is outlined in further detail below, is most relevant to SEC registrants and their financial reporting processes. The third theme, resiliency, encompasses efforts to promote fair, orderly, and efficient markets.

Broader SEC priorities often influence comment letter trends. As registrants start to prepare for the 2023 annual reporting cycle, they may find it helpful to consider the following SEC priorities:

Investor protection — In the SEC’s strategic plan for fiscal years 2022–2026, the Commission states that its three-part mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” and that its top goal is to “[p]rotect the investing public against fraud, manipulation, and misconduct.” To further its mission, the SEC pursues enforcement and examination initiatives aimed at protecting individual investors. As Chair Gensler has emphasized, “[t]he SEC is the cop on the beat watching out” for investors. In its fiscal year ended September 30, 2023, the SEC filed over 780 enforcement actions that yielded $5 billion in judgments and orders.
Rulemaking — Under the current administration, the SEC has continued an ambitious, robust rulemaking agenda. In addition to issuing more than 60 proposed rules since Chair Gensler was sworn in, the SEC has released more than 25 final rules.
The SEC staff often conducts reviews aimed at ensuring compliance with newly released final rules. For example, the staff issued a significant number of comments to registrants on pay-versus-performance disclosures in the current year (see Section 3.7.4). Therefore, it is important for registrants to consider recent final rules as they prepare for the annual reporting cycle. Key final rules issued by the SEC that recently took effect, or take effect in the coming months, address the following topics:
- Clawback policies — Under the SEC’s October 26, 2022, final rule, an issuer whose filed financial results are subsequently restated because of material noncompliance with financial reporting requirements is required to “claw back” any excess compensation awarded on the basis of the previously filed results. As outlined in the final rule, an issuer must claw back the excess compensation for the three fiscal years before the determination of a restatement regardless of whether an executive officer had any involvement in the restatement. The final rule also requires an issuer to disclose its recovery policy in an exhibit to its annual report and to include new checkboxes on the cover page of its annual report to indicate whether the financial statements “reflect correction of an error to previously issued financial statements and whether [such] corrections are restatements that required a recovery analysis.” For a registrant, the final rule’s disclosure requirements are effective beginning with the registrant’s first applicable Commission filing submitted on or after December 1, 2023 (i.e., 60 days after October, 2, 2023, the effective date of the New York Stock Exchange’s and Nasdaq’s new listing standards requiring issuers’ compliance with the SEC’s final rule). For example, a calendar-year-end registrant is required to include the applicable disclosures beginning with its 2023 Form 10-K. See Deloitte’s November 14, 2022, Heads Up for more information.
- Share repurchase disclosures — Under the SEC’s May 3, 2023, final rule, registrants are required to disclose additional detail regarding the structure of an issuer’s repurchase program and its share repurchases and file, either quarterly (domestic registrants) or semiannually (foreign private issuers), detailed quantitative daily repurchase data. The final rule also revises and expands existing periodic disclosure requirements about repurchases; for example, it requires registrants to disclose their objectives and rationale for repurchase plans and adds a new quarterly disclosure in certain periodic reports related to an issuer’s adoption and termination of certain trading arrangements. The final rule is effective for fiscal quarters starting on or after October 1, 2023 (e.g., it is effective for calendar-year-end companies beginning with the fourth quarter of 2023). On October 31, 2023, the U.S. Court of Appeals for the Fifth Circuit instructed the SEC to revise its cost-benefit analysis within 30 days. If the SEC does not successfully demonstrate that the benefits of implementing the final rule would outweigh the costs, the final rule may be vacated on the basis of a lawsuit filed by the U.S. Chamber of Commerce and other parties. It is unclear how this litigation may affect the timing or implementation of the final rule.
- Cybersecurity disclosures — Under the SEC’s July 26, 2023, final rule, a registrant is required to report the following:
  - Material cybersecurity incidents — A registrant must file a Form 8-K to disclose material cybersecurity incidents within four business days after determining that the incident is material to the registrant. The final rule amends Form 8-K to add Item 1.05, “Material Cybersecurity Incidents,” which requires the registrant to disclose both “the material aspects of the nature, scope, and timing of the incident” and “the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations,” if known at the time of the filing.
  - Annual cybersecurity disclosures — The final rule adds Item 1C, “Cybersecurity,” to Form 10-K. Item 1C requires disclosures that pertain to (1) cybersecurity risk management and strategy, including a comprehensive disclosure of the processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats; (2) “management’s role in assessing and managing material risks from cybersecurity threats,” including (a) “whether and which management positions or committees are responsible for assessing and managing such risks,” (b) the processes used to monitor cybersecurity incidents, and (c) whether and, if so, how management reports cybersecurity incidents to the board of directors; and (3) “the board of directors’ oversight of cybersecurity risks,” including (a) a description of the board’s oversight of the risks, (b) identification of any board committee or subcommittee responsible for oversight (if applicable), and (c) a description of the processes used to inform the board of the risks.
  The Form 8-K disclosure requirements are effective as of December 18, 2023 (except for smaller reporting companies, for which the effective date is June 15, 2024), and the Form 10-K disclosure requirements are effective for fiscal years ending on or after December 15, 2023. See Deloitte’s July 30, 2023, Heads Up for more information.
Looking further ahead, registrants should monitor the status of key proposed rules, including those related to the following:
- Climate-related disclosures — Under the SEC’s March 21, 2022, proposed rule, a registrant would be required to provide disclosures about greenhouse gas emissions (with attestation for Scope 1 and Scope 2 disclosures), certain financial statement disclosures, and qualitative and governance disclosures in its registration statements and annual reports. See Deloitte’s March 21, 2022 (updated March 29, 2022), Heads Up for an executive summary of the proposed rule and Deloitte’s March 29, 2022, Heads Up for a comprehensive analysis of the proposed rule. Since climate-related disclosures are a priority for Chair Gensler, we would expect the SEC to continue progressing toward a final rule, though the timing is uncertain.
- Special-purpose acquisition companies (SPACs)1 — Under the SEC’s March 30, 2022, proposed rule, the financial statement reporting requirements applicable to SPAC merger transactions would be aligned more closely with the requirements for a traditional IPO. In addition, the proposed rule would require enhanced disclosures and provide additional investor protections related to SPAC IPOs and de-SPAC transactions. See Deloitte’s October 2, 2020 (updated April 11, 2022), Financial Reporting Alert for more information.
On the basis of the SEC’s regulatory agenda, we expect the Commission to propose additional rules that would provide for more prescriptive human capital disclosure requirements and require disclosures about board diversity.
Climate-change disclosures — In advance of any new rules on climate-change disclosures, the SEC’s Division of Corporation Finance (the “Division”) has increased its focus on climate-related disclosures when reviewing public-company filings. On September 22, 2021, the Division publicly released a “Dear Issuer” letter 2 on the topic, which outlines samples of the types of comments the Division may issue to public companies about climate-change disclosures and refers to considerations described in the SEC’s 2010 interpretive release. Thus far, the SEC staff has issued such comments to more than 70 companies. Focusing primarily on the disclosures in the business, risk factors, and MD&A sections of registrants’ annual reports, these comments have addressed compliance with the 2010 interpretive release and whether voluntary disclosures in corporate sustainability reports were considered for inclusion in SEC filings (see Section 3.1.5 for more information).
AI and predictive data analytics — While advances in technology and finance are providing greater access to the U.S. markets and spurring innovation and competition within those markets, the Commission is focused on ensuring that it can achieve its core public goals with appropriate protections for everyday investors. To that end, the SEC is investigating how the use of various AI models in the financial markets could affect market stability and is considering regulation related to such use. In addition, Chair Gensler has cautioned registrants that they should ensure that any material disclosures about AI opportunities and risks are not misleading.
Crypto finance — The Commission has a number of projects on crypto finance on its agenda, and Chair Gensler has made more robust oversight and investor protection in this area a priority. On March 31, 2022, the SEC issued SAB 121, which provides SEC staff guidance on safeguarding obligations related to crypto assets (see Deloitte’s April 6, 2022 [updated July 28, 2022], Financial Reporting Alert for more information).

In addition, on July 27, 2023, after the failure of large crypto platforms, SEC Chief Accountant Paul Munter issued a statement cautioning investors and accounting firms of the potential pitfalls of purported crypto assurance work (e.g., proof of reserve) and the need for heightened scrutiny in the evaluation of (1) accounting firms’ services to companies in the crypto space and (2) public statements related to such services. Beyond rulemaking and issuing guidance, the SEC has undertaken enforcement matters related to digital asset offerings.
Disclosures about evolving risks — As global markets evolve, the Commission continues to focus on registrants’ disclosures related to matters that management and the board of directors are monitoring, evaluating, and addressing. These matters include, but are not limited to, higher interest rates, tightening credit, inflation, supply-chain and labor issues, cybersecurity, geopolitical conflicts, and concerns about the real estate and banking sectors.

To help the SEC meet its responsibilities under the Sarbanes-Oxley Act, the Division continues to selectively review documents filed by registrants under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). Under the Division’s filing review process, the Division performs some level of review of each registrant at least once every three years (referred to as a “filing review”). However, many registrants are reviewed more frequently, and they may or may not receive a comment letter from the Division.

The comment letter trends and statistics discussed in this edition3 are generated from an analysis of the comment letters issued by the Division in connection with its filing reviews of Forms 10-K and 10-Q (and any amendments to those respective forms). Filing reviews that resulted in one or more comment letters are referred to herein as “reviews with comment letters” or simply “reviews.”

Footnotes

A SPAC is a newly formed company that raises cash in an initial public offering (IPO) and uses that cash, the equity of the SPAC, or both to fund the acquisition of a private operating company.

Sample Letter to Companies Regarding Climate Change Disclosures.

Unless noted otherwise, comment letter trend information in the 2023 edition of this publication:

Was derived from data provided by Audit Analytics.
Is related to reviews conducted by the Division of Forms 10-K, 10-K/A, 10-Q, and 10-Q/A (which are referred to generally as “filings”).
Is based on SEC uploads (i.e., comment letters that the SEC issued to registrants) and does not include registrant responses.
Does not include the SEC’s “closing letter” communicating that its review is complete.
Includes only information related to reviews that have been closed and subsequently posted to EDGAR. Accordingly, the statistics presented in the tables and charts below may be affected by reviews that are still ongoing or have recently been closed.
Pertains to 12-month periods ended July 31 (“review years”).
May be different upon comparisons with the 2022 edition of this publication because additional 2022 reviews were closed and posted to EDGAR after that edition was issued. Information in this publication is based on comment letters that were closed (i.e., the SEC issued a closing letter to the registrant) within the corresponding 12-month period ended July 31.