Chapter 1 — Before the Details: Trends and Priorities

1.1 Overview

The global business landscape continues to evolve at a rapid pace. After years of increasing interest rates and inflation, these trends have begun to moderate. However, other factors such as geopolitical conflicts and concerns about the commercial real estate sector continue to affect markets worldwide. Among these persistent trends, the transformative potential of generative artificial intelligence (AI) is significantly influencing world 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. Since broader SEC priorities often influence comment letter trends, registrants may find it helpful to consider the following SEC priorities as they start to prepare for the 2024 annual reporting cycle:

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. In addition to enforcement, the SEC has encouraged expanded corporate disclosure, through either rulemaking or the comment letter process, to provide investors with more information on which to base their investment or voting decisions.
AI — 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 issued a proposed rule on July 26, 2023, to address conflicts of interest related to AI and is investigating how the use of various AI models in the financial markets could affect market stability.

Many registrants have included disclosures about AI in their SEC filings. See Deloitte’s March 2024 Financial Reporting Spotlight for an overview of how Fortune 500 registrants have addressed these disclosure requirements in their 2023 annual reports. These disclosures have largely focused on (1) AI regulation such as the EU Artificial Intelligence Act; (2) increased cybersecurity threats fueled by AI; and (3) market competition, innovation, and disruption from AI. Speaking about such disclosures at an event in February 2024, Chair Gensler cautioned registrants to avoid “AI washing” (i.e., making unfounded AI-related claims). He emphasized that “[c]laims about prospects should have a reasonable basis” and that disclosures about a company’s use of AI should be accurate, complete, and balanced with the related risks. He also stated that companies may need to “define for investors what they mean when referring to AI” (e.g., machine learning, algorithms, generative AI).
Further, in a June 2024 statement, Erik Gerding, director of the SEC’s Division of Corporation Finance (the “Division”), indicated that AI is an area of focus for the SEC staff and noted that the staff will consider whether a registrant:
- “[C]learly defines what it means by artificial intelligence.”
- “[P]rovides tailored, rather than boilerplate, disclosures . . . about material risks and the [reasonably likely impacts of AI technology] on its business and financial results.”
- Focuses on its own use of AI technology, as opposed to “generic buzz” unrelated to the registrant.
- “[H]as a reasonable basis for its claims” about its AI prospects.
Recent 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 40 final rules.
The SEC staff often conducts reviews aimed at ensuring compliance with newly released final rules. For example, the staff continues to issue comments to registrants on pay-versus-performance disclosures in the current year (see Section 3.7.4). In addition, as new accounting standards such as ASU 2022-04 on supplier finance programs and ASU 2023-07 on segment reporting become effective, we expect to see comments from the staff on those standards’ reporting requirements as well. Therefore, it is important for registrants to consider recent final rules and accounting standards as they prepare for the annual reporting cycle. Key final rules issued by the SEC that recently took effect address the following topics:
- Cybersecurity disclosures — Under the SEC’s July 26, 2023, final rule, a registrant is required to report the following:
  - Material cybersecurity incidents — Within four business days after a registrant determines that any cybersecurity incidents material to it occurred, the registrant must file a Form 8-K to disclose those incidents under newly added Item 1.05, “Material Cybersecurity Incidents.” Throughout 2024, over 20 Item 1.05 Forms 8-K were filed (excluding amendments). The SEC has begun to issue comments on these filings and has provided additional guidance.
    
    In May 2024, Mr. Gerding issued a statement to emphasize that registrants (1) should reserve disclosure under Item 1.05 of Form 8-K for cybersecurity incidents that are material and (2) may voluntarily disclose under Item 8.01 of Form 8-K a cybersecurity incident that has not been determined to be material or for which no materiality determination has yet been made. The following month, Mr. Gerding issued a statement on Regulation FD considerations related to cybersecurity incident responses. That same month, the Division issued five new Compliance and Disclosure Interpretations (C&DIs) related to Securities Exchange Act of 1934 (“Exchange Act”) Form 8-K to provide guidance on materiality considerations and disclosure requirements related to ransomware incidents and payments. See Section 3.10.1 for more information.
  - Annual cybersecurity disclosures — The final rule adds Item 1C, “Cybersecurity,” to Form 10-K. Under the final rule, registrants are required to provide disclosures in Item 1C 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”; and (3) “the board of directors’ oversight of cybersecurity risks.” See Deloitte’s March 2024 Financial Reporting Spotlight for an overview of how Fortune 500 SEC registrants have addressed these disclosure requirements in their 2023 annual reports. We expect that in a manner similar to the SEC staff’s review of registrants’ compliance with other new disclosure rules, the staff will perform targeted reviews of registrants’ cybersecurity disclosures and issue comments to several registrants before the 2024 annual reporting season.
  See Deloitte’s July 30, 2023 (updated December 19, 2023), Heads Up for more information.
- Special-purpose acquisition companies (SPACs)1 — Under the SEC’s January 24, 2024, final rule, the financial statement reporting requirements applicable to SPAC merger transactions are aligned more closely with the requirements for a traditional IPO. In addition, the final rule requires enhanced disclosures and provides additional investor protections related to SPAC IPOs and de-SPAC transactions. See Deloitte’s February 6, 2024, Heads Up for more information.
- “Clawback” policies — The SEC’s October 26, 2022, final rule mandates that issuers must “claw back” excess compensation awarded on the basis of financial results that are later restated because of material noncompliance with financial reporting requirements. The final rule requires an issuer to (1) disclose its recovery policy in an exhibit to its annual report and (2) 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 more information, see Deloitte’s November 14, 2022, and December 10, 2023, Heads Up newsletters. While there have been limited comments on these disclosures to date, we expect to see more in the future, particularly when companies report a restatement requiring a clawback analysis.
Climate-related disclosures — On March 6, 2024, the SEC issued a final rule requiring registrants to provide climate-related disclosures in their annual reports and registration statements, including those for IPOs, beginning with annual reports for the year ending December 31, 2025, for calendar-year-end large accelerated filers. In the footnotes to the financial statements, registrants must provide information about (1) specified financial statement effects of severe weather events and other natural conditions, (2) certain carbon offsets and renewable energy certificates (RECs), and (3) material impacts on financial estimates and assumptions as a result of severe weather events and other natural conditions or disclosed climate-related targets or transitions plans. Disclosures required outside of the financial statements include the following:
- For large accelerated filers and accelerated filers, material Scope 1 and Scope 2 greenhouse gas (GHG) emissions, subject to assurance requirements that will be phased in.
- Governance and oversight of material climate-related risks.
- The material impact of climate risks on the company’s strategy, business model, and outlook.
- Risk management processes for material climate-related risks.
- Material climate targets and goals.
On April 4, 2024, the SEC issued a stay on the final rule pending judicial review. See Deloitte’s March 6, 2024 (updated April 8, 2024), Heads Up for an executive summary of the final rule and Deloitte’s March 15, 2024 (updated April 8, 2024), Heads Up for a comprehensive analysis of the final rule.

Regardless of the stay, the Division has increased its focus on climate-related disclosures under existing SEC rules and regulations. On September 22, 2021, the Division publicly released a “Dear Issuer” letter 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 85 companies over the past three years. 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).
Commercial real estate — The current macroeconomic environment has created ongoing challenges and uncertainty as many commercial real estate entities have encountered increased costs of capital and tightening lending standards while also dealing with higher levels of maturing debt; reductions in the volume of real estate transactions; and evolving real estate demands and preferences related to the way people work, live, and shop. Although these issues primarily affect the banking and real estate investment trust (REIT) sectors, other companies may have exposure through investments in the industry, including pension fund investments. The SEC staff has encouraged companies with investments in commercial real estate to provide more disaggregated disclosure about such investments. It has also encouraged real estate entities to provide transparent disclosure about liquidity, lease renewals, and broader portfolio issues. See Deloitte’s May 22, 2023, Financial Reporting Alert for further discussion of these conditions and relevant accounting and reporting considerations.

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 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 edition2 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.

Unless noted otherwise, comment letter trend information in the 2024 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 2023 edition of this publication because additional 2023 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.