Dave recently shared an academic paper arguing that AI is not just analyzing MD&As — but actually shaping how they’re written. The author, Professor Keren Bar-Hava of the Hebrew University of Jerusalem, just released a new paper summarized in this CLS Blue Sky Blog, suggesting two empirical tools to measure how companies tailor their MD&As to algorithms and when AI-induced disclosure pressure has caused tone to cross the line from optimism to manipulation.
The first tool, the AI Orientation Score, ranges from 0 to 5 and assesses how machine-optimized a disclosure is based on measurable language, keyword usage, structured formatting, impersonal tone, and tonal consistency. A higher score suggests that the MD&A was likely crafted with machine readers in mind.
The second tool, the AI Manipulation Exposure Index (AI-MEX), also scored from 0 to 5, captures rhetorical red flags that may signal tone manipulation. These include upbeat language despite poor financials, absence of key performance indicators, vague aspirational claims, and excessive repetition of positive terms.
Professor Bar-Hava applied these tools to analyze 80 MD&As from 20 large S&P 100 firms between 2021 and 2024 (using both ChatGPT and Gemini, which arrived at nearly identical conclusions) and found that:
AI Orientation Scores rose steadily, indicating growing use of algorithm-friendly narrative techniques in MD&A disclosures.
AI-MEX scores were significantly higher for firms with weak fundamentals, such as negative net income or deteriorating cash flow.
By 2024, over 60 percent of companies scored high on both indices, signaling a dual strategy of structural optimization and tone management.
She concludes that these trends are . . . not great (my words, not hers). She worries that they will erode investor trust and confidence in this important narrative disclosure that is often the “only section where strategy, performance, and uncertainty are discussed together in plain language.” She suggests that anyone on the reviewing end of MD&A start to incorporate these diagnostic tools to help understand when the narrative doesn’t align with the numbers and holding companies “accountable for how tone, metrics, and structure align.”
How should public companies and their lawyers be receiving and responding to this?
First, be aware that AI is one of the several audiences of your disclosures, and that your disclosures may be screened or assessed by an algorithm. On RealTransparentDisclosure.com, Broc recently shared some great practice pointers for drafting with that in mind. (The last one in particular jumped out at me: “Recognize that today’s disclosures train tomorrow’s AI models. The tone and style choices you make now can set future industry expectations—so lead wisely.”)
Second (and this aligns with Broc’s point no. 4), ensure you’re still presenting an accurate, fair and balanced picture of company performance. Investors may start considering to what extent you’ve machine-optimized disclosure and when and whether it starts to border on manipulation (or even misrepresentation) by applying these or other analysis tools. To that end, companies may also want to start considering how their disclosures score on AI Orientation and AI-MEX.
I’d also argue that outside counsel (through human review) may be well-positioned to help clients avoid high AI-MEX scores by looking at all the disclosures holistically and asking questions where disclosures (including tone) appear inconsistent. That can be a hard task for the preparer who has been living and breathing the numbers and disclosures for a few weeks, while a more outside observer well-versed on the company and its industry reading a full draft for the first time might immediately pick up on language that comes off as overly optimistic or inconsistent.
It goes without saying that “the company and its management are responsible for the accuracy and adequacy of their disclosures notwithstanding. . . any action or absence of action” by company or investor AI. (See what I did there?)
Regulation A has been a bit of a hot topic at the SEC of late. At the Small Business Advisory Committee’s May 6 meeting, two hours were devoted to discussing Regulation A to better understand how companies have utilized Regulation A, why it’s a less popular option, and whether rule changes could help facilitate its use and improve secondary liquidity. As John recently shared, the Committee is meeting again on July 22, and the agenda contemplates continuing this discussion.
In the meantime, Corp Fin’s Office of Small Business Policy recently responded to a no-action request relating to ongoing reporting obligations under Regulation A. Here’s a Reg. A reminder from this Goodwin blog:
Regulation A was adopted by the SEC to provide an exemption from registration for smaller value securities offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. Once a Tier 2 offering has been qualified, the issuer is required to file with the SEC an annual report on Form 1-K for the fiscal year in which the offering statement became qualified and for any fiscal year thereafter, unless the issuer’s obligation to file such annual report is suspended under Rule 257(d) of Regulation A.
The company seeking no-action relief, BirchBioMed, filed an offering circular under Regulation A that was qualified by the SEC in October 2024. The company had commenced an offering, received completed subscription agreements and received funds in escrow; however, by June 20, all funds had been released from escrow and returned to investors.
Upon qualification of the offering statement, the company was required to file ongoing reports under Rule 257(b). Rule 257(d) permits the suspension of the filing obligation if (i) the issuer has fewer than 300 shareholders of record and (ii) has filed all reports required to be filed since it became a Regulation A reporting company; however, suspension of reporting obligations is not available during the fiscal year in which a Tier 2 offering statement is qualified. The company met these conditions, but for the fact that the offering circular was qualified in the current fiscal year.
The Goodwin blog points to the company’s public policy arguments — saying that the public policy considerations underlying the reporting requirements of Regulation A are not present because BirchBioMed, Inc. has no shareholders to whom the required ongoing reporting obligations are intended to benefit, and there is no secondary market that has or could develop as a result of the Regulation A offering. The SEC staff seemed to agree and granted no-action relief.
In a blog on Monday, I shared that my least favorite item of Regulation S-K (I said this was “as of” my associate years, but I think it still holds true) is Item 305 — Quantitative and Qualitative Disclosures about Market Risk. I remember form-checking those disclosures to be a terrible, and frankly, confusing slog. (Amirite?) Plus, it was always one more reason to be disappointed that I didn’t study accounting!
Anyway, it sounds like I am in good company. Inspired by reader outreach (we love that by the way — thank you to everyone who reaches out!), let’s run a quick poll. I’m curious if another item of Reg. S-K gives 305 a run for its money. I’m thinking 402 will have a lot of takers (but don’t let me influence you).
This is a Highlander situation — pick only one. But it’s anonymous, so don’t worry. Your least favorite item of Reg. S-K will never know how you truly feel about it. And I know I limited your selections, but the list got unwieldy!
The PCAOB announced yesterday that Chair Erica Williams will depart on July 22. SEC Chair Paul Atkins also issued a statement and thanked her for her service. The PCAOB press release described Chair Williams’ tenure:
Williams was originally sworn in as PCAOB Chair in January of 2022. She was reappointed in June 2024 and sworn in on October 24, 2024. Under her leadership, the PCAOB developed and executed an ambitious strategic plan to modernize standards, enhance inspections, strengthen enforcement, and improve the PCAOB’s organizational effectiveness. The PCAOB’s accomplishments under Williams’ tenure include:
Securing complete access to inspect and investigate firms headquartered in China for the first time in history and bringing record enforcement actions against China-based firms.
Launching a concentrated effort to improve audit quality that helped lead to significant improvements in deficiency rates across audit firms.
Increasing transparency in inspection reports and getting those reports out nearly a year sooner so that investors, audit committees, and others have access to valuable information more quickly.
Taking more formal actions to modernize standards and rules than any Board since the PCAOB was created, finalizing seven projects, covering 24 rules and standards.
Delivering record-setting sanctions, sending a clear message that there will be strong consequences for anyone who puts investors at risk.
Partnering with staff to make the PCAOB a better place to work, leading to a 30-percentage point increase in the number of PCAOB staff who say they would recommend the PCAOB as a great place to work.
Reimagining stakeholder outreach, reconstituting the Investor Advisory Group and the Standards and Emerging Issues Advisory Group and creating the first-ever standalone Office of the Investor Advocate.
Awarding the highest amount of merit-based scholarships to accounting students in PCAOB history.
The fate of the PCAOB has been unclear for the last few months — starting with speculation that the PCAOB’s powers would be scaled back under the new administration and subsequent attempts by Congress to eliminate it completely — and remains so, even though elimination of the PCAOB didn’t end up in the final budget reconciliation bill.
In early Q2, we saw a number of prominent companies suspend or withdraw financial guidance entirely due to tariff uncertainties. But where companies continue to provide guidance, how are they handling the potential impact of tariffs? Jenner & Block surveyed April and May 2025 earnings releases by 100 S&P 500 companies and found that:
– 20% of companies noted that the impact of tariffs wasn’t reflected in their guidance
– 30% took tariffs into account but did not quantify the impact or note specific offsetting actions
– 30% took tariffs info account and did specifically identify offsetting or mitigation actions, including pricing actions (usually when reaffirming), but did not quantify the impact
– 18% took tariffs into account and separately quantified their impact — usually on a gross or per share basis
– 2% (two companies) provided a quantification of the tariffs’ expected impact, but excepted it out of the guidance
Where companies did not mention tariffs in their discussion of guidance, they still mentioned them in their forward-looking statements disclaimer.
Late last month, I saw in the Securities Docket that two people were charged with insider trading after purchasing stock in advance of merger announcements that they learned about through their jobs as employees of an EDGAR filing agent. Apparently, they planned to leave the country but were thwarted when they were arrested by the FBI at JFK Airport. (I immediately thought Dave would be interested in that last part — since he recently shared that he was inspired to get a job at the SEC after seeing Gordon Gekko’s arrest in the movie Wall Street.)
Dramatic arrests aside, this Bryan Cave blog gives a practical take on this news and cites it as just one example of the special challenges public companies often face in protecting confidential information — especially when announcing material corporate developments and quarterly financial results. And it uses this news as an “opportunity” to share some best practices public companies can take to protect confidential information and internal controls public companies should develop surrounding public announcements. Among other things, the blog says those controls should include:
– Scrubbing metadata – or only using clean PDF formats – before releasing documents (or sharing via cloud collaboration). On some prior occasions, failures have allowed viewers to see:
Tracked changes showing edits to sensitive documents.
Comments showing internal disagreements over wording.
Author names and timestamps showing the drafting timeline.
Hidden text.
– Preventing premature posting, or mistaken posting of outdated versions, by:
Establishing clear communications with financial printers, filing and transfer agents, as well as IR and website teams and other third party vendors with access to confidential or sensitive information.
Evaluating drafting and review controls, including collaboration tools with audit trails, to avoid confusion over drafts or final versions.
Maintaining formalized levels of review by legal, finance, IR, and other relevant teams.
Reconciling SEC filings and press releases to ensure consistency.
– Evaluating controls for authorized release times, protocols for transmission to wire services and documentation of approvals from stakeholders.
– Periodically conducting testing for SEC filing and press release distribution protocols.
– Establishing procedures for promptly retracting or correcting erroneous communications, along with Form 8-Ks where appropriate.
– Reviewing or updating the external communications policy, including identification of parties authorized to speak to the media or analysts and related confidentiality obligations.
– Securing physical documents in locked drawers, whether at the office or at home.
– Evaluating third party agents for Edgarization or press release distribution, including with respect to their compliance policies, reputation, and employee training and confidentiality procedures.
It also highlights the need to remind employees of their obligations to protect confidential information, including by being careful about when and where they discuss a confidential topic. (That includes being careful at home — since I was immediately reminded of the WFH insider trading case from 2024.)
The Corp Fin Staff just released 18 revised CDIs on the filing of Schedules 13D and 13G. Thanks to the helpful redlines provided by Corp Fin, it looks like the changes are largely clean-up, clarification and updates necessary to align the CDIs with the October 2023 amended rules that, among other things, shortened the deadlines for initial and amended Schedule 13D and 13G filings. Here’s the full list of the updated CDIs, with links directly to the redlines:
The first-ever criminal conviction based on the abuse of Rule 10b5-1 plans ended in late June with the sentencing of defendant Peizer, CEO & Chair of a healthcare company, to 42 months in prison and $17.9 million in fines and forfeitures. (The DOJ had sought a 97-month sentence, $10.25 million in fines and $12.7 million in forfeiture judgment.)
As Liz blogged when the charges were announced, the facts were in the DOJ’s favor. Peizer entered into two 10b5-1 trading plans shortly after learning bad news about a relationship with the company’s largest customer and refused to use any cooling-off period despite warnings from two brokers. In fact, he “shopped” for a broker who wouldn’t require one. Plus, the facts of this case are unlikely to recur now that Rule 10b5-1 requires a 90-day minimum “cooling-off” period for directors and officers.
That said, there are still some important takeaways from the sentencing. This Winston blog notes that the government made clear in its sentencing memorandum that it plans to continue to investigate and pursue insiders who effectuate suspicious trades through Rule 10b5-1 plans — one unfortunate potential consequence of this (coupled with stiff penalties and prison time) is that it may chill the use of such plans by insiders who are operating in good faith and without MNPI. When 10b5-1 plans are used, the blog highlights the need to carefully consider the “good faith” requirement and the importance of having counsel review plans and policies:
The “good faith” requirement is subjective and must be thoroughly evaluated when taking any actions with respect to a trading plan: As discussed above, the 2022 amendments expanded existing requirements that trading plans be entered into in good faith, leading to heightened scrutiny of compliance with, and additional avenues for enforcement of, insider trading rules. It’s important that those considering entering into a plan – or taking any action with respect to a plan – remember that good faith is evaluated on a facts-and-circumstances and insider-by-insider basis. At the center of the Peizer case was an evaluation of his motivations and reasons for not just entering into the trading plan, but pursuing the stock sales at the time and in the magnitude in which he did. Additionally, it is essential that individuals are not in possession of MNPI when entering into a plan.
Counsel should review 10b5-1 plans and policies: Before entering into a Rule 10b5-1 plan, individuals should engage legal counsel to review the plan in light of all the conditions of Rule 10b5-1 and discuss whether there are any risks involved in entering into the plan. Issuers should also engage legal counsel prior to making changes to their insider trading policies.
Join us tomorrow Wednesday, July 16, at 2:00 pm Eastern for our “Securities Offerings During Blackout Periods” webcast to hear Willkie Farr’s Eddie Best, O’Melveny’s Ryan Coombs, Perkins Coie’s Allison Handy and Jones Day’s Michael Solecki discuss all the things issuers considering tapping the capital markets during a “blackout period” have to think about. Our panel of experienced practitioners will explore these issues:
– Challenges blackout periods present for capital raising
– Factors to consider in deciding whether to offer securities during a blackout period
– Issues surrounding use and content of “flash numbers” in a prospectus
– SEC staff and judicial views on flash numbers
– Perspective of underwriters & their counsel
– Differences between recently completed quarter and one in-process
– Due diligence and comfort letter issues
– Offering-specific issues
– Process of updating prospectus disclosure
As a junior associate, I worked on a lot of debt capital markets transactions representing the underwriters, so I have negotiated my fair share of comfort letters. I’m thankful I had the benefit of a forward-thinking and training-focused partner sitting me down the first time I worked on an offering during a blackout period and explaining to me why and how the comfort letter would differ a bit and that we might need a CFO certificate. Not all junior associates are so lucky, and I would especially encourage any new capital markets attorneys to join this webcast to benefit from the valuable practice pointers our panelists will share about navigating the challenges posed by these transactions.
Members of this site can attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up with a credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
This program will also be eligible for on-demand CLE credit when the archive is posted, typically within 48 hours of the original air date. Instructions on how to qualify for on-demand CLE credit will be posted on the archive page.
In late April, John shared some tips for companies preparing their first quarter 10-Qs, noting that the “timing of the President’s actions and the potential for another shoe to drop in less than 90 days create almost perfect conditions for companies to stumble into traps for the unwary when addressing these line-item disclosure requirements.” While companies were grappling with tariffs — and the resulting disclosure considerations — at 10-K and first quarter 10-Q time, we now find ourselves assessing new information and a possible August 1st effective date that presents timing challenges for second quarter 10-Qs.
It seems tariff-related disclosure reminders are once again timely. Since this is a déjà vu / glitch-in-the-matrix situation, I’ve got the easy task of gathering a blog roundup, thanks to my brilliant colleagues who shared excellent tips earlier this year:
