Given the current environment, many boards may be asking themselves whether they need to add directors with AI expertise in order to fulfill their oversight responsibilities with respect to their companies’ development and usage of AI tools. This Debevoise memo says that the answer to that question is more complicated than it seems at first glance:

While appointing a director with AI expertise may be appealing, it can present practical and governance challenges. First, the pool of individuals with both deep AI expertise and the qualifications to serve effectively as a public company director is limited.

Second, the percentage of companies for which AI is so fundamental to their business that it requires an AI expert on the board is very small. The appointment of a director with AI expertise could raise questions about a lack of specific board expertise covering other areas of potential enterprise risk (e.g., such as cybersecurity, political or environmental risks).

Third, the presence of a designated expert may inadvertently undermine effective board dynamics. For example, other directors may defer excessively to an AI expert, reducing the level of constructive challenge and debate that is critical to effective oversight. This dynamic can undermine the collective decision-making that is at the heart of board function and weaken the board’s ability to independently assess management’s approach to AI. Over time, concentrating AI knowledge in a single director may also reduce other directors’ incentives to learn about AI, which is likely to become increasingly important in the future.

Finally, individuals with deep AI expertise often have extensive experience in the technology industry and may have conflicts of interest, such as investments in AI companies or commercial relationships with vendors, which would require careful management.

The memo goes on to explain that adding an AI expert as a director isn’t the only way for a board to “get smart” about AI-related issues and discusses the role that expert guidances and appropriate education and regular reporting from management and outside advisors can play in supporting the board’s oversight of AI.

– John Jenkins

According to a new study by B-school profs at The University of Cincinnati and Penn State, the accelerated reporting of gifts adopted as part of the SEC’s 2022 Rule 10b5-1 amendments and the SEC’s comments in related releases about the potential insider trading implications of well-timed gifts  may have had significant and unexpected consequences on corporate R&D expenditures.  Here’s an excerpt from the study’s abstract:

[W]e compare firms whose insiders historically concentrate stock gifts on unusually high-price days with other firms. We find that these treated firms significantly reduce R&D investment following the reform. The effect is strongest where opportunistic gift timing is likely most valuable and where insiders have greater discretion to influence investment policy.

In contrast, we fail to find a corresponding effect for firms whose insiders historically engage in opportunistic Rule 10b5-1 stock sales, helping isolate the gift-disclosure channel from other features of the amendment. Overall, our evidence suggests that a disclosure reform aimed at curbing opportunistic insider behavior had the unintended consequence of reducing corporate risk-taking.

One of the study’s authors summarized its implications in a LinkedIn post:

The key takeaway is that a disclosure reform designed to curb insider opportunism may have had real effects on corporate investment. More broadly, personal tax-planning opportunities can shape insiders’ willingness to support risky corporate policies, and regulatory changes that constrain those opportunities can affect firm decisions in ways that extend well beyond the regulated transaction itself.

– John Jenkins

Companies that are considering the possibility of moving to semiannual reporting have plenty of things to think about. Fortunately, the law firm memos on the SEC’s semiannual reporting proposal are rolling in and are full of helpful insights for these companies and their advisors. Here are a few examples from some of the memos that we’ve received so far:

Weil’s memo discusses the implications of reporting covenants in debt instruments on the ability of companies to opt in to the semiannual reporting regime, and as this excerpt explains, it all depends on how the covenant is written:

– Rule 144A Indentures for companies that are already reporting companies sometimes provide that “whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Trustee and Holders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act, within the time periods specified in such Sections or in the applicable forms.” This formulation should provide flexibility for companies to report on a semiannual basis.

– Other Rule 144A Indentures instead require the issuer to deliver “all annual and quarterly financial statements that would be required to be contained in a filing with the SEC on Forms 10-K and 10-Q if the issuer were required to file such forms” within a specified timeframe. Because the proposed rules do not eliminate Form 10-Q, but instead make the filing of Form 10-Q optional, it is less clear that the issuer could choose not to continue to provide quarterly financial statements under this formulation.

This excerpt from Sidley’s memo discusses the need for companies to consider the seasonality & volatility of their business when deciding on the timing of their periodic reports and voluntary disclosures:

Does the company’s quarterly performance vary dramatically due to seasonality or other factors? Do investors focus on consecutive quarterover-quarter results more than results over corresponding prior-year periods? Companies with results that vary dramatically quarter to quarter would likely face longer trading blackout periods and longer quiet periods under a semiannual reporting regime absent voluntary Form 8-K filings or expanded earnings releases.

Latham’s memo highlights, among other things, the implications of the proposal for current market practice regarding auditor’s comfort letters:

Currently, an auditor’s comfort letter cannot include negative assurance regarding subsequent changes to financial statements as of a date 135 days or more after the most recent balance sheet date of the most recently completed audit or review, under PCAOB Auditing Standard 6101 (formerly SAS 72). The SEC has requested comments on whether to modernize that standard to accommodate semiannual reporting.

Investment banks have traditionally been unwilling to underwrite securities offerings without market-standard comfort letters. As a result, we would expect implementation of semiannual reporting to prompt reconsideration of the 135 day limit in AS 6101 to facilitate traditional comfort letter practice in a world of semiannual reporting.

Hunton’s memo also focuses on the proposal’s implications for capital markets transactions:

We expect market practice around securities offerings to evolve for companies electing to report semi-annually. Even if SEC rules would permit an offering on financial statements that are six months old, underwriters may be less comfortable going to market with interim financial statements older than 135 days.

Other prudential factors may also encourage companies on a six-month reporting schedule to disclose material interim developments. Quarterly ATM programs, for example, may pose unique challenges. Accordingly, companies reporting under a semi-annual cycle may still be motivated to publicize quarterly results or flash numbers, at least when contemplating an offering of securities. Again, practices across industries and companies of different sizes may diverge.

Be sure to check out these and the other law firm memos that we’re posting in our “Form 10-Q/Proposed Form 10-S” Practice Area.

– John Jenkins

According to a recent Barker-Gilmore research report, the way that corporate boards and general counsels work together could use some improvement. The report says that Boards and General Counsel are aligned on outcomes, but operating models for corporate governance haven’t kept pace with the GC’s expanded role.

The report argues that the way to address this issue and strengthen governance & decision-making is by modernizing the norms for how the GC interacts with and accesses members of the board to better reflect the way in which the GC’s role has evolved. The report’s conclusion offers some specific suggestions on how to change existing norms to improve the alignment between boards and GCs:

The research points to a clear opportunity to modernize governance interaction models to reflect the expanded scope of the General Counsel role. Effective models consistently include:

– Explicit expectations that GC input shapes strategy before board materials are finalized
– Normalized, recurring interaction with Committee Chairs and Lead Directors
– Clear CEO–GC alignment on when and how the GC may engage directors directly
– Visible GC ownership within enterprise risk management, M&A documentation, and strategic disclosures
– Use of the Corporate Secretary role to shape agenda flow, executive exposure, and risk framing

Barker Gilmore says that these modernized norms do not dilute CEO authority, but strengthen decision-making “by ensuring risk, governance, and legal judgment are integrated early and visibly.”

– John Jenkins

This BCLP blog offers some advice on topics that should be addressed with the board during cybersecurity briefings. These include discussions of the threat landscape & the company’s risk profile, the potential impact of AI, an overview of the legal and regulatory landscape, an overview of the company’s cybersecurity program, a description of maintenance/improvement activities, and topics for board approval. The blog also offers the following thoughts on private discussions with the CISO & director education efforts:

As part of periodic board briefings, it may be beneficial for the board or committee charged with overseeing cybersecurity to have private sessions with the CISO to discuss topics of material importance away from other management. Interaction between the board and CISO may build trust between the parties, which is critical in the event of a material cyber incident.

In addition to board briefings, a company may also encourage its directors to take continuing education classes on cybersecurity topics, as well as participate in the company’s tabletop exercises to get a better understanding of how significant cybersecurity incidents may be addressed.

– John Jenkins

Last month, the Corp Fin Staff issued a no-action letter to the Bank of England that addressed the U.S. federal securities implications of a proposed approach for addressing bank failures. This Reuters article notes:

The Bank of England updated its guidance on handling bank failures on Monday, introducing an alternative bail-in mechanism that changes how bondholders are compensated during a rescue, after securing assurances from U.S. regulators.

The BoE said ‌it had received a no-action letter from U.S. regulators, assuring it that U.S. authorities would not pursue enforcement action over use of the new mechanism.

The new guidance was supported by lessons learned ​from the failures of Credit Suisse and Silicon Valley Bank, the BoE said.

Under ​the new approach, bondholders whose debt is wiped out or converted ⁠as part of a bank rescue will first receive temporary placeholder rights rather than ​shares in the rescued bank.

These rights, known as PROPPs, are a provisional entitlement that ​will later be converted into actual shares in the recapitalised bank once regulators have worked out exactly how much each creditor is owed.

“The key addition is the introduction of an alternate approach to ​bail-in where affected creditors receive non-transferable contingent beneficial interests,” the BoE said in a ​statement.

The Mayer Brown Free Writings + Perspectives blog describes the Bank of England’s request for no-action relief as follows:

The PROPPs Mechanism

In the scenario described in the Incoming Letter, as part of the Bail-In [a process used by a resolution authority to recapitalize a failing financial institution without using taxpayer funds], all ordinary shares of the failed Firm would be transferred to either the BoE or a third-party depositary bank, in each case with no consideration payable and without the consent of the holders of such ordinary shares. This process was distinct from Credit Suisse’s resolution, during which its Additional Tier 1 capital securities were written down despite the common stock remaining outstanding and even being entitled to receive proceeds from the sale of that bank. The voting rights pertaining to the ordinary shares of the failed Firm will be exercisable by either the “resolution administrator” of the failed Firm appointed pursuant to the “Bail-In Resolution Instrument,” or alternatively by the BoE. The BoE would then determine a structure for how the failed Firm’s liabilities that are subject to the Bail-In, including the Bail-In Securities, would be written-down. The BoE has established a structure whereby the holders of Bail-In Securities that have been or will be written-down would be granted contingent beneficial interests, created by virtue of the Bail-In Resolution Instrument, which would entitle such holders to the delivery of ordinary shares of the Firm after the resolution, or alternatively, if applicable, the receipt of the net cash proceeds derived from the sale of the ordinary shares. These interests are referred to as Potential Rights to Onward Property or Proceeds (“PROPPs”). Once the Bail-In process has been concluded and each class of PROPPs has been valued, some PROPPs may be converted into equity securities of the post-resolution Firm. The BoE’s question was whether the exchange or conversion process was exempt from registration under Section 3(a)(9) of the Securities Act.

Section 3(a)(9) Exemption

Section 3(a)(9) exempts from registration “any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly by or indirectly for soliciting such exchange.” The BoE was of the opinion that the exchange of ordinary shares in a failing Firm with the holders of Bail-In Securities would satisfy the requirements of Section 3(a)(9) in a case where the exchange is effectuated through the PROPPs mechanism. TheStaff concluded that it would not recommend enforcement action if a Firm, as part of the Bail-In process, (1) exchanges its Bail-In Securities for non-transferable PROPPs; and (2) subsequently exchanges those PROPPs for ordinary shares in the resolved Firm without registration under the Securities Act, in reliance on an opinion of counsel that the exemption provided in Section 3(a)(9) is available.

In its no-action letter, the Staff stated:

Based on the facts presented, the Division will not recommend enforcement action to the Commission if a Firm (1) exchanges its Bail-In Securities for non-transferable PROPPs and; (2) subsequently exchanges those PROPPs for ordinary shares in the resolved Firm without registration under the Securities Act, in reliance on your opinion of counsel that the exemption provided in Securities Act Section 3(a)(9) is available.

In a statement released on the same day that the no-action letter was published, SEC Chairman Paul Atkins directed the Staff to prepare a rulemaking for consideration by the Commission that would provide an exemption from registration under Section 5 of the Securities Act for bank bail-in frameworks beyond the Bank of England situation, stating:

I am pleased that the Division has issued the letter in response to the Bank of England’s request. However, there is a wide range of bank bail-in frameworks used globally. To account for these various frameworks and to provide for a more certain and authoritative solution, I have instructed the Division to prepare a rulemaking recommendation to the Commission regarding a potential exemption from the Securities Act’s registration requirements, for securities offered and sold in connection with a regulatory bail-in.

Until the Commission takes up any such rulemaking, I encourage other foreign regulators and regulated firms to contact the Division to discuss their particular bail-in processes or frameworks.

And with that directive there is yet one more rulemaking piled on Corp Fin’s already overflowing plate!

– Dave Lynn

Zach Barlow recently noted on the PracticalESG blog that 23 State Attorneys General sent a letter to Fitch, Moody’s, and S&P Global addressing downgrades of the credit ratings for fossil fuel companies. In the letter, the AGs claim that that the ratings agencies have unjustly and unlawfully used ESG criteria in their credit rating decisions. For example, the letter states:

Based on the same flawed “energy transition” and “increasing regulations” ESG predictions, S&P claimed that fossil-fuel-producing states’ economies were only improving “for now,” and projected that those states would face a more “prolonged economic recovery,” lagging behind other states. The Ratings Agencies continue to use ESG factors to weigh down ratings for fossil-fuel-producing states and municipalities, even after the Ratings Agencies’ ESG-driven predictions have proven to be incorrect. These methodological departures and conflicts of interest harm state economies, tax revenues, and investments.

Zach notes in the blog:

The AGs allege that ratings agencies adopted undisclosed UN PRI pledges. They argue that this, in conjunction with the agencies’ ESG consulting arms, created conflicts of interest in violation of SEC rules. They are requesting that the ratings firms withdraw from ESG commitments. Along with the letter, the AGs provide a list of 27 interrogatories that ask about how firms consider ESG factors in their credit ratings. The AGs warn that if their demands are not met, they will bring state legal action or refer the credit agencies to federal regulators.

If you do not have access to the complete range of benefits and resources on PracticalESG.com, be sure to sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.

– Dave Lynn

Meredith recently noted on the Proxy Season Blog that, following the enactment of the Texas law last year that imposes regulations on proxy advisory firms, other states have enacted their own “copycat” laws, and those laws are now being challenged with lawsuits. The blog notes that Glass Lewis recently announced that it has commenced litigation against Indiana, while ISS filed a lawsuit against Kansas challenging its copycat law. These laws are scheduled to take effect July 1, 2026. Bloomberg Law reports:

The state laws also ignore a crucial fact, ISS said in its complaints against Kansas and Indiana: Many issues that come up at annual meetings don’t lend themselves to financial analyses, such as whether to reelect a board member who has missed too many meetings.

Glass Lewis cited a similar concern in its litigation: “There is no obvious way to assign a dollar figure to a vote for one director over another, a vote to ratify or reject a particular auditor, or a vote for or against a nonbinding shareholder proposal,” according to its Indiana complaint.

The two firms said they aren’t only concerned about a compliance hassle—though Glass Lewis said the burden would likely be overwhelming. They’re concerned about what compliance actually means.

Terms of the state laws are too vague, ISS and Glass Lewis both said.

Note that only members of the TheCorporateCounsel.net can access the Proxy Season Blog. If you are not a member, email info@ccrcorp.com to sign up today or call us at 800.737.1271.

– Dave Lynn

The SEC’s optional semiannual reporting proposal for public companies was released on Tuesday, and with the benefit of some time, we can now reflect on some of the finer details of the proposal.

Rationale

In the proposing release, the Commission recounts the history of interim period reporting under the U.S. federal securities laws, noting that the SEC had initially moved from an early quarterly reporting regime to a semiannual reporting approach in 1953, and then revisited that decision in 1970 by adopting Form 10-Q and the quarterly reporting system that is in place today. In terms of the potential benefits of optional semiannual reporting, the SEC notes in the proposing release:

Companies that elect semiannual interim reporting may see a reduction in compliance costs of time and money, as they would incur these interim reporting costs only one time in connection with each fiscal year instead of three times in connection with each fiscal year pursuant to quarterly reporting. These companies could then choose to dedicate any compliance cost and resource savings to their business growth. Other potential benefits of semiannual reporting include: less distraction from running the day-to-day business; reallocation of attention from interim reporting to company strategy; additional time spent on new product development; and ability to engage in transactions that might not be possible when management is focused on preparing interim reports. To the extent that companies could not previously do so due to quarterly reporting, companies electing semiannual reporting may employ business strategies that may help ensure these companies’ long-term viability. In particular, emerging growth companies and smaller reporting companies may value having the flexibility to select the interim reporting requirement that is most appropriate for them and their investors. Additionally, reducing the compliance costs associated with quarterly reporting may contribute to more private companies deciding to enter the public markets and more companies deciding to remain public. Further, the flexibility provided in the proposal may appeal to companies in certain industries where investors may focus more on certain business, product, or regulatory developments than interim financial results.

Applicability

The SEC’s proposal would permit semiannual reports for all Exchange Act reporting companies that file Form 10-Q today, regardless of filer status, revenues, market capitalization, or other criteria. The Commission solicits comment as to whether the option for semiannual reporting should be available only for Exchange Act reporting companies that satisfy certain criteria.

Earnings Release Practices

The Commission makes the point in the proposing release that this proposal does not contemplate any general changes to the current regulatory requirements governing earnings releases or earnings guidance practices. The SEC notes that “federal securities laws do not impose general duties upon Exchange Act reporting companies to announce or publish earnings, conduct earnings calls, or issue earnings guidance.” The proposing release notes that, while the proposed rule changes are focused on the specific issue of the frequency of interim reporting, the Commission would welcome comments on the impact of the proposal on voluntary earnings release practices.

Other Rule and Standard Changes

The Commission notes that, if the proposal is adopted, changes may be necessary to existing stock exchange rules and accounting and auditing standards, and the proposing release notes that the Commission staff would coordinate any such changes with accounting and auditing standard-setters, securities exchanges, and other market participants. The proposing release seeks comment on what exchange rules and accounting and auditing standards may be impacted by the adoption of optional semiannual reporting. Similarly, the proposing release recognizes that regulations of other Federal agencies reference quarterly SEC reports, and therefore such agencies may need to change their regulations in the event that the SEC moves forward with the shift to optional semiannual reporting.

More Cover Page Check Boxes!

The proposing release contemplates adding a check box to the cover page of certain forms that would allow an issuer to elect to provide semiannual reports if the box is checked. If the box is not checked, the issuer will be subject to the “default” reporting regime of filing one Form 10-K and three Form 10-Qs for each fiscal year. The check box would be added to Form 10-K, as well as registration statements on Forms S-1, S-3, S-4, and S-11 and Form 10. The proposing release notes:

Companies that have yet to file Exchange Act reports, such as private companies conducting initial public offerings, would make initial elections to use semiannual reporting by checking the box on the cover page of the registration statement filed. This election would determine what financial statements are required in the registration statement and indicate the company’s planned interim reporting frequency to investors and other market participants. Similar to current requirements for the first quarterly report for companies that have newly become Exchange Act reporting companies, the first semiannual report on Form 10-S would be due the later of 45 days after the effective date of the registration statement or the date that Form 10-S would otherwise have been due had the company been an Exchange Act reporting company.

Correcting a Check Box Mistake

Recognizing the possibility that a company may mistakenly leave the check box unmarked or incorrectly mark the check box, the SEC proposes to amend Rule 13a-13(b) and Rule 15d-13(b) to permit companies to amend their Form 10-K to correct any such inadvertent mistakes. The proposing release notes that the corrective amendments would be required to be filed as soon as practicable after discovery of the mistake, but no later than the due date by which the company’s first Form 10-Q report would be required to be filed for the fiscal year in which the initial Form 10-K with the erroneous election was filed.

Changing Your Mind

The proposed optional semiannual reporting approach would permit a change in interim reporting frequency (either from quarterly to semiannually or vice versa) to be indicated on a Form 10-K by checking the box on the cover page to file semiannually or leaving the box unchecked to file quarterly. The proposal contemplates that the determination to report semiannually or quarterly would thus be made on an annual basis and may not be changed until the next Form 10-K annual report is filed. Companies would be required to file interim reports based on the chosen frequency, beginning with the report for the first interim period of the fiscal year in which the Form 10-K with the election was filed. The proposing release includes a number of examples explaining how this would work if the proposed amendments were adopted.

Amendments to Regulation S-X

The Commission is proposing amendments to various rules in Regulation S-X that would incorporate semiannual reporting and simplify the rules with respect to the age of financial statements. Specifically, the proposed amendments would:

– Simplify Rule 3-01 and Rule 8-08 by reorganizing each and consolidating the requirements of Rule 3-12 regarding the age of financial statements in a registration or proxy statement into the balance sheet requirements of Rule 3-01;

– Revise the age of financial statements requirements to incorporate semiannual reporting through the introduction of a revised model for determining the age of interim financial statements; and

– Revise other rules in Regulation S-X to incorporate semiannual reporting.

The Commission’s proposed consolidation of Rules 3-01 and 3-12 would streamline Regulation S-X, which the proposing release says would make the age of financial statement requirements easier to apply. The SEC is proposing to adopt new Rule 3-01(a), which would provide that the date of the most recent balance sheet included in a registration statement or proxy statement must be updated to comply with that section’s requirements as if the effective date of the registration statement, or proposed mailing date in the case of a proxy statement, were the filing date.

Transition Reports and Technical Amendments

The Commission proposes amendments to Exchange Act Rules 13a-10 and 15d-10, which set forth the Commission’s requirements with respect to transition reports upon a change in fiscal year, to incorporate the proposed semiannual reporting option. The Commission is also proposing a wide range of technical amendments to conform existing rules and forms to incorporate the proposed optional semiannual reporting frequency.

Comments

The proposing release includes numerous specific questions about a wide range of topics concerning the move to optional semiannual reporting, as well as more general requests for comment. Comments will be due within 60 days from publication of the proposing release in the Federal Register.

– Dave Lynn

The CAQ’s SEC Regulations Committee meets periodically with the SEC Staff to discuss emerging financial reporting issues relating to SEC rules and regulations. The CAQ recently published the highlights from the joint meeting of the SEC Regulations Committee and the Staff that took place on March 12, 2026. The topics addressed include:

– Smaller Reporting Company status following a change in fiscal year end;

– Smaller Reporting Company status determination when annual revenues previously exceeded $100 million;

– Corporation Finance Interpretations 130.05 and filer status determination upon consummation of a de-SPAC transaction; and

– Filing interim financial information for private operating company when a reverse merger between two operating companies occurs after fiscal quarter end, but before Form 10-Q is due.

As always, these highlights offer useful insights into the Staff’s approach on a wide range of financial reporting issues.

– Dave Lynn