Nasdaq Board Diversity Rule Vacated by the Fifth Circuit

On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit issued a majority opinion that vacated the SEC’s order approving Nasdaq’s board diversity listing rule (the “rule”). The opinion means that Nasdaq-listed companies need not comply with the rule, which required all companies listed on Nasdaq’s U.S. exchange, including foreign private issuers, to publicly disclose diversity statistics regarding their boards of directors and to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an “underrepresented minority” or “LGBTQ+.”

The rule was challenged by several conservative groups, including the Alliance for Fair Board Recruitment and the National Center for Public Policy Research, who argued, among other things, that it violated federal securities law.

The court held that the SEC failed to justify its determination that the rule was consistent with the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which the rule must do before approving a proposed Nasdaq regulation. The SEC argued that the rule furthered the purposes of the Exchange Act, in particular, (i) promoting just and equitable principles of trade, (ii) removing impediments to and perfecting the mechanism of a free and open market and a national market system and (iii) protecting investors and the public interest, “because [the rule] will make available the information that some investors want.” However, those purposes, the court concluded, “bear no relationship to the disclosure of information about the racial, gender, and sexual characteristics of the directors of public companies.” The court stated that “no part of the Exchange Act even hints at [the] SEC’s purported power to remake corporate boards using diversity factors” and that the SEC’s approval of the rule had “intruded into territory far outside its ordinary domain.”

The opinion wades into the hotly debated topic of diversity, equity and inclusion (“DEI”) initiatives at a time when many public companies are navigating the attention that DEI commitments are drawing from activists and shareholders. As the court noted, nothing prevents companies from voluntarily disclosing—or even advertising—their directors’ social, demographic, political or any other characteristics if they believe that shareholders want that information.

The decision places Nasdaq and New York Stock Exchange-listed companies back on the same playing field—both without diversity disclosure requirements. Similarly, in December 2024, asset manager BlackRock released updated proxy voting guidelines for benchmark policies, removing a previous recommendation that boards aspire to have at least 30% of their directors be diverse. However, in response to proxy advisor guidelines and institutional shareholder interest, many public companies have begun providing voluntary disclosure relating to board diversity. As such, the practical impact of the court’s decision on DEI disclosure remains to be seen.

The Fifth Circuit’s opinion is available here. For more information, see Debevoise Insights.

Key Considerations for the 2025 Proxy Season

With proxy season approaching, public companies should consider the following key areas when preparing proxy statements for their 2025 annual meetings, including the timing of new insider trading and equity grant disclosure, pay-versus-performance disclosure and the development and disclosure of governance structures to identify and manage AI-related risks.

Regulatory Updates:

1. Equity Grant Disclosure Requirements
   
   Effective for fiscal years beginning after April 30, 2023, calendar year-end public companies must comply with new disclosure requirements relating to stock option awards and stock appreciation right (“SAR”) awards granted close in time to a company’s release of material non-public information (“MNPI”). Like other executive compensation disclosure, the information required—under Item 402(x) of Regulation S-K—may be incorporated by reference into Form 10-K from a definitive proxy statement if the proxy statement is filed within 120 days of the end of the fiscal year. For more detailed guidance regarding the disclosure requirements under Item 402(x) of Regulation S-K, please refer to our Debevoise Update—SEC Disclosure Requirements for Equity Grants: What You Need to Know for 2024.

2. Pay-versus-Performance
   
   The 2025 proxy season will be the third year that public companies are required to make pay-versus-performance disclosure under Item 402(v) of Regulation S-K. Comment letters issued by the Division during 2024 generally show that the Division is conducting a close review of pay-versus-performance disclosures, including probing calculations of compensation actually paid. Companies should ensure the numbers reported in the pay-versus-performance table are accurate and the accompanying footnotes and relationship disclosures comply with Item 402(v) of Regulation S-K. For a detailed discussion on the final pay-versus-performance disclosure rules, please refer to our Debevoise In Depth—Final Pay-versus-Performance Disclosure Rules: Compliance Q&As. Our Debevoise Updates from February 2023, September 2023 and November 2023 describe the Compliance & Disclosure Interpretations published by the SEC since Item 402(v) was finalized.

3. Insider Trading Policies and Procedures
   
   For public companies with a calendar year-end, compliance with the new disclosure requirements relating to insider trading policies and procedures begins with the 2024 Form 10-K or Form 20-F or related proxy statement.

   Under Item 408(b), public companies must disclose whether they have adopted insider trading policies and procedures governing trading in the company’s securities by employees, officers or directors, or by the company itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations and any applicable listing standards. Companies that have not adopted such policies and procedures are required to explain why they have not done so. Although this disclosure is required by Form 10-K, it may be incorporated by reference from a definitive proxy statement if the proxy statement is filed within 120 days of the end of the fiscal year. 

   For more information and recommendations on how to comply with the disclosure requirements under Item 408(b) of Regulation S-K, please refer to our Debevoise In Depth—Key Considerations for the 2024 Annual Reporting Season.

4. Cybersecurity Disclosure
   
   Although companies are not required to include cybersecurity-related disclosure in their proxy statements, companies should consider whether, in describing the board’s leadership structure and administration of risk oversight in the proxy statement, it is appropriate to refer to the board’s oversight of cybersecurity. Many companies already take this approach, and those that do should ensure that their cybersecurity risk management and governance disclosures are consistent across their SEC filings and other publicly available information.

   For more information on best practices regarding cybersecurity disclosures and trends in risk management and governance, please refer to the Recap of Cybersecurity Disclosures section in our Debevoise In Depth—Key Considerations for the 2024 Annual Reporting Season.

5. AI Board Risk Management and Governance
   
   As the use of artificial intelligence (“AI”) becomes more prevalent, investors may expect companies in industries that are significantly impacted by AI to include disclosure about board risk management and governance of AI in their proxy statements. Notably, investor focus on AI increased in 2024, commensurate with increased disclosures by companies regarding their use of or plans to use AI in their business operations. Twelve shareholder proposals relating to AI were submitted as of June 30, 2024, as compared to four in 2023. 

   For companies that use or are testing the use of AI, having an effective, risk-based governance program will be important when facing investor scrutiny of AI disclosures.

   For further discussion of AI governance considerations, see the Data Blog of our Data, Strategy and Security practice.

6. SEC Changes to EDGAR System
   
   Enrollment for the SEC’s new EDGAR filer access and account management system (“EDGAR Next”) opens on March 24, 2025. Although proxy statements for 2025 annual meetings for calendar year-end reporting companies will not need to be filed through EDGAR Next, companies would be well advised to consider what actions they should take to prepare for EDGAR Next. Companies can prepare for the transition through trialing the beta system, which is currently open and allows testers to use EDGAR Next functions using fictitious data.

All filers will need to have enrolled in EDGAR Next by September 15, 2025. While enrollment opens in March, filers who do not enroll will still be able to file through the legacy EDGAR system until September 12, 2025. Importantly, filers who are not enrolled in EDGAR Next by December 19, 2025 will be required to submit an amended Form ID to access and make submissions on EDGAR, which may result in a delay in filing.

Key Takeaways:

• Beginning with the 2025 proxy season, calendar year-end public companies will need to comply with the new equity grant and insider trading disclosures required by Item 402(x) and Item 408(b).

• In light of recent U.S. Securities and Exchange Commission (the “SEC”) guidance, companies’ pay-versus-performance disclosure should (1) explain the relationship between executive compensation and each company performance metric, (2) disclose GAAP net income as reported in the audited income statement and (3) disclose how company-selected non-GAAP measures used to link executive compensation to company performance are calculated from the audited financial statements.

• Companies should consider whether, in describing the board’s leadership structure and administration of risk oversight, it is appropriate to refer to the board’s oversight of cybersecurity. If making such disclosure, companies should ensure that it is consistent across their SEC filings and other publicly available information.

• Following an increase in investor focus on AI in 2024, companies that use or are testing the use of AI should evaluate whether they have an effective, risk-based governance program that will stand up to investor scrutiny.

For more information, practical tips and an analysis of trends from the 2024 proxy season, see Debevoise Insights.

2025 Executive Compensation Reminders for Public Companies

As the 2025 executive compensation season approaches, public companies face a swiftly evolving regulatory and market landscape. Heightened scrutiny of perquisites (“perks”) and environmental, social and governance (“ESG”) metrics, shifting noncompete laws, and enhanced disclosure obligations for option awards mean compensation committees, in-house counsel and HR professionals must anticipate and respond to emerging challenges. Below are nine key issues and reminders to guide compensation planning and disclosure for 2025.

1. Understand SEC disclosure and tax implications of executive and director perks;
2. Revisit ESG (including diversity, equity and inclusion) goals in short- and long-term incentive plans;
3. Enhance disclosure for adjustments to non-generally accepted accounting principle (GAAP) metrics that increase incentive payouts;
4. Comply with new disclosure requirements for timing of option awards;
5. Prepare for the third year of pay-versus-performance disclosures;
6. Assess next steps on Dodd-Frank clawback policies and recovery analyses;
7. Consider expanding clawback policies beyond Dodd-Frank minimum requirements;
8. Monitor noncompete developments and reassess restrictive covenant programs.

For more information, see Debevoise Insights.

Preparing for EDGAR Next: What Filers Should Do Now

On September 27, 2024, the SEC adopted rule and form amendments to the Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system designed to improve access to and management of EDGAR accounts (referred to as “EDGAR Next”). All rule and form amendments will be effective on March 24, 2025, and filers will be required to comply by September 15, 2025. EDGAR Next will impact all electronic filers, including:

• SEC reporting companies, including public companies;

• Section 16 officers and directors;

• Shareholders with filing obligations (e.g., Schedule 13D, Schedule 13G, Form 13F, Form 144);

• Investment funds; and

• Third-party filing agents.

• We expect that transitioning to EDGAR Next will require significant coordination and, as such, public companies and other EDGAR filers should begin planning now.

Each filer will be required to have their own EDGAR Next account. Under the new system, each filer must authorize and maintain at least two (or one, in the case of individuals and single-member companies), and up to 20 individuals, with individual account credentials as “account administrators” to manage the filer’s EDGAR account and make submissions on EDGAR on behalf of the filer. Account administrators may also authorize and de-authorize additional individuals as account administrators or “users”. Users will only be able to access the filer’s EDGAR account to make filings on behalf of the filer and will not otherwise be able to alter the filer’s EDGAR account.

Additionally, the new EDGAR system will offer optional Application Programming Interfaces (“APIs”), a machine-to-machine method of making submissions, retrieving information and performing account-management tasks. Account administrators will need to authorize at least two technical administrators to manage technical matters related to the APIs. Finally, Form ID, the application for obtaining access to EDGAR, will be modernized to make the form more user-friendly.

A webinar on EDGAR Next, focusing on Section 16 filers, is scheduled for January 23, 2025 and can be registered for here. The SEC has provided and is expected to continue to provide materials to assist with the transition which are available on the EDGAR Next website.

SEC Settles Charges Against Multiple Entities for Failing to Timely File Forms D

On December 20, 2024, the SEC announced charges against two private companies and one registered investment adviser for failing to timely file Forms D for several unregistered securities offerings, in violation of Rule 503 of Regulation D, in connection with nearly $300 million of unregistered securities offerings. The entities charged were GRID 202 LLC, a registered investment adviser which does business as Re-Envision Wealth, Pipe Technologies Inc., a privately held financial technology company and Underdog Sports Holdings, Inc., a privately held corporation that operates an online fantasy sports website and mobile app. Re-Envision Wealth, Pipe Technologies and Underdog Sports were required to pay the respective civil penalties of $60,000, $195,000 and $175,000.

For more information, see the SEC orders with respect to Re-Envision Wealth,Pipe Technologiesand Underdog Sports.

SEC Charges Canadian Audit Firm with Violating Auditor Independence Rules

On December 19, 2024, the SEC charged Vancouver-based audit firm Davidson & Company LLP (“Davidson”) and two of its partners, Erez Bahar and Grant Block, with violating auditor independence rules. The SEC’s order (the “Order”) found that Davidson failed to comply with partner rotation requirements while engaged as the independent auditor for nine U.S.-issuer clients.

Under applicable securities and accounting rules, audit partners who serve as lead or concurring partners must rotate off engagements after certain periods of time in order to maintain auditor independence. The Order found that between 2019 and 2023, certain of Davidson’s partners, including Bahar and Block, failed to rotate off their audit engagements, which impaired Davidson’s independence on 11 annual audits and 26 interim reviews, further causing the issuer clients to violate their reporting obligations. The Order also found that Davidson had a deficient system of quality controls, monitoring and firm management, leading to these violations.

The SEC’s Order found that Davidson violated, and Bahar and Block caused Davidson’s violations of, Section 10A(j) of the Exchange Act and Rule 10A-2 thereunder and Rule 2-02(b)(1) of Regulation S-X. The Order also found that Davidson, Bahar and Block caused certain of the issuer clients to violate Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder. Without admitting or denying these findings, Davidson, Bahar and Block agreed to cease and desist from future violations and to pay civil penalties of $265,000, $25,000 and $20,000, respectively. Davidson also agreed to engage a compliance consultant to review, test and evaluate its partner rotation controls. 

FINRA Requests Comment on Proposed Changes to Corporate Financing Rules

FINRA has announced that it is seeking comment on proposed amendments to FINRA Rules 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements), 5121 (Public Offerings of Securities With Conflicts of Interest) and 5123 (Private Placements of Securities).

In May 2023, FINRA published Regulatory Notice 23-09 to request comments on rules, operations and administrative processes that impact capital formation. FINRA received feedback on Notice 23-09, and is now seeking comment on proposed amendments to Rules 5110, 5121 and 5123 that would (i) clarify how Rule 5110 regulates underwriting compensation, including valuations of and exemptions to securities acquisitions that are considered underwriting compensation; (ii) simplify compliance with and operation of Rule 5121 through the clarification of the substantive requirements for a conflicted member and a Qualified Independent Underwriter; and (iii) expand exemptions that are available under Rule 5123 to include offerings that are sold to accredited investors in certain family offices and certain entities with over $5 million assets under management, which aligns with SEC treatment of such categories.

FINRA is requesting comments on all aspects of the proposal and asks that commenters provide empirical data or other factual support for their comments where possible. Comments to the proposed amendments must be received by March 20, 2025, and can be submitted online, via email, or via hard copy notice.

FASB Seeks Public Comment on Proposed Accounting for and Disclosure of Environmental Credit

On December 17, 2024, the Financial Accounting Standards Board (“FASB”) published a proposed Accounting Standards Update (“ASU”) to improve financial accounting for, and disclosure related to, environmental credits and environmental credit obligations.

The proposed ASU was published in response to the FASB’s 2021 agenda consultation project and other outreaches, where stakeholders highlighted the increase for certain entities in applicable government mandates and regulatory compliance programs related to emissions. Entities can receive environmental credits through the settlement of obligations arising from these mandates and programs and can also voluntarily purchase environmental credits from third parties. As there are currently no generally accepted accounting principles that offer specific guidance on how to recognize and measure financial activity related to environmental credits, reporting of these credits has been varied in practice. The proposed ASU aims to standardize disclosure for entities that purchase or hold environmental credits, addressing only amounts that are reported in financial statements. Voluntary emissions or actual greenhouse gas emissions are not addressed by the FASB or the proposed ASU.

FASB is seeking public comment from stakeholders on the proposed ASU by April 15, 2025.

FCA Publishes Consultation Paper on PISCES

On December 17, 2024, the UK Financial Conduct Authority (the “FCA”) published Consultation Paper CP24/29 (the “Proposal”), which sets out its proposed approach, objectives and regulatory framework for the Private Intermittent Securities and Capital Exchange System (“PISCES”), a new trading platform, to be operated by various market participants, intended to facilitate trading shares of private companies. The publication follows HM Treasury’s consultation paper on PISCES published in March 2024 (available here) and the UK government’s response published on November 14, 2024 (available here).

PISCES is intended to give employees, early investors, venture capital firms, private equity firms and other investors a path to liquidity for their investment in a private company that does not include a traditional listing on a public market or an M&A transaction. The deadline for comments on the Proposal is February 17, 2025. The FCA, in close partnership with HM Treasury, aims to launch PISCES by May 2025, following publication of the final rules.

Key Proposals

The key elements of the Proposal include:

1. Core Disclosures
   
   Companies would be required to disclose a standardized set of core information sufficiently in advance of the relevant PISCES trading event to those potential investors who have the ability to participate in the event. Such core information is expected to correspond to the type of information investors would typically expect to receive in connection with an investment in a private company. While PISCES operators would not be expected to monitor companies’ compliance with disclosure obligations, they would be required to notify the FCA if they suspect or have reasonable grounds to believe that disclosures include misleading statements.
2. Additional Disclosure Arrangements
   
   PISCES operators would be required to ensure appropriate disclosure arrangements for their market’s efficient and effective functioning, but with flexibility to adapt to different PISCES business models. For example, rules could require disclosure of information considered by the board of directors of a company to be relevant to investors (a so-called “sweeper-model” requirement) or information in response to specific investor requests (an “ask-model”).
3. Higher Standard for Disclosure-Related Liability
   
   Core information would be subject to a negligence standard, and forward-looking statements and other additional information provided through PISCES disclosure arrangements would be subject to a recklessness or dishonesty standard. The FCA has rule-making authority to specify the definition of a “forward-looking statement” for the PISCES regime, which is expected to include financial forecasts and details of a company’s business strategy for the upcoming 12 months.
4. Trading Events
   
   PISCES platforms would operate as multilateral systems, but they would not be trading venues as defined under the UK version of the Markets in Financial Instruments Regulation. PISCES operators would not be subject to the regulations that apply to multilateral trading facilities, but would be subject to a bespoke regulatory regime to be set out in the FCA’s new PISCES sourcebook. On PISCES platforms, private companies would have a higher degree of control over the trading of, and disclosure of information on, their shares than is currently possible for shares admitted to trading on public markets.
5. Price Parameters and Data Transparency
   
   PISCES operators would be required to make certain pricing information available to all investors that can trade in the trading event. Such information would include the current bid and offer prices, the interest at these prices and the information on the transactions executed on the platform, in as close to real time as possible.
6. Restrictions on Access to Trading Events
   
   Access to a trading event could be limited by a company, but only if there is a legitimate commercial interest of the company that requires promotion or protection. Examples of legitimate criteria would include restrictions on competitors of the company, investors from certain jurisdictions or particular types of investors (for example, employees or existing shareholders).
7. Market Risk
   
   As acknowledged by the Proposal, trading on PISCES will involve higher risks for investors than trading in public markets. As such, the Proposal contemplates that PISCES operators apply a market risk warning as part of any disclosure information that companies disseminate on the applicable PISCES platform, noting, among other things, that the investment is of a high risk and the investors may lose all their money. The mandated risk warning would also note that the company disclosures are subject to a different liability regime and that UK Market Abuse Regulation does not apply to shares traded on PISCES.
8. Prohibitions on Manipulative Trading Practices
   
   PISCES operators are proposed to be subject to existing obligations applicable to trading venue operators to ensure fair and orderly trading on their platform. The FCA did not specify types of manipulative trading practices that PISCES operators should prohibit in the Proposal. Instead, the Proposal states that PISCES sandbox applicants should provide a comprehensive assessment of their rules and arrangements for detecting and preventing manipulative trading practices. The FCA also proposes that operators should consider interventions to protect market integrity if they become aware of manipulative trading practices on their platforms, such as postponing, suspending or terminating a trading event.

Key Takeaways

The Proposal attempts to strike a balance between a self-regulatory approach embedded in the rules to be adopted by each of the PISCES operators and a regulatory framework to be set out in the statutory instrument. The FCA proposes to implement PISCES through a Financial Market Infrastructure sandbox, enabling the framework to be tested and fine-tuned over a five-year period in order to balance innovation with appropriate regulatory oversight, ensuring that the platform meets the needs of companies and investors while maintaining market integrity.

At the same time, important details of the PISCES regime remain subject to rules to be adopted by specific PISCES operators. The approach to disclosure of various categories of information required by the PISCES regime remains to be tested, and it is unclear at the moment whether PISCES, as currently proposed by the FCA, will be utilized by companies and investors.

For more information, see Debevoise Insights.

SEC Rule-Making Agenda

The SEC’s Spring 2024 Regulatory Agenda was posted on July 8, 2024, and a summary of these key rule changes is included below. On October 17, 2024, the SEC approved the publication of an agenda of its rulemaking actions for publication in Fall 2024, which was expected to be released by January 2025. However, we expect the SEC’s regulatory agenda and timing to be impacted by the incoming administration’s personnel and priorities. For more information, see the full regulatory agenda here.

Title	Stage of Rulemaking	Expected Release Date
Incentive-Based Compensation Arrangements	Proposed Rule Stage	April 2025
Foreign Issuer Reporting Modernization
Corporate Board Diversity	Proposed Rule Stage	October 2025
Rule 144 Holding Period
Human Capital Management Disclosure
Regulation D and Form D Improvements
Revisions to Definition of Securities Held of Record
EDGAR Filer Access and Account Management	Final Rule Stage	December 2024
Financial Data Transparency Act Joint Data Standards
Amendments to Exchange Act Rule 3b-16 re Definition of “Exchange”; Regulation ATS and Regulation SCI for ATSs That Trade U.S. Government Securities, NMS Stocks and Other Securities
Electronic Submission of Certain Materials Under the Securities Exchange Act of 1934; Amendments Regarding FOCUS Report
Cybersecurity Risk Management Rules for Broker-Dealers, Clearing Agencies, MSBSPs, the MSRB, National Securities Associations, National Securities Exchanges, SBSDRs, SBS Dealers, and Transfer Agents
Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers	Final Rule Stage	March 2025
Reporting of Security-Based Swap Positions	Final Rule Stage	April 2025
Rule 14a-8 Amendments	Final Rule Stage	October 2025
Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices
Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies
Volume-Based Exchange Transaction Pricing for NMS Stocks

 

PCAOB Standard-Setting and Rule-Making Agenda

On November 4, 2024, the PCAOB released standard-setting and rule-making agendas for the remainder of 2024 and 2025, and a summary of these key changes is included below. For more information, see the full regulatory agenda here.

Recently Completed and Pending Standard Setting Projects
Project	Date of PCAOB Adoption	Date of SEC Approval
Firm and Engagement Metrics	November 21, 2024	Pending
Short-Term Standard Setting Projects
Project	Next PCAOB Action	Anticipated Timing
Noncompliance with Laws and Regulations (NOCLAR)	TBD pending analysis of comment letters on June 6, 2023 proposal and March 6, 2024 Roundtable, and responses to targeted inquiries of firms about their approach relating to noncompliance with laws and regulations or illegal acts	2025
Attestation Standards Update	Proposal	2025
Going Concern	Proposal	2025
Substantive Analytics Procedures	Adoption	2025
Inventory	Proposal	2025
Recently Completed and Pending Rulemaking Projects
Project	Date of PCAOB Adoption	Date of SEC Approval
Registration (Constructive Requests to Withdraw from Registration)	November 14, 2024	Pending
Firm Reporting	November 21, 2024	Pending

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.