Understanding Item 402(x) of Regulation S-K

Item 402(x) of Regulation S-K, introduced by the U.S. Securities and Exchange Commission (SEC) on Dec. 14, 2022, and effective for 2024 proxy statements, requires that public companies disclose detailed information about their policies and practices concerning the timing of grants of options and stock appreciation rights (SARs).

These disclosure requirements aim to enhance transparency in the timing of equity grants to executives and ensure that investors are aware of any potential influence of material non-public information (MNPI) on compensation decisions. Specifically, Item 402(x) seeks to prevent the timing of equity grants around MNPI releases from providing executives with a benefit due to immediate stock valuation changes when MNPI is disclosed. Item 402(x) introduces new narrative and tabular disclosure requirements to help investors understand whether timing considerations influenced executive compensation decisions.

New Narrative Disclosure

The narrative disclosure requires that companies explain their policies and practices related to the timing of equity awards, particularly stock options and SARs, in relation to MNPI releases. Companies must provide this disclosure even if no grants were made close to an MNPI release. Key points to address in the narrative include:

• Grant Timing Policies. Discuss the company's policies for granting equity awards and how grant timing is determined.
• Consideration of MNPI. Indicate whether MNPI is considered by the company when timing award grants.
• Timing of MNPI Releases. State whether the company has timed its release of MNPI with the intent to affect the value of executive compensation.

This narrative offers insight into whether the company engages in practices that could affect stock price values at the time of the grant in a way that benefits executives. For many companies, the narrative disclosure affirms that equity grants are not scheduled to coincide with MNPI disclosures or that MNPI release timing is not based on equity award dates.

New Tabular Disclosure

The tabular disclosure applies if a company has granted options or SARs to named executive officers (NEOs) within four business days before and one business day after an MNPI release through financial reports and earnings releases, such as filing a Form 10-K. For each relevant award, the table must include:

• Name of the NEO. The executive receiving the option or SAR grant
• Grant Date. The date the option or SAR was granted
• Number of Securities. The number of shares underlying the option or SAR
• Exercise Price. The per-share exercise price of the award
• Grant Date Fair Value. The fair value of the award on the grant date
• Percentage Change in Stock Price. The percentage change in closing stock price between the trading day before and the day immediately after MNPI release

This tabular data provides investors with a clear, standardized view of equity grant terms within the specified period, helping assess potential manipulation or undue influence on executive compensation timing.

Closing Considerations

Though the narrative disclosure provides broad insight into company policies, the tabular disclosure offers objective data on equity grant timing and terms, ensuring that awards made close to an MNPI release are thoroughly documented. Due to this SEC guidance shift, boards and compensation committees are encouraged to review equity grant policies and practices to align with Item 402(x). Many public companies will likely find compliance with the narrative disclosure straightforward; however, the tabular disclosure may necessitate reconsideration of internal policies to avoid triggering unnecessary disclosures. Changes may include requiring a set minimum number of days between grant dates and a release of MNPI.

For more information or questions, please contact the authors.

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