Codes of Ethics: SEC Requirements

Your good client Socrates is on the line. Socrates – who gave up a promising career in philosophy to take up professional soccer – has an ethics question for you. No, he is not asking you to explain Stoicism, Epicureanism or even Hedonism. He instead wants you to untangle the requirements US public companies face for codes of ethics. Companies that are listed on Nasdaq or the NYSE need to comply with overlapping requirements of the SEC and the relevant stock exchange. In this WoW, we summarize the SEC rules.

The Form 10-K requirement

Form 10-K (via Regulation S-K Item 406) requires a company to disclose whether it has adopted a code of ethics that applies to the company’s principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. If the company has not adopted a code of ethics, it must explain why not. Unsurprisingly, almost all public companies have adopted a code of ethics within the meaning of Item 406.

Required content

Item 406(b) defines “code of ethics” to mean written standards reasonably designed to deter wrongdoing and promote:

  • honest and ethical conduct (including matters regarding “actual or apparent conflicts of interest between personal and professional relationships”); full, fair, accurate, timely and understandable public disclosure;
  • compliance with applicable laws and regulations;
  • prompt internal reporting of violations; and
  • accountability for adherence to the code.

Instruction 1 to Item 406 specifically contemplates that companies may bifurcate their codes of ethics for this purpose:

  • a company “may have separate codes of ethics for different types of officers”; and
  • a code of ethics “may be a portion of a broader document that addresses additional topics or that applies to more persons” other than the officers required to be covered.

Disclosure of the Code

A company can disclose its codes of conduct in one of three ways (see Item 406(c)):

  • file the code as an exhibit to the Form 10-K;
  • post the code on the company’s website (disclosing that fact and the web address in the Form 10-K); or
  • expressly undertake in the Form 10-K to provide a free copy upon request and explain how to make a request.

Companies that have bifurcated their codes of ethics as described above need only “file, post or provide the portions of a broader document that constitutes a code of ethics” as defined in Item 406 and applicable to covered officers.

Disclosure of amendments and waivers

Item 5.05 of Form 8-K requires companies to disclose within 4 business days any amendment or waiver of the Item 406 code of ethics, either:

  • via Form 8-K filing; or
  • on the company’s website, so long as the company previously stated in its most recently filed Form 10-K both the company’s intention to disclose any amendment on its website and the website address (in this scenario, the information must remain posted to the website for at least 12 months, and the company must retain the information for another five years).

Companies need not disclose technical, administrative or other non-substantive amendments. In addition, companies must disclose amendments to or waivers of their codes of ethics only if specifically required by Item 406(b) (i.e., one of the five subjects listed above) and applicable to the covered officers.Implicit waivers

Instruction 2(i) to Item 5.05 of Form 8-K defines “waiver” as the approval by the company of a material departure from a provision of the code of ethics. This also includes “implicit waivers,” defined under Instruction 2(ii) of Item 5.05 as a failure to act within a reasonable time after an executive officer knows of a material departure from the code of ethics. Implicit waivers, as with express waivers and amendments, require disclosure only if related to the covered officers and the provisions specifically referenced in Item 406(b). Companies may also disclose implicit waivers via website if they satisfy the requirements described above. Of course, codes of ethics sometimes describe situations where board approval is specifically contemplated, and an approval process in accordance with the provisions of the code would not constitute a “departure” that would implicate a waiver.

In addition to the SEC disclosure requirements, both Nasdaq and NYSE listing rules require listed companies to have a code of conduct whose scope is broader that the code of ethics for purposes of SEC reporting. 

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