AI is no longer experimental. It now plays a central role in core decision-making processes, and without proper oversight, it can create significant legal, financial, and operational consequences. Regulators are increasingly requiring organizations to move beyond general policy guidance and implement actionable, audit-ready controls.

Emerging AI Risk Areas

As regulatory scrutiny increases, several key risk areas have emerged across industries:

• Black box opacity: AI systems often operate in ways that are difficult to interpret. Organizations must be able to explain how decisions are made to regulators and stakeholders.

• Systemic and automation risk: AI can rapidly scale decisions, allowing small errors to be repeated at high speed, potentially leading to widespread operational failures.

• Third-party and data risks: Reliance on external data sources introduces risks related to data privacy, accuracy, and potential bias or manipulation.

• AI-enabled fraud: Technologies such as deepfakes and AI-driven phishing schemes create new avenues for fraud, increasing potential liability and requiring stronger verification controls.

Why AI Risk Management Matters

Organizations that fail to implement effective AI governance frameworks face both regulatory and competitive consequences:

• Avoiding heavy penalties: Regulatory enforcement actions have resulted in significant financial penalties for inadequate compliance systems.

• Competitive advantage: Companies that successfully integrate AI within structured risk frameworks can innovate more efficiently while maintaining compliance and trust.

NIST AI Risk Management Framework

The National Institute of Standards and Technology (NIST) has developed a widely adopted AI Risk Management Framework that organizations can use to manage AI systems throughout their lifecycle.

The framework includes four core functions:

• Govern: Establish internal governance structures to oversee accountability, compliance, security, and risk management, including clear decision-making and escalation procedures.

• Map: Develop and maintain an inventory of AI use cases, including third-party tools, and evaluate each for risk factors such as data security, regulatory impact, and operational significance.

• Measure: Assess risks through audits and feedback, focusing on issues such as bias, transparency, explainability, and potential manipulation.

• Manage: Implement controls to mitigate identified risks, including human oversight, access controls, employee training, and continuous system monitoring.

Staying Ahead of Regulatory Developments

AI risk management is rapidly evolving as both technology and regulatory expectations continue to develop. Organizations that proactively implement structured frameworks will be better positioned to manage risk, maintain compliance, and capitalize on emerging opportunities.

The attorneys at Corporate Securities Legal LLP provide guidance on navigating evolving regulatory requirements and implementing effective compliance strategies.

The risks presented by artificial intelligence (AI) are becoming an increasing concern for corporate boards as emerging technologies influence business strategy, operations, and long-term planning. At the same time, regulators are closely examining how accurately companies disclose AI-related risks and the mitigation measures being implemented.

The U.S. Securities and Exchange Commission (SEC) has already initiated enforcement actions challenging misleading or incomplete disclosures related to artificial intelligence claims.

Growing Focus on AI Risk Reporting

A recent study conducted by Cornell University analyzed more than 30,000 filings from over 7,000 companies during the past five years. Using both quantitative and qualitative analysis, researchers identified a significant increase in AI risk disclosures. Mentions of AI-related risks in company filings increased from 4% of filings in 2020, to more than 43% of filings in 2024. This dramatic increase reflects both expanded corporate reliance on artificial intelligence and heightened regulatory scrutiny.

The Role of Form 10-K Disclosures

Evaluation of AI-related risk disclosure begins with Form 10-K, the annual report most U.S. public companies must file with the SEC. The Commission establishes required disclosure topics and prescribes how information must be presented to investors.

Companies must disclose:

• Material risks affecting business operations;
• Methods used to evaluate emerging risks;
• Strategies implemented to mitigate potential threats.

Because artificial intelligence can affect nearly every aspect of business operations, AI risks may be considered material at multiple levels, including:

• The broader economy;
• Industry-wide impacts;
• Geographic exposure;
• Company-specific operational risks.

Material Disclosure Obligations

Federal securities laws prohibit companies from:

• Making materially false or misleading statements; or
• Omitting material information necessary to prevent investor deception.

To reinforce accountability, both the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) must certify the accuracy and completeness of Form 10-K disclosures.

Categories of Material Risk

Companies generally evaluate disclosure obligations across four recognized categories of material risk.

Market Risk

Market risk arises from broad economic fluctuations such as:

• Interest rate changes;
• Foreign exchange volatility;
• Commodity price movements;
• Stock market valuation shifts.

These risks are largely outside company control but must still be disclosed when material.

Credit Risk

Credit risk evaluates the likelihood that customers or counterparties may fail to meet payment obligations. Companies may manage this risk through:

• Structured repayment terms;
• Collateral requirements;
• Credit evaluation procedures.

Liquidity Risk

Liquidity risk concerns a company’s ability to meet financial obligations as they become due. Companies must assess how quickly they can:

• Obtain financing; or
• Convert assets into cash during downturns.

Operational Risk

Operational risk involves failures in internal systems or external dependencies, including:

• Cybersecurity threats and AI system vulnerabilities;
• Ineffective internal controls;
• Employee training deficiencies;
• Supplier concentration risks;
• Financial reporting fraud or system failures.

Why Compliance Matters

Failure to comply with SEC disclosure requirements—including Form 10-K reporting obligations—can result in significant regulatory consequences and enforcement actions. Accurate disclosure not only promotes investor confidence but also protects companies from allegations of misleading statements.

Consultation with experienced securities counsel helps companies maintain compliance while developing practical risk mitigation strategies aligned with evolving regulatory expectations.

The securities lawyers at Corporate Securities Legal LLP assist companies in navigating disclosure obligations, strengthening compliance frameworks, and implementing effective governance practices related to emerging technologies such as artificial intelligence.

Contact Corporate Securities Legal LLP to ensure your company’s SEC disclosures remain accurate, compliant, and aligned with current regulatory standards.

Fair and orderly securities markets depend on the accuracy and honesty of information provided to investors. Public companies and individuals involved in securities transactions are required to ensure that all filings and communications are complete, truthful, and not misleading. There is no tolerance under federal securities laws for inaccuracies—whether negligent or intentional.

False or misleading disclosures can distort investor decision-making, lead to substantial financial losses, and improperly enrich bad actors. To address these risks, the Securities Exchange Act strictly prohibits deceptive conduct in connection with the purchase or sale of securities.

Federal Prohibitions Against Securities Fraud

Under the Securities Exchange Act, it is unlawful for any person, directly or indirectly, using interstate commerce, the mails, or the facilities of a national securities exchange, to:

• Employ any device, scheme, or artifice to defraud;
• Make untrue statements of material fact or omit material facts necessary to prevent statements from being misleading;
• Engage in any act, practice, or course of business that operates as a fraud or deceit upon any person.

These provisions apply broadly and are enforced aggressively by the Securities and Exchange Commission (SEC).

SEC Enforcement and Real-World Consequences

Some individuals attempt to conceal misconduct through sophisticated accounting practices or misleading disclosures. However, such schemes are frequently uncovered through SEC investigations, whistleblower reports, or audits. When violations are discovered, the consequences can be severe—financially, professionally, and, in some cases, criminally.

A recent enforcement action illustrates these risks.

Example: SEC v. Wagenhals, Wiley, and Larson

In Securities and Exchange Commission v. Frederick W. Wagenhals, Robert D. Wiley, and Christopher D. Larson, the SEC charged three former executives of Scottsdale, Arizona–based Ammo, Inc. (now known as Outdoor Holding Co.) with accounting and disclosure fraud.

According to the SEC’s complaint, former CEO Wagenhals and former CFO Wiley made repeated materially false and misleading statements in Ammo’s public filings and financial statements. These statements were allegedly intended to conceal unfavorable information about the company’s management and operations.

The SEC further alleged that the filings hid the fact that Defendant Larson—a company co-founder and key business leader—continued to play a critical executive and management role despite a 2020 federal court order prohibiting him from serving in an executive capacity at a public company.

Alleged Misconduct and Disclosure Failures

The complaint alleges that Larson’s undisclosed senior role enabled him to:

• Lead major business operations in violation of the court order;
• Negotiate the largest acquisition in the company’s history;
• Structure transactions that financially benefited himself or members of his family.

According to the SEC, Ammo’s public reports and financial statements contained pervasive misstatements, omissions, and fundamental accounting errors. The SEC alleges that Wagenhals and Wiley approved and certified these filings while knowing they were inaccurate.

Legal Charges and Potential Penalties

The SEC filed its complaint in the U.S. District Court for the District of Arizona, charging all three defendants with violations of:

• Sections 17(a)(1) and (3) of the Securities Act of 1933;
• Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Wagenhals and Wiley were also charged with falsifying books and records, misleading auditors, submitting false certifications, and failing to reimburse the company for compensation following an accounting restatement, as required under the Sarbanes-Oxley Act.

The SEC seeks:

• Permanent injunctions;
• Civil monetary penalties;
• Officer and director bars;
• Disgorgement of ill-gotten gains with prejudgment interest;
• Reimbursement of compensation under Section 304(a) of the Sarbanes-Oxley Act.

Civil penalties are often assessed in amounts equal to disgorgement, effectively doubling the financial consequences of the misconduct.

Why Compliance Matters

SEC filing obligations are complex, and mistakes—whether intentional or accidental—can expose companies and executives to significant enforcement risk. Proper legal guidance is essential to ensure accurate disclosures, compliant accounting practices, and adherence to federal securities laws.

If you have questions or concerns regarding SEC filing requirements, the securities attorneys at Corporate Securities Legal LLP can provide experienced counsel and practical guidance. Early legal involvement can help ensure compliance, reduce risk, and prevent costly SEC enforcement actions.

Forward-looking statements are designed to address that final element: how management expects the company to perform going forward. While these statements can provide valuable insight into a company’s strategic vision, they also carry legal risk if not prepared carefully and in compliance with federal securities laws.

What Is a Forward-Looking Statement?

A forward-looking statement is a management prediction or projection regarding the future performance of a business. These statements are typically included in SEC registration materials and other public disclosures and may address a wide range of anticipated outcomes.

Common categories of forward-looking statements include:

• Financial performance
  Forecasts of revenue, losses, earnings per share, dividends, operating expenses, capital expenditures, and retained earnings.
• Operational plans
  Planned business development initiatives, mergers or acquisitions, capital investments, and anticipated product lines or services.
• Risk factors
  External conditions that could impact performance, such as economic trends, regulatory changes, or competitive pressures.
• Management assumptions
  The underlying assumptions and reasoning that support the company’s projections and strategic direction.
• Independent review
  Reports or analyses from outside reviewers that lend credibility to the reasonableness of management’s projections.
• Legal disclaimers
  Statements clarifying that projections are inherently speculative and not guarantees of future performance. The SEC requires such disclaimers in published management materials to prevent investors from treating projections as assurances.

Legal Protections for Management

To balance investor protection with the need for companies to communicate future plans, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides a “safe harbor” that protects corporate officers and directors from unwarranted securities fraud claims based solely on forward-looking statements, provided those statements meet statutory requirements.

Under U.S. Supreme Court interpretations of the PSLRA, an investor bringing a claim based on a forward-looking statement must prove:

• A material misrepresentation or omission meeting the legal definition of fraud;
• Direct reliance on that misrepresentation when deciding to buy or sell a security; and
• A resulting financial loss caused by the transaction.

Absent these elements, claims based on forward-looking statements are unlikely to succeed.

Procedural Requirements Under the PSLRA

The PSLRA also introduced procedural safeguards designed to curb frivolous shareholder lawsuits and abusive litigation practices. These safeguards include:

• Stricter pleading standards – Allegations of negligence are insufficient. Plaintiffs must plead facts creating a “strong inference” of fraudulent intent.
• Lead plaintiff requirements – Class actions must be led by the shareholder with the largest financial interest in the claim, not random or nominal investors.
• Automatic stay of discovery – Discovery is paused while motions to dismiss are pending, preventing plaintiffs from engaging in costly fishing expeditions.
• Limits on damages and attorneys’ fees – Recovery is limited to actual losses, and caps are placed on permissible attorneys’ fees.
• Auditor obligations – Auditors must report illegal acts to management and, if necessary, to the SEC.
• Proportional liability – Defendants are liable only for their share of the harm, rather than being jointly responsible for the entire damage award.

Why Proper Drafting Matters

To qualify for PSLRA safe harbor protection, forward-looking statements must meet specific statutory and regulatory requirements. Poorly drafted projections, missing disclaimers, or unsupported assumptions can expose a company and its leadership to unnecessary legal risk and SEC scrutiny.

Need Guidance on Forward-Looking Statements?

The attorneys at Corporate Securities Legal LLP have extensive experience preparing compliant forward-looking statements and full SEC registration filings. Our team understands how to balance meaningful disclosure with legal protection, helping companies avoid delays, revisions, and enforcement exposure.

Contact us to ensure your forward-looking statements meet SEC requirements, qualify for PSLRA safe harbor protection, and move smoothly through the registration process.

Public companies are required under U.S. Securities and Exchange Commission (SEC) rules to periodically provide transparent disclosures to investors and the public regarding executive compensation, partcularly when compensation is tied to equity awards such as stock and stock options. These requirements are collectively referred to as equity plan disclosure rules.

Equity plan disclosures include:

• Grant policies
• Pay versus performance policies
• Clawback policies
• Insider trading and ownership disclosures

SEC Requirements for Pay Versus Performance Disclosures

The SEC provides highly specific instructions governing how pay versus performance information must be presented. Public companies are required to include detailed tables that compare executive compensation against company performance metrics.

These tables must clearly disclose:

• The compensation of the Chief Executive Officer (CEO);
• The average compensation of other Named Executive Officers (NEOs); and
• The company’s financial performance, often tied to equity-based awards.

The purpose of these disclosures is to allow investors to evaluate whether executive compensation aligns with company performance.

Mandatory and Company-Selected Performance Measures

Under SEC rules adopted in 2022 pursuant to the Dodd-Frank Act, public companies must disclose specific performance measures in their proxy statements to illustrate the relationship between executive pay and performance.

Mandatory measures include:

• Total Shareholder Return (TSR); and
• Net income.

In addition, companies must identify and disclose Company-Selected Measures (CSMs)—the financial performance measures the company believes are most important in linking executive compensation to performance.

Common CSMs include:

• Earnings before interest, taxes, depreciation, and amortization (EBITDA);
• Earnings per share (EPS); and
• Revenue or sales.

TSR measures the return generated for shareholders through stock price appreciation and dividends over a specified period and must be compared to a selected peer group. Net income reflects the company’s profitability after all expenses and taxes.

Uniform Formatting and Disclosure Obligations

The SEC requires pay versus performance disclosures to be presented in a uniform and standardized format to ensure comparability across public companies. Failure to comply with the prescribed format constitutes a violation of SEC reporting requirements. Ignorance of the rules is not a defense.

The SEC’s detailed disclosure instructions include the following requirements:

1. Footnotes to the table. Registrants must disclose specified information in footnotes, including the name of each Principal Executive Officer (PEO) and each non-PEO NEO included in the average compensation amounts, as well as amounts deducted or added to calculate executive compensation actually paid.
2. Relationship disclosure. Item 402(v) requires registrants to describe the relationships between each financial performance measure and the executive compensation actually paid to the PEO and, on average, to other NEOs over the five most recently completed fiscal years (or three years for Smaller Reporting Companies). Registrants other than SRCs must also describe the relationship between company TSR and peer group TSR. These disclosures may be presented in narrative, graphical, or combined formats.
3. Tabular List. Registrants other than SRCs must provide a list of three to seven financial performance measures they determine are the most important measures used to link executive compensation to performance. Non-financial measures may be included if they are among the company’s most important metrics.
4. Inline XBRL. All registrants are required to use Inline XBRL to tag pay versus performance disclosures in proxy or information statements. Each value in the pay versus performance table must be separately tagged, with block-text tagging required for footnotes, relationship disclosures, and the Tabular List where applicable.

Why This Matters for Public Companies

Pay versus performance disclosures are a frequent focus of SEC review and investor scrutiny. Errors, omissions, or deviations from the required format can result in regulatory comments, amended filings, enforcement actions, and reputational harm.

Careful coordination between legal, finance, compensation, and reporting teams is essential to ensure compliance and minimize regulatory risk.

Need Legal Guidance on Pay Versus Performance Compliance?

The securities attorneys at Corporate Securities Legal LLP advise public companies on executive compensation disclosures, proxy statement compliance, equity plan reporting, and SEC regulatory strategy.

Our team can help ensure your Pay Versus Performance Executive Compensation disclosures fully comply with SEC requirements—so you can avoid regulatory exposure and the uncertainty of how the SEC may respond.

Materiality in is a type of fraud, because it uses informational defects to evade a transaction. A fact is material if “there is a substantial likelihood a reasonable investor would consider important” while deciding something concerning securities. (TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). The Supreme Courts wanted to make the definition stronger than the mere possibility that an investor would consider it important, they wanted it more than likely that that bit of information would be deemed decisive by the investor. The misinformation must therefore be significant enough to sway an investor’s decision on whether or not they would buy the securities being offered.

A reasonable investor is one who is not an irrational investor, someone who suffers from hindsight bias, over-optimism, availability bias, endowment effects, or just one who follows what everyone else thinks. Most of this disclosure is meant for professional securities analysts who usually combine the new data with their prior knowledge to get a confirmation about the company. In some court cases materiality is a mixture of law and fact, and the judges have to decide whether or not the issue concerns the law or not, assuming the role of the “reasonable investor.”