SEC-Proposed Amendments to Modernize, Simplify and Increase the Accessibility of Required Disclosure
As previously reported in the October 13, 2017 edition of Corporate & Financial Weekly Digest, on October 11, the Securities and Exchange Commission proposed amendments (the Proposal) to modernize and simplify disclosure requirements in Regulation S-K, and related rules and forms. The Proposal is intended to reduce registrants’ burden and costs to comply with the SEC’s disclosure requirements, while making public filings easier for investors to read, navigate and understand, including by discouraging repetitive disclosure and the disclosure of immaterial information.
The following are some key elements of the Proposal:
- Management’s Discussion and Analysis (MD&A) Disclosure. Item 303(a) of Regulation S-K would be amended to allow registrants making a filing that includes financial statements covering three years to exclude Management Discussion and Analysis (MD&A) disclosure about the earliest year reflected in those financial statements so long as (1) the MD&A disclosure relating to the earliest year “is not material to an understanding of the registrant’s financial condition, changes in financial condition or results of operations;” and (2) “the registrant previously filed its prior year Form 10-K on EDGAR” including such earliest year. The staff of the SEC (the Staff) noted that this proposed amendment is intended to discourage repetition of disclosure that is no longer material. This proposed amendment would not change the requirement for smaller reporting companies and emerging growth companies that include in their filings financial statements covering only two years, in which case, the MD&A disclosure would continue to require disclosure regarding the two-year period covered by the financial statements. The proposed amendment also would clarify that registrants may use any form of MD&A presentation that would “enhance a reader’s understanding,” noting, for example, that a registrant may decide that narrative disclosure for one or more of the years in the three-year period is more appropriate than a year-to-year comparison.
- Confidential Treatment Requests and Exhibits.
- The SEC proposed to add Items 601(a)(5), 601(a)(6) and 601(b)(10)(iv) to Regulation S-K, which would permit registrants, without submitting a confidential treatment request, to omit from exhibit filings (1) schedules and similar attachments from all exhibits unless any schedule or similar attachment contains material information or information not otherwise reflected in the exhibit or disclosure document (effectively expanding the existing accommodation under Item 601(b)(2) of Regulation S-K that permits registrants to omit such schedules and attachments from plans of acquisition, reorganization, arrangement, liquidation or succession) provided that the registrant provides with each exhibit a list identifying the contents of omitted schedules and attachments and agrees to provide, on a supplemental basis, a copy of any omitted schedules or attachments to the Staff upon request; (2) personally identifiable information; and (3) confidential information contained in material contracts filed as exhibits if such information both (a) would be competitively harmful if disclosed to the public, and (b) is not material, even where the registrant has not submitted a confidential treatment request to the SEC. The Staff noted that it will continue its selective review of registrant filings and will selectively assess whether the exhibit redactions appear to be limited to “information that is not material and that would subject the registrant to competitive harm if publicly disclosed.” The Staff may request that registrants promptly provide supplemental materials, consistent with the current confidential treatment process, including an unredacted paper copy of the exhibit and the registrant’s analysis to support its redaction. Similar to the current confidential treatment process, if the supplemental materials do not support the redactions, the Staff may request that the registrant amend its filing to include some or all of the previously redacted information.
- Currently, Item 202 of Regulation S-K requires registrants to provide disclosure in their registration statements regarding the terms and conditions of the securities it is registering. The SEC proposed an amendment that would require a registrant to provide similar disclosure for each registered class of the registrant’s securities as exhibits to Form 10-K.
- Registrants are currently required to file every material contract not made in the ordinary course of business, so long as either (1) some or all of the contract must be performed at or following the filing of the relevant registration statement or report; or (2) the contract was not entered into more than two years before the relevant filing (the Two Year Look Back). The Proposal contains a proposed amendment to Item 601(b)(10)(i) of Regulation S-K that would restrict the application of the Two Year Look Back to “newly reporting registrants” (which the proposal defines as any registrant that either (a) is not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) at the time it files a registration statement; or (b) has not filed an annual report since becoming subject to SEC reporting obligations again following a previously suspended reporting obligation).
- Description of Property. Item 102 of Regulation S-K would be amended to “emphasize materiality” by providing that the description of property is only required if one or more physical properties are material to the registrant. However, the proposed amendment would not apply to companies involved in the mining, real estate or oil and gas industries, given the significance of this disclosure for registrants in those industries.
- Section 16 Compliance. Section 16(a) of the Exchange Act requires that certain insiders report their beneficial ownership of a registrant’s equity securities in a format prescribed by the SEC, and Item 405 of Regulation S-K (Item 405) requires registrants to disclose certain information regarding Section 16 reporting persons. The Proposal would:
- eliminate the requirement that reporting persons furnish Section 16 reports to the registrant;
- clarify that, in order for registrants to make the disclosure required by Item 405, registrants may rely on Section 16 reports filed on EDGAR (rather than Section 16 reports furnished to the registrant by its reporting persons), but are not required to limit their inquiry to those Section 16 filings; and
- include an instruction that registrants should not include the “Section 16(a) Beneficial Ownership Reporting Compliance” heading in their filings if they do not have any Section 16(a) delinquencies to report. In addition, the SEC proposes to change the heading to “Delinquent Section 16(a) Reports” to more precisely describe the required disclosure.
- Offerings and Prospectuses.
- The proposed amendments would explicitly permit a registrant, when it is impracticable to state on a prospectus cover page the public offering price of the securities (as is currently required by Item 501(b)(3) of Regulation S-K), to state that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus (including a cross-reference to the method or formula).
- Currently, Item 501(b)(4) of Regulation S-K requires a registrant to disclose each national securities exchange that lists, and the corresponding trading symbols for, the securities being offered. The Proposal would require each registrant to disclose each principal U.S. market (not just each national securities exchange) for, and the corresponding trading symbols of, the securities being offered.
- Risk Factors. The SEC has proposed to eliminate the risk factor examples currently listed in Item 503(c) of Regulation S-K in order to both (1) avoid the implication that a registrant must address each of the example risk factors (regardless of the relevance of those risk factors to the registrant’s business); and (2) “encourage registrants to focus on their own risk identification processes.”
- Elimination of Certain Undertakings. The Proposal contains proposed amendments to Item 512 of Regulation S-K that would eliminate the requirement that registrants include certain undertakings that are duplicative of other rules or that have become unnecessary due to developments since their adoption.
- Accessibility (XBRL, Hyperlinking, Incorporation by Reference and Flexibility in Items/Numbering).
- The SEC has proposed to require registrants to tag all “data points” on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F (as applicable) using Inline XBRL (or traditional XBRL if the SEC’s Inline XBRL proposal is not adopted) (whereas the current rules require that operating company registrants tag some, but not all, data points on cover pages). The SEC also proposed an amendment to revise the cover page of those forms to require that registrants include the trading symbol for each class of its securities that are registered under the Exchange Act, as an additional data point to be formatted in XBRL.
- The Proposal would:
- subject to certain exceptions, eliminate the prohibition on registrants incorporating a document by reference if the document has been on file with the SEC for more than five years;
- eliminate the requirement that copies of information incorporated by reference be filed as exhibits to periodic reports or registration statements; and
- unless otherwise specifically allowed or required by applicable SEC rules, prohibit registrants from incorporating by reference or cross-referencing information from disclosure outside of the financial statements into the financial statements.
- The Proposal also would permit registrants filing a Form 10, Form 10-K or Form 20-F to exclude certain item numbers and captions or create their own captions tailored to their disclosure, other than those captions that are expressly required by those forms or otherwise by Regulation S-K. The Staff noted that the purpose of this proposed amendment is to “reduce the use of unnecessary cross-references when information may be responsive to more than one disclosure item.”
The SEC is soliciting comments on the Proposal for a period of 60 days after publication in the Federal Register.
The full text of the Proposal is available here.