Alerts

SEC Adopts Final Rules Modernizing Business and Financial Disclosure Requirements

Alerts / March 27, 2019

On March 20, 2019, the Securities and Exchange Commission (SEC) adopted amendments to the disclosure requirements for public companies under Regulation S-K, and to similar provisions regarding investment company disclosures. These final amendments are based on rules proposed by the SEC on Oct. 11, 2017, and were mandated by the 2015 Fixing America’s Surface Transportation Act. The final rules are intended to improve the quality and accessibility of public company disclosure by modernizing, simplifying, removing redundancies, clarifying ambiguities and increasing the use of technology to reduce disclosure burdens while still providing all material information to investors. The most significant sections of the amendments are summarized below.

Item 303(a) ‒ MD&A

Item 303(a) requires registrants to discuss their financial condition, changes to financial condition and results of operations in a Management’s Discussion and Analysis (MD&A). Under the prior rules, registrants that included three years of financial statements in their annual reports were required to address all three years in the MD&A. The amendments allow registrants who are providing financial statements covering three years to forgo discussion of the earliest of the three years if such a discussion was already included in the registrant’s prior EDGAR filings. If a registrant elects not to discuss the earliest year, it must provide the location of the prior filing where this information can be found.

The amendments also eliminate a reference to five-year selected financial data in the instructions related to requirements to discuss trend information in the MD&A, and simplify the instructions to clarify that registrants may present the MD&A in any format that, in their judgment, enhances the reader’s understanding.

The adopting release emphasizes that these changes seek to reduce the burden on registrants of disclosing information and to decrease duplicate information in order to improve readability for investors; however, registrants should continue to focus on the general obligation within MD&A to “provide investors with all material information, customized in light of the company’s particular circumstances, and presented in a manner that best reflects the discussion and analysis of the business as seen through the eyes of those who manage that business.”

Item 601 – Exhibits and Confidential Information

Item 601(b)(10) requires registrants to file as exhibits to periodic reports and registration statements certain material contracts entered into within the previous two years or having future performance obligations. If these contracts contained sensitive information that was not material, the registrant could redact such information and simultaneously submit a confidential treatment request (CTR) to the SEC. The CTR process required a registrant to present the legal grounds for confidential treatment and its arguments as to why disclosure of the information is not necessary for the protection of investors. The amendments allow a registrant to conduct this analysis without submitting a CTR and to redact the confidential information if it (i) is not material and (ii) would likely cause competitive harm if publicly disclosed. Additionally, the registrant may redact information from exhibits if the disclosure of such information would be considered a “clearly unwarranted invasion of personal privacy,” such as disclosure of bank account numbers, Social Security numbers, home addresses and similar information. These rules do not change the registrant’s disclosure obligations, including the requirement to mark exhibits as redacted, or the substantive bases upon which information could be redacted, but rather reduce the cost and burden of the registrant in preparing and processing a CTR. The SEC staff will continue its selective review of filings, including regarding the appropriateness of redacted information, and may request the information that would have been previously submitted with the CTR. The rules also extend this ability to redact sensitive information from certain other types of exhibits pursuant to specific form requirements rather than Item 601.

Under the prior rules, registrants generally had to attach complete copies of required exhibits, which often include extensive schedules and attachments and are not useful to investors. However, in the case of material acquisition and similar agreements filed pursuant to Item 601(b)(2), registrants could omit immaterial schedules and attachments. The final rules extend this accommodation to other types of material agreements filed pursuant to Item 601. The amendment permits registrants to omit entire schedules and attachments that do not contain material information not otherwise disclosed in the exhibit or the disclosure document. If a registrant elects to omit a schedule or attachment, the registrant must provide a list briefly identifying the contents of such omitted schedule or attachment. Comparable changes were also made to the exhibit requirements of Item 1016 of Regulation M-A and investment company registration and related forms.

Under the prior rules, registrants were required to file certain material contracts if one of two tests were met: (i) the contract must be performed in whole or in part at or after the filing of the registration statement or report, or (ii) the contract was entered into not more than two years before that filing. The amendment requires only new registrants comply with the second prong – the two-year look-back. Registrants who have already made filings with the SEC would no longer be subject to this two-year requirement, as investors already have access to these contracts in other filings on EDGAR.

The SEC also amended Item 601(b)(4), which now requires registrants to provide a brief description of their registered capital stock, debt securities, warrants, rights, American Depository Receipts and other securities as an exhibit to Form 10-K. Previously, registrants were only required to provide this information in their registration statements. The amendment is intended to provide these disclosures in one location rather than forcing investors to piece together this information from multiple sources.

Item 503(c) ‒ Risk Factors

Item 503(c) requires the registrant to provide a discussion of the most significant risks and challenges that it faces. The prior rules listed specific risk factor examples to provide context to registrants to aid them in completing this section. The final amendments eliminate these specific examples, noting that these examples are irrelevant to many registrants, and often lead registrants to fail to state risks that are unique to their business. The SEC seeks to encourage registrants to focus on risks that are applicable to their circumstances, and thus provide more meaningful insight to investors. The final amendments also relocated the risk factor disclosure requirement to a new item, Item 105.

Item 102 ‒ Physical Properties

Registrants were required to disclose the location and general nature of “the principal plants, mines and other materially important properties of the registrant and its subsidiaries” by providing such information that would reasonably inform investors as to the suitability, adequacy, productive capacity and extent of the registrant’s utilization of the property, taking into account both quantitative and qualitative factors. The SEC recognized that this requirement was ambiguous, and oftentimes led to the registrant’s disclosing information about physical property that was irrelevant to investors. The final amendment provides that disclosure only needs to be provided about a physical property to the extent that it is material to the registrant.

Items 401, 405 and 407
  • Item 401 sets forth the disclosure requirements regarding the identity and background information about the registrant’s directors, officers and executive employees. The amendment to Item 401 clarifies that registrants do not need to include this disclosure in their proxy statements if the information is already provided in Part I of their Form 10-K.
  • Section 16(a) of the Securities Exchange Act of 1934 requires officers, directors and certain security holders to report their beneficial ownership of a registrant’s securities. Item 405 requires the registrant to provide disclosure regarding individuals that failed to timely file such reports and has been amended to eliminate the requirement for filers to furnish duplicate copies of their reports to the registrant, which can instead rely on electronically filed reports to make this disclosure. Also, the amendment to Item 405 changes the disclosure heading from “Section 16(a) Beneficial Owner Compliance” to “Delinquent Section 16(a) Reports” to provide a more accurate title, encourages registrants to remove this heading if there are no delinquencies to report, and modifies the Form 10-K cover page to eliminate the check-box indicating the absence of Item 405 disclosure.
  • The amendments to Item 407 further clarify that emerging growth companies are not required to provide a compensation committee report and correct the outdated auditing standard reference in the audit committee report requirements.
Items 501, 508 and 512 ‒ Registration Statement and Prospectus Provisions
  • Items 501 contains disclosure requirements for the cover page of a prospectus and the amendments provide some additional flexibility for (i) providing the name of the registrant, (ii) referring to more detailed disclosure provided later in the prospectus regarding how the offering price will be determined and (iii) modifying the statement that the prospectus is subject to completion to eliminate the part of the statement regarding state law where such law does not prohibit the offering. Item 501(b)(4) requires a registrant to list on the cover page of a prospectus the name of any “national securities exchange” that lists the securities being offered, which as defined is limited to a securities exchange that has registered with the SEC. The amendments also expand this requirement to include the principal United States market where, through the engagement of a registered broker-dealer, the securities are being quoted.
  • Item 508 requires disclosure about the plan of distribution for the securities, including the involvement of underwriters and “sub-underwriters,” which is now defined in the amended requirements.
  • Item 512, which requires the issuer to provide certain undertakings with respect to its offering of securities, has also been amended to eliminate duplicative and obsolete provisions.
Incorporation by Reference

The amendments set forth several changes to streamline and provide more flexibility for the manner in which registrants and registered investment companies can incorporate information by reference into a filing. Item 10(d) has been revised to eliminate the prohibition against incorporating documents by reference that have been on file for more than five years. The SEC stated that this prohibition currently served little purpose since documents are now filed electronically. The amendments also eliminate the requirement in certain forms to file as exhibits previous filings from which information is incorporated and now require a registrant to provide hyperlinks to information incorporated from another disclosure on EDGAR. The SEC recently adopted rules for hyperlinks for exhibits, but expanding this to documents that are incorporated by reference allows for investors to have greater access to information that can be easily retrieved through a hyperlink. The amendments also clarify that information cannot be incorporated by reference or cross-referenced in financial statements from information outside of the financial statements unless it is specifically permitted by the SEC or accounting standard rules applicable to the filing.

XBRL Tagging

Currently, operating company registrants are required to file their financing statements as an exhibit in a machine-readable format using eXtensible Business Reporting Language (XBRL). This is required for periodic reports and certain registration statements. Registrants must tag a specific group of data points on the cover page in XBRL format, but it is not required to tag all data points. The amendments extend this requirement to require that all data points on the cover page be tagged in XBRL in accordance with the EDGAR Filer Manual, and that the cover page of these forms also include a trading symbol for each class of registered securities.

Effective Dates

The amendments will be effective 30 days after they are published in the Federal Register, except that the amendments relating to the redaction of confidential information will become effective upon publication in the Federal Register. The requirements to tag certain information on the cover pages of filings are subject to a three-year phase in.

This alert provides a high-level overview of the detailed changes implemented to these disclosure requirements. If you have any questions about the amendments, please feel free to contact Janet A. Spreen, John Harrington, Anthony Alfano or another member of our Securities and Corporate Governance Team.

Authorship Credit: Janet A. Spreen, John J. Harrington and Anthony G. Alfano

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