On March 20, once again without an open meeting, the SEC adopted, with a dissent by Commissioner Robert Jackson, changes to its rules and forms designed to modernize and simplify disclosure requirements. The final amendments, FAST Act Modernization and Simplification of Regulation S-K, which were adopted largely as originally proposed in October 2017 (see this PubCo post), are part of the SEC’s ambitious housekeeping effort, the Disclosure Effectiveness Initiative. (See this PubCo post and this PubCo post.) The amendments are intended to eliminate outdated, repetitive and unnecessary disclosure, lower costs and burdens on companies and improve readability and navigability for investors and other readers. Here is the SEC’s press release.
The final amendments make a number of useful changes, such as eliminating the need to include discussion in MD&A about the earliest of three years of financial statements, permitting omission of schedules and attachments from most exhibits, limiting the two-year lookback for material contracts, and streamlining the rules regarding incorporation by reference and other matters. The final amendments also impose some new obligations, such as a requirement to file as an exhibit to Form 10-K a description of the securities registered under Section 12 of the Exchange Act and a requirement to data-tag cover page information and hyperlink to information incorporated by reference.
Certainly one of the most welcome changes is the SEC’s innovative new approach to confidential treatment, which will allow companies to redact confidential information from exhibits without the need to submit in advance formal confidential treatment requests. This new approach became effective on April 2, 2019. The remainder of the final amendments will become effective on May 2, 2019, with the exception of new cover page data-tagging requirements, which are subject to a three-year phase-in.
(The final amendments also include certain parallel changes to investment company and investment adviser rules and forms, not discussed in this post.)
First, below is a slimmed down version of the handy table the SEC has included in the adopting release:
| Rule | Summary Description of Amended Rules |
|---|---|
| Regulation S-K, Item 303 and Form 20-F | Registrants will generally be able to exclude discussion of the earliest of three years in MD&A if they have already included the discussion in a prior filing. |
| Regulation S-K, Items 601(b)(10) and 601(b)(2) and investment company registration forms | Registrants will be able to omit confidential information in material contracts and certain other exhibits without submitting a confidential treatment request to the Commission, so long as the information is (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. |
| Regulation S-K, Item 601(b)(10) | Only newly reporting registrants will be required to file material contracts that were entered within two years of the applicable registration statement or report. |
| Regulation S-K, Item 601(a)(5) and investment company forms | Registrants will not be required to file attachments to their material agreements if such attachments do not contain material information or were not otherwise disclosed. |
| Regulation S-K, Item 102 | Registrants will need to provide disclosure about a physical property only to the extent that it is material to the registrant. |
| Forms 8-K, 10-Q, 10-K, 20-F and 40-F | Registrants will be required to disclose on the form cover page the national exchange or principal U.S. market for their securities, the trading symbol, and title of each class of securities. |
| Securities Act Rule 411(b)(4); Exchange Act Rules 12b-23(a)(3), and 12b-32; Investment Company Act Rule 0-4; and Regulation S-T Rules 102 and 105 | Registrants will no longer be required to file as an exhibit any document or part thereof that is incorporated by reference in a filing, but instead will be required to provide hyperlinks to documents incorporated by reference. |
| Forms 10-K, 10-Q, 8-K, 20-F and 40-F. | Registrants will be required to tag all cover page data in Inline XBRL. |
| Regulation S-T Rules 102, 105, 201, 202 and 311; Form N-CSR; and investment company registration forms | Investment companies will be required to file reports on Form N-CSR and registration statements and amendments thereto in HTML format and provide hyperlinks to exhibits and other information incorporated by reference. |
The final amendments likely to have the most significant impact relate to MD&A, confidential treatment and other exhibit-related matters, property and incorporation by reference. In addition to various conforming changes, the amendments also comprise a fair amount of useful streamlining and clean-up, such as revising outdated references and eliminating vestigial requirements and other unnecessary clutter.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 303)
Omission of Earliest Year. Currently, in MD&A, companies generally provide two comparative year-to-year discussions of three annual fiscal years (i.e., year 3 compared to year 2 and year 2 to year 1). In the final amendments as adopted, where companies provide financial statements covering three years in the filing, “discussion about the earliest of the three years may be omitted if such discussion was already included in the registrant’s prior filings on EDGAR that required disclosure in compliance with Item 303 of Regulation S-K, provided that registrants electing not to include a discussion of the earliest year must include a statement that identifies the location in the prior filing where the omitted discussion may be found.”
The final version reflects two significant changes from the proposal. The SEC had originally proposed to eliminate discussion of the earliest year, on the condition that “(i) that discussion is not material to an understanding of the registrant’s financial condition, changes in financial condition, and results of operations, and (ii) the registrant has filed its prior year Form 10-K on EDGAR containing MD&A” of that omitted year. However, a number of commenters questioned how the “material to an understanding” condition would be interpreted and applied in practice, and suggested that the uncertainty (and potential litigation risk) would cause some companies to be reluctant to omit the discussion of the earliest year “for fear that their judgment would be challenged.” As a result, the SEC eliminated the first condition. Emphasizing that “[m]ateriality remains, as always, the primary consideration,” the SEC characterized the change as a recognition “that the language of the proposed condition was superfluous and never intended to modify, supplement, or alter the overarching materiality analysis that management must undertake with respect to the information it provides investors in MD&A.” While a discussion of the prior year could, under some circumstances, be material,
“in many cases the entirety of the discussion of the earliest year that was presented in the MD&A of a prior filing would not need to be reiterated if, in management’s view, that discussion is not necessary to understand the financial condition, changes in financial condition, and results of operations. This is the standard that applies to all of MD&A, and our amendments do not change that standard. A registrant’s obligation is 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. We continue to encourage registrants to take the opportunity to reevaluate their disclosure in light of these amendments and determine whether a discussion of the earliest year’s information remains material. We believe these amendments underscore the continuing relevance of the Commission’s guidance in the 2003 MD&A Release that ‘it is increasingly important for companies to focus their MD&A on material information. In preparing MD&A, companies should evaluate issues presented in previous periods and consider reducing or omitting discussion of those that may no longer be material or helpful, or revise discussions where a revision would make the continuing relevance of an issue more apparent.’”
In addition, the amendments expand the second condition to allow companies to rely on any prior EDGAR filings that include the referenced discussion, not just the prior Form 10-K, so long as the prior filing that includes the relevant discussion is clearly identified.
Note that this provision in the final amendments does not affect smaller reporting companies that limit their disclosure to the two-year period covered by their financial statements or emerging growth companies to the extent they provide only two years of audited financials in their IPO registration statements.
Conforming changes are also included for foreign private issuers in Item 5 of form 20-F.
Tailored Presentations. The revised instruction also emphasizes that companies may tailor their presentations using any format that would enhance a reader’s understanding, not solely year-to-year comparisons. However, the SEC anticipates that many companies will continue to provide year-to-year comparisons as they have in the past.
Reference to Selecteds. Given that trend information is already required for liquidity, capital resources and results of operations, the final amendments also eliminate as duplicative the direction in Instruction 1 to refer to the five-year selected financial data where trend information is relevant.
Exhibits
Confidential Treatment. The SEC has adopted, with some modifications, the new approach proposed to “streamline” the confidential treatment process. The final amendments revise Item 601(b)(10), material agreements, as well as, in a change from the proposal, Item 601(b)(2), plans of acquisition, to permit companies to omit or redact from these exhibits confidential information that is not material and would likely cause competitive harm to the company if publicly disclosed—adding “likely” also reflects a change from the proposal—without having to submit an unredacted copy and formal confidential treatment request in advance to the staff, as is currently required. Instead, companies will simply mark the exhibit index to indicate that portions of the exhibit have been omitted, mark the filed exhibit with brackets to show where information has been omitted and add a “prominent statement” on the first page of the redacted exhibit to indicate that marked information has been omitted from the exhibit because it is both (i) not material and (ii) would likely cause competitive harm to the company if publicly disclosed.
Upon request by the staff, companies will be required to provide, on a supplemental basis, an unredacted paper copy and supporting analyses regarding materiality and competitive harm. Using Rule 83, companies could request confidential treatment of the supplemental information provided while in the possession of the staff. If the staff determined that the supplemental rationale did not support the redactions, the staff may request that the exhibit be refiled to disclose additional information. After the staff has completed its review of the supplemental materials, the company should request return or destruction of the supplemental material submitted under Rule 418 or Rule 12b-4, as applicable. And, because the SEC would not retain an unredacted copy or supplemental materials, no CTR would be required for FOIA purposes.
The final amendments also expanded the new approach to apply to certain exhibit-related requirements in specified disclosure forms for which Item 601(b)(10) does not apply, such as Form 20-F (for FPIs), as well as Item 1.01 (entry into a material definitive agreement) of Form 8-K (to the extent exhibits are filed with the intent of incorporating them into future filings in satisfaction of Item 601(b)(10)).
Under special transition provisions, a company that had a confidential treatment request pending when the new rules became effective on April 2 may withdraw its pending application. However, the SEC advises that the company should refile the exhibit in redacted form in an amended filing that conforms to the amended rules and coordinate with the AD responsible for reviewing the filings. The staff will continue to process, following established procedures, any pending CTRs that have not been withdrawn. (See the new Corp Fin guidance on confidential treatment.)
Omission of Personally Identifiable Information. New paragraph 601(a)(6) codifies the current staff practice of allowing companies to omit personally identifiable information from exhibits without the need for a CTR. Personal identifying information is information the disclosure of which would be “a clearly unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses and similar information).” Comparable provisions are being added to the exhibit requirements of Item 1016 of Reg M-A.
Omission of Schedules and Attachments From Exhibits (Item 601(a)(5)). Generally, companies are required to file complete copies of exhibits, including every single attachment, no matter how immaterial or irrelevant; only Item 601(b)(2) allows acquisition agreements to be filed without schedules or similar attachments if they are not material. New paragraph 601(a)(5) would likewise permit the omission of schedules and similar attachments to other exhibits, so long as they do not contain material information and the information is not otherwise disclosed in the exhibit or the disclosure document. Companies would instead be required to file with each exhibit a list briefly identifying the contents of the omitted schedules and to furnish them supplementally upon request (although no agreement to furnish them would be required). Comparable provisions are added to the exhibit requirements of Item 1016 of Reg M-A.
Limit the Two-Year Look Back for Material Contracts (Item 601(b)(10)(i)). Currently, Item 601(b)(10)(i) requires companies to file every contract not made in the ordinary course of business if the contract is material and (i) to be performed after the filing of the registration statement or report or (ii) was entered into not more than two years before the filing, even if fully performed. The final amendments limit the application of the two-year look-back requirement for exhibits only to newly reporting companies (i.e., companies that, at the time of filing, are not subject to 13(a) or 15(d) Exchange Act reporting requirements, certain shell companies and any company that has not filed an annual report since the revival of a previously suspended reporting obligation). The reason for the change is that companies that are already reporting companies will have previously filed those contracts, and they will be available on EDGAR.
Description of Securities (Item 601(b)(4)). Currently, a description of securities is required under Item 202 only in registration statements. To increase ease of access to information about classes of securities, the final amendments require companies to file descriptions of their securities registered under Section 12 of the Exchange Act as exhibits to Form 10-K (Item 601(b)(4)). Note that, to the extent that a company has previously filed an exhibit to a Form 10-K containing the new required Item 202 disclosure, it could incorporate that exhibit by reference and hyperlink to the previously filed exhibit in future Form 10-K filings, assuming that the information remains unchanged. Existing disclosure obligations regarding modifications to the rights of security holders and amendments to charters and bylaws under Form 8-K and Schedule 14A remain in place, including the requirement to file a complete copy of any amended charter or bylaws. Under new Item 601(b)(4)(vi), any modifications and amendments during a fiscal year should also be reflected in the Item 202 disclosure provided in the exhibit, even if not material.
Foreign Private Issuers. Under the final amendments, foreign private issuers will be required to provide comparable information in exhibit filings for Form 20-F, but not 40-F.
Form 8-K. The final amendments add a number of the new exhibit-related provisions to Item 1.01 of Form 8-K, including new provisions regarding confidential treatment (to the extent exhibits are filed with the intent of incorporating them into future filings in satisfaction of Item 601(b)(10)), omission of schedules and similar attachments and omissions for personally identifiable information.
Incorporation by Reference and Cross-Referencing of Information
Streamline Rules. The final amendments streamline the current hodgepodge of rules associated with incorporation by reference and facilitate investor access to incorporated documents through the use of hyperlinks. More specifically, the amendments revise Rule 411, Rule 12b-23, and a number of forms, as well as rescind Rule 12b-32, the substance of which will be included in Rule 12b-23. In addition, the amendments essentially eliminate Item 10(d), including moving the provision prohibiting indirect incorporation (incorporating by reference a portion of a document that itself also incorporates pertinent information by reference) into other incorporation rules (Rule 411, Rule 12b-23), and the procedural incorporation rules are being consolidated in Reg C and Reg 12B.
Hyperlinks. Rule 411 and Rule 12b-23 are being amended to require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. Companies will be required to include, at the location of the information, an express statement clearly identifying the document where the incorporated information was originally filed or submitted and the location of the information within that document.
Note that the requirements for hyperlinking of incorporated material are similar to the requirements for exhibit hyperlinking, including requiring documents that are subject to hyperlinking to be filed in HTML. Companies will not be “required to file an amendment to a document solely to correct an inaccurate hyperlink, unless that hyperlink was included in a pre-effective registration statement, similar to the existing requirements for exhibit hyperlinking. An inaccurate hyperlink alone would neither render the filing materially deficient nor affect a registrant’s eligibility to use Form S-3, Form SF-3, or Form F-3.” However, there are some key (and welcome) differences. In contrast to exhibit hyperlinking, a company will not be ”required to correct inaccurate hyperlinks to information incorporated by reference in an effective registration statement by including a corrected hyperlink in a subsequent periodic report or a post-effective amendment.” That’s because the SEC believes that correction in this context could just create confusion. By comparison, for exhibit hyperlinks, the “corrected hyperlink would be unobtrusively located in the exhibit index with other exhibits.” In addition, the SEC believes, the requirement in the final amendments to “describe the location of the information incorporated by reference should mitigate the impact of any inaccurate hyperlinks.” In addition, companies are not required to refile information that is incorporated by reference from a document that was previously filed with the Commission in paper.” (See this PubCo post.)
Elimination of Five-Year Limitation on Incorporation (Item 10(d)). Currently, under Item 10(d), incorporation beyond five years is prohibited, except for documents contained in registration statements and documents identified by file number. The final amendments eliminate the current five-year limitation, which, in light of the current electronic filing system, has become an anachronism. Companies would be required to describe the location of the information incorporated by reference and include hyperlinks to incorporated documents when filed on EDGAR. Companies would not be permitted to incorporate a destroyed document.
The prohibition in Item 10(d) on incorporation of a portion of a document that itself also incorporates pertinent information by reference is being moved into other incorporation rules (Rule 411, Rule 12b-23).
Filing Copies of Incorporated Information (Rule 12b-23 and Rule 411). The final amendments also eliminate another relic: the requirement in Rule 12b-23 (which applies to Exchange Act filings) and Rule 411 (which applies to Securities Act filings) to file as exhibits copies of any information incorporated by reference. Likewise eliminated is the corresponding exhibit requirement in Item 601, as well as the provision in Item 601(b)(13) that requires Forms 10-Q to be filed as exhibits when they are incorporated by reference into a filing (because hyperlinks to the incorporated information will now be required).
Financial Statements. The final amendments prohibit incorporation by reference or cross-referencing in the financial statements to information outside the financial statements except (in a change from the proposal to make the exception more explicit) where otherwise specifically permitted or required by SEC rules or by U.S. GAAP or IFRS as issued by the IASB, as applicable. The rationale for this prohibition is that incorporation or cross-referencing into the financials can raise questions as to the scope of an auditor’s responsibilities, potentially creating confusion about what exactly has been audited. The final amendments do not change the current rules on incorporation by reference from the financial statements into other filings or incorporation of financial information from other filings to satisfy financial reporting.
Description of Property (Item 102)
Because the current rule sometimes elicits disclosure regarding property that is not really material, such as information regarding corporate headquarters or other office space, the final amendments clarify that disclosure regarding properties is required only to the extent that the property is material to the company and encourage each company to “engage in a comprehensive consideration of the materiality of its properties.” The amendments also clarify that the disclosure “should focus on physical properties that are material to the registrant and may be provided on a collective basis, if appropriate.” The revisions also harmonize some of the descriptors (other than the industry-specific descriptors) by providing a uniform standard of disclosure based on materiality.
Management, Security Holders and Corporate Governance
Directors, Executive Officers, Promoters, and Control Persons (Item 401)
- Clarifying that instruction 3 to Item 401(b) (which allows disclosure of information about executive officers to be included in Part I of Form 10-K without requiring repetition in the proxy statement) applies to any executive officer disclosure required by Item 401 generally (such as the “bad boy” provisions of Item 401(f)) by making it a general instruction to Item 401; and
- Revising the Item 401 caption to read “Information about our Executive Officers.”
Compliance with Section 16(a) of the Exchange Act (Item 405)
- Allowing companies to rely on Section 16 reports filed on EDGAR (as opposed to only on paper) when assessing whether there are any Section 16 delinquencies that must be disclosed under Item 405;
- Eliminating the requirement for insiders to furnish Section 16 reports to the company on paper;
- Changing the caption related to Section 16 reporting delinquencies from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports”;
- Eliminating the need to include the caption “Delinquent Section 16(a) Reports” when the company does not have Section 16(a) delinquencies to report; and
- Eliminating the checkbox on the cover page of Form 10-K relating to Item 405 disclosures and the related instruction in Item 10 of Form 10-K.
Corporate Governance (Item 407)
- Changing the outdated auditing standard, AU section 380, Communication with Audit Committees, referred to in the Audit Committee Report, Item 407(d)(3)(i)(B), to refer instead to the applicable requirements of the PCAOB and the SEC (which would accommodate future changes); and
- Revising Item 407(g) to clarify that, because an EGC is not required to provide a Compensation Discussion and Analysis, its compensation committee need not state, as would otherwise be required by Item 407(e)(5), whether it has reviewed and discussed the CD&A nor whether it recommended to the board that the CD&A be included in the annual report or proxy statement.
Registration Statement and Prospectus Provisions
Outside Front Cover Page of the Prospectus (Item 501(b))
Determination of Offering Price. Currently, instruction 2 to Item 501(b)(3) states that “[i]f it is impracticable to state the price to the public, explain the method by which the price is to be determined” on the outside front cover page. The final amendments permit the method of determining pricing to be disclosed in the prospectus elsewhere than on the cover page. Companies will need to include on the cover page a clear statement that the offering price will be determined by a particular method or formula that is described in the prospectus, along with a cross-reference to that disclosure and a page number highlighted by prominent type (similar to the cross-reference to “Risk Factors”). Note that there is no change to the instruction regarding securities to be offered at market price, or where the offering price is to be determined by a formula related to market price.
Principal U.S. Public Trading Market. Companies are now required, under Item 501(b)(4), to disclose only the national securities exchange where the securities are listed. The final amendments require, where the securities are not listed on any national securities exchange, disclosure of the principal U.S. public trading market or markets for the securities being offered, so long as the company, through the engagement of a registered broker-dealer, has actively sought and achieved quotation on those markets. Disclosure of the corresponding trading symbols is also required.
Red Herring Legend. In the prospectus “subject to completion” legend, companies will be permitted to reduce the length by eliminating the language regarding state law prohibitions if not applicable (e.g., because of preemption of state blue sky laws under NSMIA). Here’s a version of the legend as suggested in Item 501(b)(10): “The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.” If state law prohibitions were not applicable, the last sentence could be deleted.
Confusing Company Names. The final amendments also streamline the instruction to Item 501(b)(1) (which refers to misleading or confusing company names) by eliminating the portion that discusses when a name change may be required and the exception to that requirement.
Plan of Distribution (Item 508)
- Amending Rule 405 to define a “sub-underwriter” as a dealer that is not itself in privity of contract with the issuer, but is participating as an underwriter in an offering by committing to purchase securities from a principal underwriter. Item 508 requires disclosure about the plan of distribution for securities in an offering, including information about underwriters, as well as a general statement if a dealer is paid any additional discounts or commissions for acting as a “sub-underwriter,” currently an undefined term.
Undertakings (Item 512)
- Eliminating a number of undertakings as duplicative or obsolete, including Item 512(c) (warrants offerings), (d) (competitive bidding), (e) (delivery of incorporated annual report) and (f) (securities certificates).
Risk Factors (Item 503(c))
- Relocating “Risk Factors” from Item 503(c) to a new, separate item (Item 105), to reflect the application of risk factor disclosure requirements to registration statements on Form 10 and periodic reports;
- Eliminating the currently enumerated examples of possible risk factors included in Item 503 to reinforce the Item’s principles-based approach, to encourage companies to focus on their own risk-identification processes and avoid leading companies to believe they must address these factors, regardless of the significance to their specific businesses.
XBRL Tagging. The final amendments also require that all of the information on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F appear in HTML format and be tagged in Inline XBRL (i.e., embedded into the document), requiring companies to file with each of those forms a “Cover Page Interactive Data File.” The amendments also require that the cover pages of these forms include the trading symbol for each class of registered securities, and for Forms 10-Q and 8-K, to also include the title of each class of securities and each exchange on which they are registered.
The SEC has provided for phased compliance dates for the requirements to tag data on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F in Inline XBRL. These dates are identical to the compliance dates for mandatory compliance with the Inline XBRL rules, and vary depending on the type of filer as set forth in the SEC’s table below.
| Operating Companies | Compliance Date |
|---|---|
| Large accelerated filers that prepare their financial statements in accordance with U.S. GAAP | Reports for fiscal periods ending on or after June 15, 2019 |
| Accelerated filers that prepare their financial statements in accordance with U.S. GAAP | Reports for fiscal periods ending on or after June 15, 2020 |
| All other filers | Reports for fiscal periods ending on or after June 15, 2021 |
Note, however, that domestic filers will be required to comply beginning with their first Form 10-Q for a fiscal period ending on or after the applicable compliance date, as opposed to the first filing for a fiscal period ending on or after that date.
The SEC Did Not Adopt…
- Proposed amendments to Form 10, Form 10-K and Form 20-F to allow exclusion of those unsightly item numbers and captions and to permit companies to create their own captions tailored to their disclosure.
- Proposed amendments to Reg S-K Item 601(b)(21)(i), requiring disclosure of legal entity identifiers (“LEIs”)— 20-character, alpha-numeric codes that permit unique identification of entities engaged in financial transactions—if obtained, for the company and the significant subsidiaries identified on Exhibit 21, which was a favored project of former Commissioner Kara Stein.
