SEC Simplifies Disclosure Requirements for Public Companies
The Securities and Exchange Commission recently adopted amendments to modernize and simplify disclosure requirements for public companies. The changes made will have a broad impact on many rules and forms, primarily by amending Regulation S-K. The amendments were adopted as part of a mandate for the SEC to simplify rules under the Fixing America’s Surface Transportation Act (FAST Act), and follow on earlier simplification efforts under the FAST Act in 2018.
The amendments are intended to improve the readability and navigability of company disclosures and to discourage repetition and disclosure of immaterial information, as well as incorporate technology to improve access to information. The amendments also include parallel amendments to several rules and forms applicable to investment companies and investment advisers. Notably, the amendments also add a few new requirements applicable to public companies.
- One less year required for Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Currently, companies are generally required to address in MD&A the three year period covered by the financial statements included in an annual report or registration statement, which is typically presented in year-to-year comparisons. Under the amended rules, companies will be able to exclude discussion of the earliest of the three years if such discussion has already been included in a prior filing and the location in the prior filing where the omitted discussion may be found is identified. This amendment will not affect smaller reporting companies, since they are already permitted to limit their discussion in MD&A to a two year period, or emerging growth companies that provide, as permitted by the rules, only two years of audited financial statements in their registration statements.
- Confidential Treatment Requests (CTRs) essentially eliminated. Prior to the amendments, companies that wanted to redact from their exhibits to registration statements and periodic reports confidential information that could cause competitive harm had to file a CTR with the SEC. CTRs required detailed applications supporting such redaction and were subject to review and approval by the SEC. The amendments allow companies to redact from material contracts and certain other exhibits filed with the SEC confidential information that is not material and would cause a company competitive harm if made public without requiring the company to first file a CTR, so long as the company (i) marks the exhibit index to the registration statement or periodic report to indicate that portions of the redacted exhibit have been omitted, (ii) includes a prominent statement on the first page of the redacted exhibit that certain information has been excluded from the exhibit because it is both not material and would be competitively harmful if publicly disclosed, and (iii) indicates with brackets where the information has been omitted from the filed version of the exhibit. Note that redacted exhibits are still subject to request by the SEC for more information. In addition, the amendments allow companies to omit personally identifiable information (i.e., information the disclosure of which would be "a clearly unwarranted invasion of personal privacy," such as bank account numbers, social security numbers, home addresses and similar information) from exhibits without the need for a CTR or other conditions.
- Requirements to file schedules and exhibits to material contracts mostly eliminated and other simplifications made for exhibits. Many periodic reports and registration statements require companies to file their material contracts as exhibits. Besides the agreements themselves, companies were technically required to file nearly all attachments to their material contracts, such as exhibits and schedules, which are often lengthy and detailed. The amendments allow companies to omit attachments to their material contracts if such attachments do not contain material information or were not otherwise disclosed. Companies are required instead to provide with each filed exhibit a list briefly identifying the contents of the omitted attachments to the extent such information is not already included in the exhibit, and to furnish any omitted attachments to the SEC upon request. Further, except for newly reporting companies, companies will not be required to file material contracts that were fully performed but entered into less than two years before the applicable filing. The amendments also eliminate the requirement for companies to file as an exhibit any document or part thereof that is incorporated by reference; instead, companies must provide hyperlinks to documents that are incorporated by reference.
- Description of property requirements will now be much more limited. Under the amendments, the required disclosure for physical properties will be limited to only physical properties that are material to companies.
- Section 16 disclosures revised. The amendments permit companies to omit disclosures regarding Section 16 reports from proxy statements and annual reports if all reports have been timely filed. If late reports are being disclosed, the amendments proscribe a new caption for that disclosure. In addition, regardless of whether or not late reports will be disclosed, the amendments eliminate the check-the-box disclosure on the cover of Form 10-Ks regarding Section 16 disclosures.
- Other minor tweaks made. The amendments also: (i) clarify the information discussed for purposes of audit committee reports in proxy statements to eliminate outdated rule references; (ii) tweak the required legend requirements for preliminary prospectuses; (iii) eliminate the list of examples for risk factors in the rules to emphasize the SEC's principles-based approach to risk factor disclosure; (iv) eliminate the five year limitation for incorporating by reference; and (v) eliminate a number of undertakings currently required for registration statements as duplicative or obsolete, among other minor changes.
Though the bulk of the amendments eliminate or simplify disclosures, a few new requirements were added:
- Stock exchange listing added to cover pages. The amendments require companies to disclose on the cover page of Forms 8-K, 10-Q, 10-K, 20-F and 40-F the national exchange or principal U.S. market for their securities, their trading symbol and the title of each class of securities.
- XBRL tagging added to cover pages. The amendments require certain information on the cover page of Forms 8-K, 10-Q, 10-K, 20-F and 40-F to appear in HTML format and be tagged in Inline XBRL (phased in over three years beginning June 15, 2019, based on a company’s filer status).
- New exhibit added for description of registered securities. The amendments will require companies to file as an exhibit a brief description of their registered securities. Companies currently must provide such descriptions in their registration statements; the amendments expand this requirement as a new exhibit to Form 10-K.
The amendments, which can be found here, are effective May 2, 2019, except for the amendments to the rules governing the redaction of confidential information in material contracts, which are effective as of April 2, 2019. Therefore, these amendments may be in effect by the time companies with quarterly reports due in May make those filings.
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If you would like further information regarding these amendments or other recent amendments adopted by the SEC, please contact the lawyer at Sullivan & Worcester LLP with whom you regularly consult, or any of the lawyers listed above.