On March 20, 2019, the SEC adopted amendments to modernize and simplify certain disclosure requirements in Regulation S-K. A majority of the amendments were adopted in the form that they were proposed in October 2017, which in turn were largely consistent with the recommendations in the SEC’s FAST Act Report to Congress in November 2016.1 The amendments are intended to improve the readability and navigability of SEC documents and discourage repetition and disclosure of immaterial information.
The final rules include approximately 30 discrete changes to Regulation S-K and related rules and forms. Highlights of key aspects of the final rules are summarized below. Annex A contains a more comprehensive summary of the amendments.
Summary of the Amendments
MD&A. Instruction 1 to Item 303(a) currently provides that, generally, a company’s MD&A should address the three-year period covered by the financial statements and either use year-to-year comparisons or another format that, in the company’s judgment, enhances a reader’s understanding. The Instruction also states that, where trend information is relevant, reference to the five-year selected financial data may be necessary.
Under the final rules, the discussion of the earliest year may be omitted from MD&A if the company has included such discussion in a prior filing on EDGAR and includes a statement identifying the location in the prior filing. In addition, the final rules eliminate the reference to the five-year selected financial data in Instruction 1 because Item 303(a)(3)(ii) already requires disclosure of known trends and uncertainties. The final rules also further simplify Instruction 1 to emphasize that companies may use any presentation that, in the company’s judgment, would enhance a reader’s understanding. In the adopting release, the SEC acknowledged that many companies will continue to provide year-to-year comparisons as the format “is a familiar and, in many cases, appropriate method of presentation” but noted its belief that such a presentation “may not always be the most effective format, depending on the unique circumstances of a particular registrant.”
Confidential Treatment. The final rules allow companies to redact confidential information from material contracts filed under Item 601(b)(10) where such information is both (a) not material and (b) would likely cause competitive harm to the registrant if publicly disclosed, without simultaneously submitting a confidential treatment request (“CTR”) to the SEC. If the staff requests, the company must promptly provide an unredacted paper copy of the exhibit along with the company’s materiality and competitive harm analyses. These changes are intended to substantially reduce the burden currently borne by companies in preparing and processing CTRs while still providing all material information to investors. Note, however, the staff will continue its selective review of company filings and will selectively assess whether redactions appear to satisfy the above requirements. If the company’s analyses do not support its redactions, the staff may request that the company file an amendment that includes some, or all, of the previously redacted information.
The provisions governing redaction of confidential information in material contracts will become effective on the date the final rules are published in the Federal Register. If a company has a CTR pending at the time the amended rules become effective, the company may withdraw its pending CTR application. The SEC and its staff will continue to process pending CTR applications that are not withdrawn. Companies that elect to withdraw their CTR applications to rely on the amended rules are advised to (1) refile the relevant exhibit(s), in redacted form, in an amended filing that conforms to the amended rules and (2) coordinate with the Assistant Director office responsible for reviewing their filings.
Exhibits. The final rules expand to all exhibits filed under Item 601 the existing accommodation that permits companies to omit immaterial schedules and attachments to acquisition agreements. Under the final rules, companies will still be required to provide with each filed exhibit a list that briefly identifies the contents of omitted schedules and attachments and, upon SEC staff request, furnish a copy of any omitted schedules or attachments. A separate list of omitted schedules and attachments need not be prepared if the information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. The final rules also permit companies to redact any personally identifiable information (“PII”) (e.g., bank account numbers, social security numbers, home addresses, and similar information) from filed exhibits.
Risk Factors. Item 503(c) requires companies to disclose the most significant factors that make an offering speculative or risky. The final rules relocate the line item from subpart 500 to subpart 100 of Regulation S-K to reflect the application of risk factor disclosure requirements to both Exchange Act reports and registration statements. In addition, the final rules eliminate risk factor examples. In the adopting release, the SEC stated that it believed that the elimination of these examples would encourage public companies to focus on their own risk identification processes.
Incorporation by Reference. The final rules eliminate the limit in Item 10(d), which generally prohibited the incorporation of documents by reference if they had been on file with the SEC for more than five years, and require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. Unlike the requirements for exhibit hyperlinking, a company will not be required to correct inaccurate hyperlinks in an effective registration statement by including a corrected hyperlink in a subsequent periodic report or a post-effective amendment. Under the final rules, companies also need to include a clear statement describing the specific location of the information that is being incorporated by reference and identify the document where the information was originally filed or submitted and the location of the information within that document.
In addition, the final rules prohibit the incorporation by reference or cross-referencing from the financial statements to information outside of the financial statements, unless otherwise specifically permitted or required by the SEC’s rules, U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), because the practice could raise questions as to the scope of an auditor’s responsibilities.
Trading Symbols and XBRL. Some of the amendments require additional disclosure or incorporation of new technology. Under the final rules, the cover pages of Forms 10-K, 10-Q, 8-K, 20-F, and 40-F will be revised to require the disclosure of the trading symbol and title for each class of a company’s registered securities and the name of each exchange on which the company’s securities are registered. In addition, under the final rules, all information on the cover pages of these forms must be tagged in Inline XBRL. The SEC adopted a three-year phase-in for operating companies to tag data on the cover pages of these forms that are identical to the compliance dates for mandatory compliance with the Inline XBRL rules adopted in 2018. For more information on the Inline XBRL rules, see our prior Alert here. As a result, large accelerated filers will be required to comply with these tagging requirements beginning in reports for a fiscal period ending on or after June 15, 2019, accelerated filers will be required to comply in reports for a fiscal period ending on or after June 15, 2020, and all other filers—including foreign private issuers—will be required to comply in reports for fiscal periods ending on or after June 15, 2021.
Proposed Amendments that Were Not Adopted. The SEC had proposed, but declined to adopt, rules relating to legal entity identifiers (“LEIs”) and tailored presentations based on the comments that were submitted. The proposed rules would have required companies to include the LEIs of the company and each subsidiary listed on the company’s subsidiary list exhibit. While some commenters favored this proposal, several commenters expressed doubts about the benefits of the information or were concerned that it would be costly and time-consuming to acquire and maintain LEIs, particularly for global companies with numerous subsidiaries. The proposed rules also contained amendments to Forms 10, 10-K, and 20-F that would have allowed companies to exclude item numbers and captions or create their own tailored captions in those forms. A majority of commenters opposed these amendments and indicated that the proposed changes could make an investor’s task more challenging to locate information important to them.
Effective Date of the Amendments
Except for the amendments to the rules governing redaction of confidential information in material contracts, which are effective on the date the final rule is published in the Federal Register, the amendments will become effective 30 days after such publication date.
While the timing of the rules' official publication is uncertain, calendar year-end reporting companies should take note as these amendments could affect their preparation of first quarter 2019 reports on Form 10-Q and/or 2019 proxy statements. With respect to proxy statements filed after the effective date, for example, companies will be required to update the caption from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports,” and should consider revising any references to a specific auditing standard regarding communications between the audit committee and the independent auditor that may appear in the audit committee report to refer more broadly to those matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the SEC. In addition, several amendments will affect any registration statements and prospectuses that are first filed after the effective date.
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Please feel free to contact any member of Ropes & Gray’s securities & public companies practice group or your usual Ropes & Gray contact with any questions about this Alert.
1 See Report on Modernization and Simplification of Regulation S-K (November 2016), which was required by Section 72003 of the Fixing America’s Surface Transportation (FAST) Act.
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