On October 11, 2017, the U.S. Securities and Exchange Commission (SEC) proposed amendments designed to “modernize and simplify” numerous but mostly technical disclosure requirements of Regulation S-K under the Securities Act of 1933, as amended (Securities Act) and the Securities Exchange Act of 1934, as amended (Exchange Act). The proposed amendments are part of the SEC’s ongoing examination of its disclosure regime, and are largely consistent with the recommendations made by the SEC staff in its FAST Act Report delivered to Congress in November 2016. The proposed amendments are intended to make information in SEC disclosure documents clearer, discourage unnecessary repetition and immaterial disclosure, and leverage technology to make disclosures more accessible.
The proposed amendments are largely technical in nature and a number of the proposals codify existing SEC guidance. Individually, none of the changes is likely to have a significant impact. Taken as a whole, however, both reporting companies and investors are likely to welcome the streamlined disclosure requirements. Some of the more significant proposals are highlighted below.
Form 10-K and Analogous Sections in Offering Documents
Management’s Discussion and Analysis (MD&A) – Item 303
Item 303 of Regulation S-K requires a company’s MD&A discussion to cover the three-year period covered by the financial statements and to present the financial information using a year-to-year comparison or other format that would help a reader’s understanding. Consistent with the SEC staff’s existing interpretive guidance on MD&A, the proposed amendment would permit companies to eliminate discussion of the earliest year if the discussion is not material and if the company filed a Form 10-K the previous year containing an MD&A. This proposal would not apply to smaller reporting companies or emerging growth companies (EGCs) that are only required to provide two years of audited financials. Conforming changes are proposed for foreign private issuers who file on Form 20-F, but not to Canadian companies that file Form 40-F.
Description of Property – Item 102
Item 102 of Regulation S-K requires the disclosure of a company’s principal properties, including plants, mines and other materially important physical properties. While physical properties may be material to companies in certain industries, they may not be material for others, such as companies in the services or information technology sectors. As a result, the staff has observed that the current phrasing tends to elicit immaterial information, such as the description of office space and company headquarters, from companies without material physical properties. To reduce these immaterial disclosures, the proposed amendment would clarify that a description of property is required only to the extent the property is material to the company’s business and may be provided on a collective basis, if appropriate.
Executive Officers – Item 401
The proposed amendments would clarify that a company does not need to repeat the identifying and background information required by Item 401 of Regulation S-K about its executive officers in the company’s proxy statement if it is already included in Part I of the company’s Form 10-K.
Description of Securities – Item 202
Item 202 of Regulation S-K requires companies to include a brief description of their registered securities in their registration statements but not in their Form 10-K or Form 10-Q reports. The proposed amendments would require Item 202 disclosure as an exhibit to Form 10-K for securities registered under Section 12 of the Exchange Act. Modifications to the Item 202 disclosure during a fiscal year would be reflected in an exhibit to the following year’s Form 10-K, but would not change existing disclosure obligations under Items 3.03 and 5.03 of Form 8-K and Item 12 of Schedule 14A (proxy statement).
Section 16(a) Beneficial Ownership Reporting Compliance – Item 405
Section 16(a) of the Exchange Act requires officers, directors and specified types of security holders to report their beneficial ownership of a company’s equity securities through EDGAR and to furnish a copy of those reports to the company. Item 405 of Regulation S-K requires companies to disclose each reporting person who failed to file Section 16 reports on a timely basis during the most recent fiscal year, based solely on review of the reports furnished to the company. Since all reporting persons have been required to file their Section 16 reports electronically through EDGAR since 2003, the proposed amendments would require companies to review Section 16 reports that are available on EDGAR (rather than furnished to the company), and would eliminate the requirement that reporting persons furnish Section 16 reports directly to the company.
The proposed rules would also change the heading of this section to “Delinquent Section16(a) Reports” and add an instruction to encourage companies to omit the heading if they have no delinquencies to report. The proposal would also eliminate the checkbox on the cover page of Form 10-K that indicates a company is not including disclosure of any Section 16 reporting delinquencies.
Updated Audit Committee Report – Item 407
Under the current SEC rules, when a company files a proxy or information statement relating to an annual or special meeting, the company’s audit committee is required to state that it has discussed with its auditors the matters required by AU 380, Communication with Audit Committees. The reference to AU 380 has been outdated for several years, and the proposed amendments would update this reference by referring generally to the applicable requirements of the PCAOB and the SEC. If this proposal is implemented, companies will need to update their future audit committee reports.
Compensation Committee Report – Item 407
The proposed amendments would clarify that EGCs are expressly excluded from the requirement to provide a compensation committee report.
Exhibits – Item 601
Item 601 of Regulation S-K generally requires companies to file complete copies of all exhibits required to be filed under either the Securities Act or the Exchange Act, unless the SEC staff approves a request for confidential treatment. Item 601(b) currently allows companies to omit schedules to acquisition agreements unless they contain information material to an investment decision and such information is not otherwise provided in the disclosure. The SEC staff also routinely permits companies to omit personally identifiable information from exhibits. The proposed amendments would streamline the confidential treatment process and extend existing accommodations as follows:
- Omission of Immaterial Schedules. The proposed amendments would effectively extend to all exhibits, including material contracts, the existing accommodation for schedules to acquisition agreements. Under the proposal, companies would be permitted to omit entire schedules to exhibits unless they contain material information that is not otherwise provided in the disclosure document or exhibit. The proposal would require companies that rely on this exception to provide with each exhibit a list that briefly identifies the contents of any omitted schedule, and would require companies to provide a copy of any omitted schedule to the SEC staff upon request.
- Limitation of Lookback Period for Existing Companies. Current SEC rules require companies to file all contracts made outside the ordinary course of business that (1) have ongoing obligations or (2) have no ongoing obligations but were made within two years of the filing date. The proposed amendments would eliminate the two-year lookback test for all companies except newly reporting companies, the rationale being that existing reporting companies already will have filed those agreements and they would be available on EDGAR.
- Omission of Personally Identifiable Information. The proposed amendments would expand existing SEC staff accommodations that permit companies to omit personally identifiable information without a confidential treatment request.
- Redaction of Confidential Information in Material Contracts. The proposed amendments would permit companies to omit confidential information from material contracts without a confidential treatment request where the omitted information is immaterial and would be competitively harmful if publicly disclosed. Upon request by the SEC staff, companies would be required to provide copies of any supplemental materials to the staff, including an explanation of why the omitted information is not material and would cause competitive harm if disclosed.
The proposed amendments would apply to foreign private issuers who file on Form 20-F, but not to Canadian companies that file on Form 40-F.
Incorporation of Exhibits by Reference – Item 10(d)
The proposed amendments would eliminate the current prohibition on incorporating by reference many documents that have been on file with the SEC for more than five years, instead requiring hyperlinks to information incorporated by reference that is otherwise available on EDGAR. This amendment would eliminate a technical requirement adopted when SEC filings were publicly disseminated using microfiche cards; the availability of historical filings on the EDGAR system and the requirement to include hyperlinks to these exhibits has rendered this requirement unnecessary.
Registration Statement and Prospectus Provisions
Item 501 of Regulation S-K sets forth certain disclosure requirements related to the forefront of the registration statement and the outside front cover of the prospectus. The proposed amendments aim to streamline the disclosure requirements to give companies more flexibility to tailor the cover page in line with their business and the offering. The proposed amendment would:
- eliminate the instruction that a company change its name if its name is similar to that of a well-known company;
- allow companies to include on the cover a clear statement that the offering price will be determined by a specific method or formula that is more fully explained in the prospectus;
- expand the existing requirement that companies include on the cover the “national securities exchange” on which the securities are being offered to require companies to name the principal U.S. market or markets for the securities being offered for which the company has actively sought and achieved quotation, and the corresponding trading symbols; and
- allow companies to exclude the state law prohibition language from the “subject to completion” legend when state blue sky laws are preempted.
Undertakings – Item 512
The proposed amendments would eliminate existing undertakings that are duplicative or obsolete.