United States: SEC Proposes Amendments To Regulation S-K And Related Rules And Forms

On October 11, 2017, the Securities and Exchange Commission (SEC) issued proposed rules (Proposal) that would amend select disclosure requirements in Regulation S-K and related rules and forms, impacting the periodic reports and registration statements of all SEC registrants. This rulemaking effort is in response to the mandate issued by Congress in Section 72003 of the Fixing America's Surface Transportation Act (FAST Act) to provide "specific and detailed recommendations on modernizing and simplifying Regulation S-K in a manner that reduces costs and burdens on registrants while still providing all material information."

The proposed amendments amend, clarify or streamline certain existing requirements, including requirements regarding a registrant's description of property, Management's Discussion and Analysis (MD&A), description of securities, and material contracts disclosure. The SEC has also proposed several updating amendments to eliminate certain provisions considered obsolete or out-of-date, as well as to account for developments in technology. In limited instances, the new proposed rules would result in an increased disclosure burden for the registrant including the SEC's proposed amendments regarding the description of registrant's securities, disclosure of legal entity identifiers (LEIs) and national securities exchanges (and corresponding trading symbols), and requiring hyperlinks internal to the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) in certain circumstances. Additionally, new technology adoption may be required for certain registrants to meet proposed new data tagging requirements.

The Proposal, if adopted, will cause SEC registrants to make a variety of changes to annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and registration statements or /prospectuses. These changes are mostly straight forward and surgical, but several would require some evaluation and discretion by the registrants, particularly with respect to the MD&A. Commissioner Michael S. Piwowar emphasized the incremental nature of the proposed changes, stating, "[the] amendments are not an exercise in slash-and-burn clearcutting."1

Substantive Changes

SEC proposed amendments to Item 102: Description of Property.

Item 102 of Regulation S-K requires a registrant to describe the location and general character of certain physical properties owned by the registrant and its subsidiaries. The SEC has proposed to amend Item 102 to (1) require disclosure of physical properties only to the extent material to the registrant and (2) allow for such disclosure to be provided on a collective basis, if appropriate. Although the SEC has not provided specific guidance as to what constitutes materiality in this context, the guidance provided in the staff's preamble to the Proposal contemplates that registrants would move away from detailed listings of properties that individually are not material to the registrant. Individual property disclosure would likely continue only where the property is material from a financial standpoint on a registrant's balance sheet or from an operational standpoint where loss or significant damage would disrupt operations in such a fashion as to materially impact results of operations and the ability to conduct business.

SEC proposed amendments to Item 303: Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 303 of Regulation S-K requires an explanation of any changes in the financial condition or results of operation of a registrant. MD&A is required to cover the three-year period covered by the financial statements and either provide year-to-year comparisons or present any other format that would enhance a reader's understanding. The SEC has proposed to amend Item 303 to eliminate discussion of the earliest year of the three-year period if (1) that discussion is not material to an understanding of the registrant's financial condition, changes in financial condition, and results of operations and (2) the registrant has filed its prior year Form 10-K on EDGAR and that report's MD&A contains a discussion of the earliest of the three years included in the financial statements of the current filing. However, the SEC clarified in the preamble to the Proposal that the earlier year information may be material to the extent instructive to explain material changes in financial trends. Accordingly, the SEC indicated in the Proposal that the change to Item 303 is "intended to encourage companies to re-evaluate disclosures in their prior year MD&A and take a 'fresh look' to determine whether such disclosure remains material."

Additionally, to maintain a consistent approach across domestic and foreign registrants, the SEC has proposed to change Form 20-F (the annual report that must be submitted by foreign private issuers) to conform to the proposed amendments to the instructions to Item 303(a). However, the SEC has excepted Canadian issuers from the proposed changes, reasoning that Canadian issuers are permitted to use Canadian disclosure documents to satisfy the SEC's registration requirements and those forms are prepared in accordance with Canadian disclosure standards.

SEC proposed amendment regarding Item 202: Description of Registrant's Securities.

Item 202 of Regulation S-K requires registrants to provide a description of their registered capital stock, debt securities, warrants, rights, American Depositary Receipts, and other securities in their registration statements. The SEC has proposed to amend Item 601(b)(4) to require that registrants provide a similar description as an exhibit to Form 10-K, while making clear that where (1) a registrant has previously filed Item 202 information as an exhibit to a prior annual report filed under the Securities Exchange Act of 1934 (Exchange Act) Section 13(a) or 15(d) and (2) there has not been any change to the information responsive to Item 202, the registrant may incorporate the information by reference and provide a hyperlink to the relevant exhibit to such previously filed annual report. As a result of the Proposal, all registrants would be required to file a description of securities as an exhibit to the first 10-K due to be filed after the effectiveness of the final rules.

SEC proposed amendments to material contracts disclosure.

Item 601(b)(10)(i) of Regulation S-K requires registrants to file material contracts not made in the ordinary course of business if (1) the contract is performed in whole or in part at or after the filing of the registration statement or report or (2) the contract was entered into not more than two years before that filing. Recognizing that the second test does not provide any new information to investors for registrants with established reporting histories, the SEC has proposed to amend Item 601(b)(10)(i) so that the two-year look back test is limited to newly reporting registrants. Accordingly, the vast majority of SEC registrants would be expected to review and prune from its exhibit list material contracts that are no longer effective with ongoing obligations.

SEC proposed amendments to disclosure of subsidiaries of the registrant.

The SEC has proposed an amendment to Item 601(b)(21) of Regulation S-K that would require registrants to include any subsidiary's (as well as the registrant's) LEI in the exhibit listing each of its subsidiaries but only to the extent an LEI had been obtained. An LEI is a 20-character alpha numeric code that allows for unique identification of entities engaged in financial transactions. However, the SEC made clear it was not requiring each subsidiary to have an LEI, though it is seeking comment on whether to impose such a requirement.

In her Statement on Proposal of FAST Act Modernization and Simplification of Regulation S-K, SEC Commissioner Kara M. Stein noted the imperative nature of an investor's ability to precisely and quickly identify a relevant entity, particularly in the event of a crises, indicating that LEIs facilitate such identification.2

To maintain a consistent approach across domestic and foreign registrants, the SEC has proposed to similarly amend Form 20-F but, again, has excepted Canadian issuers from the proposed changes.

SEC proposed amendments relating to incorporation by reference.

Acknowledging the need for modernization and simplification in the shadow of EDGAR becoming the primary method for filing various reports, registrations statements, and other forms with the SEC, with commensurate new and existing requirements for hyperlinks to exhibits and to information that is incorporated by reference, the SEC has proposed amendments to various rules and forms generally to codify and clarify instances where incorporation by reference is acceptable and  eliminate any redundancies.

The Proposal eliminates the rule in Item 10(d) of Regulation S-K that, subject to several exceptions, forbids incorporation by reference of documents filed with the SEC more than five years ago. This change will allow incorporation by reference to any document previously filed with the SEC regardless of time frame, recognizing that most if not all documents on file with the SEC are now in electronic format and available in EDGAR. The Proposal also amends certain rules to require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. This will affect most if not all issuers on an ongoing basis.

The Proposal also addresses the often-debated issue of incorporating information from the financial statements and related notes into other narrative disclosure in periodic reports and prospectuses, as well as incorporating by reference from those other disclosures into the financial statement narrative. To that end, the SEC has proposed amending certain rules and forms to prohibit financial statements incorporating by reference or cross-referencing from outside the financial statements except where already explicitly permitted. This is intended to help limit the scope of the materials that are covered by the independent auditors' responsibilities. In contrast, the SEC opted not to adopt a restriction on incorporation by reference of non-financial information from within the financial statements into disclosures required elsewhere in the SEC filings, but seeks comment from the public on this issue.

SEC proposed amendments regarding information omitted from Exhibits.

Pursuant to Exchange Act Rule 24b-2 and Securities Act of 1933 (Securities Act) Rule 406, registrants are permitted to request confidential treatment of information included in an exhibit to a filing under either the Exchange Act or the Securities Act. Additionally, it has been the SEC's practice to accept filings where a registrant has omitted personally identifiable information from exhibits without submitting a confidential treatment request. The SEC has proposed to amend Item 601 of Regulation S-K to (1) expand the existing accommodation to explicitly permit the omission of personally identifiable information, (2) permit registrants to omit schedules and similar attachments to all exhibits unless they contain material information and such information is not otherwise disclosed, with each exhibit containing "a list briefly identifying the contents of all omitted schedules", and (3) permit registrants to omit confidential information from material contracts without submitting a confidential treatment request to the SEC where such information is immaterial and competitively harmful if publicly disclosed, while reserving the right to require delivery of supplemental materials to the SEC upon its request.

The SEC's proposal aimed "to reduce significantly the need for registrants to submit applications for confidential treatment of information in material contract exhibits..."

Certain Technical Changes

SEC proposed amendments regarding cover page data.

Item 601 of Regulation S-K requires operating company registrants to file their financial statements as an exhibit in a machine-readable format eXtensible Business Reporting Language (XBRL) and tag in XBRL certain data points appearing on the cover page of the filing. The SEC has proposed amendments requiring (1) the inclusion of trading symbols for each class of registered securities and (2) tagging in Inline XBRL all information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F and 40-F.

SEC proposed amendments to requirements of the cover of prospectus.

The SEC has proposed to make a number of amendments to the outside front cover page of the prospectus. Registrants will be required to disclose the principal US markets for the securities being offered and the corresponding trading symbols, but the SEC has proposed to limit disclosure of markets that are not national securities exchanges to those principal US markets where the registrant, through the engagement of a registered broker-dealer, has sought and achieved quotation.

SEC proposed amendments to Item 503(c): Risk Factors.

In addition to certain minor edits related to the risk factors disclosure, the SEC has proposed to eliminate the examples of risk factors currently listed in Item 503(c) of Regulation S-K to "encourage registrants to focus on their own risk identification processes." The SEC opted to suggest eliminating the examples altogether rather than revising or adding to the list of examples in order to avoid "[anchoring or skewing] the registrant's risk analysis in the direction of the examples."

SEC proposed amendments to Item 405: Compliance with Section 16(a) of the Exchange Act.

Item 405 of Regulation S-K requires registrants to disclose each reporting person who failed to file on a timely basis reports required by Section 16(a) ("16(a) reports") of the Exchange Act. Section 16(a) requires officers, directors, and certain security holders to report their beneficial ownership of and transactions in a registrant's equity securities. Currently, a registrant is required to disclose any such failure based on its review of copies of 16(a) reports as well as any written representations it receives from reporting persons. The SEC has proposed several related amendments including (1) amend Item 405 to clarify that registrants may rely on 16(a) reports available on EDGAR rather than reports furnished to the registrant, and (2) eliminate the requirement that reporting persons must deliver a duplicate copy of any 16(a) reports to the registrant from the Exchange Act rules.


1 See https://www.sec.gov/news/public-statement/piwowar-statement-101117.

2 See https://www.sec.gov/news/public-statement/stein-statement-101117

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