United States: SEC Adopts Amendments To Update and Simplify Disclosure Requirements

On August 17, 2018, the SEC adopted amendments to eliminate, integrate, update or modify certain of its disclosure requirements. The amendments are part of the SEC's efforts to improve disclosure effectiveness as well as implement the FAST Act's mandate to improve Regulation S K. In addition, the amendments—which are focused on disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded—are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. While many of the changes are highly technical in nature, issuers, preparers, and investors will likely view these amendments as positive, incremental changes to the SEC's disclosure requirements.

Overview of the Amendments

The amendments eliminate, integrate, update or modify:

  • redundant or duplicative disclosure requirements that provide substantially the same disclosures as U.S. GAAP, IFRS, or other SEC requirements;
  • overlapping disclosure requirements, which require reasonably similar disclosures as U.S. GAAP or other SEC requirements;
  • outdated disclosure requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environments; and
  • superseded disclosure requirements that are inconsistent with newer accounting, auditing, and disclosure requirements.

Many of the amendments were adopted substantially in the form that they were proposed in July 2016, except for some disclosure requirements that the SEC referred to the FASB for potential incorporation into U.S. GAAP and several other requirements that the SEC determined to retain unchanged. The SEC noted that any disclosure requirements incorporated into U.S. GAAP could affect all public business entities in the same way because U.S. GAAP has no concept of scaled disclosure, such as the SEC regime for smaller reporting companies (SRCs) and issuers relying on Regulation A or Regulation Crowdfunding. The SEC is requesting that the FASB determine whether the referred disclosure items will be added to its agenda within 18 months after publication of the final rule in the Federal Register.

Disclosure Location Considerations

The SEC weighed certain disclosure location considerations that could result as a consequence of adopting the amendments, including the following:

  • Prominence Considerations – the relocation of some disclosures in a filing may change the prominence and/or context of both the relocated disclosures and the remaining disclosures.
  • Financial Statement Considerations – the relocation of some disclosures from outside to inside the financial statements would subject the information to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, and would no longer qualify for safe harbor protection under the Private Securities Litigation Reform Act of 1995 (PSLRA). Conversely, relocation of disclosures from inside to outside the financial statements would have the opposite effect.
  • Bright Line Disclosure Threshold Considerations – the removal of a bright line disclosure threshold could potentially reduce the amount of required disclosures and increase the judgment required to determine what disclosures are meaningful to investors.

Summary of the Amendments

The following summary highlights some of the noteworthy changes that will affect a company's typical disclosures made in its SEC filings.

Description of Business

Many of the below changes implicate prominence and financial statement considerations because these disclosures are located in the business description section of an annual report filing, while the corresponding disclosures are located in different sections of the filing (e.g., risk factors or MD&A) or in the notes to the financial statements.

  • Segments – The amendments eliminate the requirement to provide financial information about segments1 as part of the description of the business as U.S. GAAP and Item 303(b) of Regulation S-K require similar disclosures. Segment disclosures will continue to be available in the notes to the financial statements and, where applicable, in the MD&A.
  • Research and Development Activities – The amendments eliminate the requirement to disclose, if material, the amount spent on research and development activities2 as U.S. GAAP and IFRS require reasonably similar disclosures. However, the disclosure of trend information related to those items, where material, is required by Item 303 of Regulation S-K, and companies should continue to provide trend information disclosures in the business description section, as necessary. In addition, the amendments do not preclude companies from continuing to provide voluntary disclosures of their R&D activities as part of their business description or elsewhere outside of the financial statements.
  • Geographic Areas – The amendments eliminate the requirement to disclose in the description of the business financial information by geographic area, the risks associated with an issuer's foreign operations and any segment's dependence on foreign operations3 as U.S. GAAP and other parts of Regulation S-K require similar disclosures. In addition, the SEC amended Item 303 of Regulation S-K to add an explicit reference to "geographic areas." The SEC also clarified that geographic areas are an example of a subdivision of a business that is required to be discussed when management believes such discussion would be appropriate to an understanding of the business and that discussion of geographic areas is not required in all circumstances.
  • Seasonality – The amendments retained the seasonality disclosure requirements in annual reports,4 but eliminated Instruction 5 to Item 303(b) of Regulation S-K as U.S. GAAP, in combination with the remainder of Item 303, requires disclosures in interim reports that convey reasonably similar information. While investors could potentially receive less supplemental forward-looking information about seasonality because the PSLRA safe harbor is not available for such information when it is disclosed in the notes to the financial statements, the SEC stated its belief that, even without Instruction 5, the requirements in Item 303 elicit disclosure of forward-looking information in interim reports to the extent that the effects of seasonality may become material.

Market for Registrant's Common Equity

Regulation S-K requires a company to disclose basic information about the public trading market (or absence thereof) and historical trading prices for its common equity.5 The SEC observed how this disclosure requirement has become outdated, given that investors can easily access a company's stock price information for free on numerous websites. As a result, the SEC eliminated the requirement for a company to disclose the high and low sales prices of its common equity for each full quarterly period within the two most recent fiscal years and interim periods and replaced it with disclosure of the trading symbol(s) for each class of the company's common equity. Other specific disclosure requirements will apply to issuers with common equity that is traded over-the-counter and issuers with no class of publicly-traded common equity. Foreign private issuers will be subject to similar disclosure requirements as U.S. issuers as Form 20-F will be updated with consistent changes.

Dividends

Companies will also no longer need to state the frequency and amount of any cash dividends in the body of a Form 10-K, Part I of a Form S-1, or other relevant filings, as Regulation S-X will be amended to require similar disclosure.

In addition, the amendments consolidate disclosure requirements pertaining to restrictions that currently, or are likely to, materially limit the issuer's ability to pay dividends on its common equity6 into a single requirement in Regulation S-X. Similar changes are being made with regard to Form 20-F that will apply to foreign private issuers.

Warrants, Rights and Convertible Instruments

The amendments eliminate the requirement to disclose on Form S-1 or Form 10 the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established U.S. public trading market.7 U.S. GAAP more broadly requires disclosure of the terms of significant contracts to issue additional shares, the number of shares authorized for certain equity awards, and, in the calculation of diluted earnings per share, the weighted-average incremental shares that would be issued from the assumed exercise or conversion of options, warrants, and convertible securities.

Ratio of Earnings to Fixed Charges

Regulation S-K requires issuers that register debt securities to disclose the historical and pro forma ratios of earnings to fixed charges and issuers that register preference equity securities to disclose the historical and pro forma ratio of combined fixed charges and preference dividends to earnings.8 Regulation S-K also requires the filing of an exhibit setting forth the computation of any ratio of earnings to fixed charges.9 The amendments eliminate these requirements because U.S. GAAP and IFRS require disclosure of many of the components commonly used in the ratio (e.g., income, interest expense, lease expense) as well as information from which other ratios may be computed that convey reasonably similar information about an issuer's ability to meet its financial obligations.

Extraordinary Items

The SEC updated various disclosure requirements and forms to replace the outdated reference to "extraordinary items," which the FASB had eliminated from U.S. GAAP in January 2015.

Where You Can Find More Information

The amendments eliminate the requirement to identify the Public Reference Room and disclose its physical address and phone number,10 but retain the requirement to disclose the SEC's internet address and a statement that electronic SEC filings are available there. This requirement will also be expanded to foreign private issuers. In addition, all issuers will be required to disclose their Internet addresses, if they have one (previously, only accelerated filers and large accelerated filers were required to provide their Internet address and all other issuers were merely "encouraged" to do so).

Exhibits

The following exhibit requirements were eliminated (the SEC's exhibit-numbering system has been preserved, however, as the below items have been removed and "[Reserved]"):

  • Item 601(b)(11) – Statement re: computation of per share earnings;11
  • Item 601(b)(12) – Statement re: computation of ratios;
  • Item 601(b)(19) – Report furnished to security holders;12
  • Item 601(b)(22) – Published report regarding matters submitted to vote of security holders;13 and
  • Item 601(b)(26) – Invitation for competitive bids.14

Referrals to the FASB

As noted above, the SEC is referring a number of items to the FASB for potential incorporation into U.S. GAAP, including disclosure requirements relating to major customers, products and services, foreign currency, repurchase and reverse repurchase agreements, equity compensation plans, discount on shares, income tax disclosures, consolidation matters, debt obligations, related party transactions, and interim financial statements. Companies should take note as any disclosure requirements that are incorporated into U.S. GAAP could potentially affect all entities that prepare financial statements under U.S. GAAP, including SRCs.

In contrast to the foregoing items, the SEC decided not to refer the disclosure requirements relating to legal proceedings, which are one type of loss contingency, to the FASB for potential incorporation into U.S. GAAP. The SEC had previously solicited comments as to whether to amend or refer these disclosure requirements to the FASB. The SEC had observed that issuers commonly repeated some or all of the disclosures provided in the notes to the financial statements under U.S. GAAP or included a cross-reference to those disclosures when complying with the SEC disclosure requirement. Many commenters opposed the integration of the Regulation S-K and U.S. GAAP requirements, expressing concerns about financial statement disclosure considerations (including the PSLRA safe harbor) and bright line disclosure threshold considerations. The SEC concluded that further consideration is warranted with respect to the implications of potential changes to these requirements.

Effective Date of the Amendments

The amendments will become effective 30 days after the final rule is published in the Federal Register. While the timing of the rule's official publication is uncertain, calendar year-end reporting companies should take note as these amendments could affect their preparation of third quarter 2018 reports on Form 10-Q.

Footnotes

1 Item 101(b) of Regulation S-K and Item 7(b) of Form 1-A. The SEC also eliminated Rule 3-03(e) of Regulation S-X as it was redundant with U.S. GAAP.

2 Item 101(c)(1)(xi) of Regulation S-X, Item 101(h)(4)(x) of Regulation S-X, Item 5.C of Form 20-F and Item 7(a)(1)(iii) of Form 1-A.

3 Item 101(d)(1)-(3) of Regulation S-K.

4 Item 101(c)(1)(v) of Regulation S-K.

5 Item 201(a) of Regulation S-K.

6 Item 201(c)(1) of Regulation S-K.

7 Item 201(a)(2)(i) of Regulation S-K.

8 Item 503(d) of Regulation S-K.

9 Item 601(b)(12) of Regulation S-K.

10 Item 101(e)(2) and Item 101(h)(5)(iii) of Regulation S-K; Forms S-1, S-3, S-4, S-11, F-1, F-3, and F-4; Item 1118(b) of Regulation AB; and Forms SF-1, SF-3, N-1A, N-2, N-3, N-5, N-6, and N-8B-2.

11 This provision was eliminated as substantially redundant or duplicative of U.S. GAAP or IFRS disclosures. Instruction 6 to "Instructions as to Exhibits" of Form 20-F was similarly eliminated.

12 General Instruction D(3) to Form 10-Q, which refers to Item 601(b)(13) of Regulation S-K, provides specific instructions to address incorporation by reference into Form 10-Q of information that is separately made available to security holders.

13 This provision became obsolete since shareholder voting results may be disclosed in Forms 10-K and 10-Q and Item 5.07 of Form 8-K.

14 This provision was deleted as it provided little additional value to investors. Those participating in a competitive bid would directly receive the invitation, and all other investors would have access to the registration statement covering the securities offered at competitive bidding, as well as the results of the competitive bidding and the terms of reoffering.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions