United States: SEC Disclosure Simplification Continues

On March 20, 2019, the Securities and Exchange Commission (SEC) adopted amendments to simplify and modernize disclosure requirements of Regulation S-K and certain forms.1

The amendments are intended to streamline disclosures made by public companies to make them more effective and reduce compliance costs while continuing to provide material information to investors. The amendments apply to both U.S. domestic registrants and foreign private issuers. The final rules substantially reflect the amendments proposed by the SEC in a proposing release published on October 11, 2017.2 Most of the rules will become effective 30 days after the date of publication in the Federal Register, except for the rules governing treatment of confidential information in material contracts which will become effective on the date of publication in the Federal Register. Highlights of the changes effected by the amendments are described below.

Streamlined Process to Redact Confidential Information in Material Contracts (Item 601(a)(10) and Item 601(b)(2)).3 The amendments will permit companies to redact confidential information from filed material contracts without submitting, and receiving approval from the SEC of, a formal confidential treatment request. The existing standards for determining whether information can be redacted from a contract still apply. Therefore, companies still must determine that information redacted from a contract (a) is not material to investors and (b) would likely cause competitive harm if it was disclosed. 

While companies will no longer need to provide a written analysis of these two factors to SEC staff, SEC staff retains the ability to request companies to provide materiality and competitive harm analyses at any point after a company has filed the redacted material contract. As such, companies should continue to craft their redactions narrowly and keep a record of the reasons for the redactions, addressing the two factors. The elimination of the front-end SEC approval process significantly streamlines the confidential treatment process and is particularly significant for IPOs and other transactions because it reduces the risk of delay previously associated with the need to clear a confidential treatment request with the SEC before it would declare a registration statement effective.

Excluding Schedules to Filed Exhibits (Item 601(a)(5)). The amended rules also permit companies to omit entire schedules and similar attachments to any filed exhibits unless the schedules and attachments contain material information that is not otherwise disclosed in the exhibit itself or in the disclosure document. This amendment expands an accommodation previously available only for schedules to acquisition agreements. This amendment means that companies need only determine whether the information in schedules or similar attachments to an exhibit is not material. Unlike the process for redacting portions of material contracts discussed above, companies do not have to conclude that the public disclosure of the omitted schedules would likely cause competitive harm.

An exhibit must contain a list briefly identifying the contents of each omitted schedule or attachment, but that requirement is deemed satisfied if the information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments, such as an exhibit list contained within the filed exhibit. This ability to omit schedules and attachments is not limited to material contracts, but applies to all filed exhibits. A company should be prepared to furnish the schedules or similar attachments upon request. The SEC expects the impact of this change to be small because it believes that the majority of schedules and similar attachments contain at least some material information and thus cannot be omitted.

Elimination of MD&A for the Earliest Year in a Three-Year Presentation (Item 303). When financial statements included in a filing cover a three year period, like an Annual Report on Form 10-K, companies are currently required to include a Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) that covers the entire three-year period. The MD&A usually takes the format of a discussion comparing the changes in the financial condition and results of operations of the company between the first and second year and the second and third year. The amendments will allow a company to exclude the discussion of the “earliest of the three years” – effectively changes between the first and second year – if such a discussion was included and required in any prior EDGAR filing. A company would have to identify the filing and location in such filing where the discussion may be found. As these year-to-year comparison discussions have already been written and filed, this amendment will not save companies time or effort. It does, however, address the common complaint that the annual disclosure documents are increasing in length with each year. 

The adopting release excluded the condition, which was part of the rule proposal, that the omitted year-to-year discussion cannot be “material to an understanding” of the registrant’s results of operations and financial condition. The SEC, however, did state that materiality “remains, as always, the primary consideration.” Therefore, materiality considerations are relevant when considering whether to exclude a year-to-year discussion.  For example, when companies restate their financial statements or recast information retrospectively for a change in segment reporting or accounting principle, they should consider whether to prepare a revised MD&A for the earliest year reflecting the restatement or recast. This amendment does not affect IPO companies that are required to show three years of financial statements and the comparison discussion for both periods.

Flexibility in MD&A Presentation (Item 303). The amendments remove the explicit reference to a year-to-year comparison discussion as the default format for MD&A. Under the existing rules, companies are already permitted to use any other format that in their judgment enhances a reader’s understanding of changes in its financial condition and results of operations. In removing the reference to year-to-year comparison, however, the SEC seeks to indicate that no one mode of presentation is preferable to another. While the SEC expects that many registrants will continue to provide year-to-year comparisons as the familiar presentation, it also recognizes that this may not always be the most effective format, depending on the unique circumstances of a particular registrant. This provides flexibility to choose a narrative format or other format that a company deems appropriate to supplement or substitute the current year-over-year comparison that is ubiquitous in MD&A discussions. 

Limitation of Property Descriptions to Material Properties (Item 102). The amendments replace the various non-industry specific disclosure triggers for “principal” plants and mines, “materially important” physical properties and “major” encumbrances with a more uniform materiality standard and make other clarifying amendments. Property descriptions will be required only to the extent the described properties are material. The industry specific property disclosure requirements for mining, real estate, and oil and gas industries remain unchanged.

Section 16(a) Compliance (Item 405). The SEC eliminated the requirement that Section 16 reporting persons furnish Section 16 reports to relevant registrants. Under the revised rules, registrants may rely on Section 16 reports filed on EDGAR and written communications to registrants from Section 16 reporting persons to report delinquent Section 16 filings in Form 10-Ks and/or proxy statements. Furthermore, the SEC eliminated the checkbox on the cover page of Form 10-K relating to section 16(a) compliance.

Description of Registrant’s Listed Securities Required in Form 10-K (Item 601(b)(4)). The amendments require public companies to provide a brief description of their registered securities as an exhibit to their annual reports on Form 10-K, rather than limiting such disclosure to registration statements. This change is intended to increase investors’ ease of access to information about the rights and obligations of each class of registered securities by consolidating the information in one location. While most of that information will already have been prepared for purposes of Securities Act registration, compiling it into consolidated exhibit form will involve additional work for companies. This is especially true of companies with multiple series of listed debt securities. The requirement does not apply to unlisted debt securities. 

Elimination of Two-Year Look-Back for Material Contracts (Item 601(b)(10)). Material contracts not entered into in the ordinary course of business must be filed as exhibits if they either (a) must be performed in whole or in part at or after the filing of the registration statement or periodic report or (b) were entered into not more than two years before that filing.4 The amendments eliminate the two-year look-back, except for newly reporting companies. As a result, public companies will no longer need to file material contracts entered into during the two years prior to the filing of a registration statement or periodic report if those contracts have already been fully performed.

Incorporation by Reference. The SEC also updated several rules relating to incorporation by reference. Changes in this area include the following:

  • Removal of Age Limit on Incorporated Documents (Item 10(d)). The amendments remove the limits on incorporating by reference to documents that have been on file with the SEC for more than five years, unless certain requirements were met (such as referencing the prior SEC file number), to reflect the current practice of retaining documents electronically.
  • Elimination of Need to File Information Incorporated into Exchange Act Reports as Exhibits (Item 601(b)(99)(ii), Item 601(b)(13)). The amendments eliminate the requirement to file information incorporated by reference into an Exchange Act report as an exhibit. In addition, the amendments eliminate the requirement to file a Form 10-Q as an exhibit when it is specifically incorporated by reference into a prospectus.
  • Expansion of Hyperlinking From Exhibits to All Incorporated Documents. Public companies are already required in their filings to hyperlink to exhibits that are listed on the exhibit index. The amendments expand the hyperlinking requirement to information that is incorporated by reference in a periodic report or registration statement if that information is available on EDGAR. 

Tagging of Cover Page Information. All data points found on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F need to be provided in eXtensible Business Reporting Language (XBRL) (using Inline XBRL when such requirement goes into effect). The rules do not apply when Form 20-F and Form 40-F are used as registration statements. This requirement has a three-year phase-in compliance period depending on filer status.

Market for Securities (Item 501(b)(4)). The amendments require disclosure of the principal United States market or markets for the securities being offered and the corresponding trading symbols. The disclosure is limited to markets where the registrant has actively sought and achieved a quotation.

Omission of Personally Identifiable Information From Exhibits (Item 601(a)(6)). The amendments permit the omission of personally identifiable information without a confidential treatment request and formalize current SEC staff guidance.

No Incorporation by Reference or Cross-Referencing in Financial Statements (Securities Act Rule 411; Exchange Act Rule 12b-23). The amendments provide that incorporating information by reference or cross-referencing in financial statements to information from outside of the financial statements is prohibited unless otherwise specifically required or allowed through the SEC’s rules or U.S. GAAP or IFRS. The SEC intends this amendment to eliminate questions as to whether information incorporated by reference into the financial statements has or has not been subject to review by an independent auditor.

Elimination of Risk Factor Examples (Item 503(c), Item 105). The amendments eliminate the example risk factors that were previously provided. The SEC believes that eliminating the examples will “encourage registrants to focus on their own risk identification processes.”

Implications

Although these amendments are not expected to meaningfully alter the disclosure regime for public companies or significantly impact the resources devoted to public reporting obligations, certain aspects of the amendments will reduce the reporting burden. These amendments do, however, reflect the SEC’s focus on modernizing the reporting regime and eliminating duplicative or unnecessary disclosure. We expect further reform in this area.

In advance of the effective date and imminent filing deadlines, we advise companies to understand how to reflect such changes in their disclosure and update their procedures accordingly. For further guidance in applying the new rules to upcoming filings, please reach out to your Shearman & Sterling contacts.

Footnote

https://www.sec.gov/rules/final/2019/33-10618.pdf.

https://www.sec.gov/rules/proposed/2017/33-10425.pdf. See our client memo summarizing these proposed changes at: https://www.shearman.com/perspectives/2017/10/sec-proposes-streamlining-disclosure-requirements.

3  Unless otherwise noted herein, the amendment citations refer to Regulation S-K.  Analogous changes were generally made to the rules applicable to foreign private issuers.  This memorandum focuses on the impact of the amendments to domestic U.S. companies.

4  With respect to Quarterly Reports on Form 10-Q, only those contracts executed or becoming effective during the most recent period reflected in the report are required to be filed.

5  Large accelerated filers that prepare their financial statements in accordance with U.S. GAAP will be required to comply in reports for fiscal periods ending on or after June 15, 2019. Accelerated filers that prepare their financial statements in accordance with U.S. GAAP will be required to comply in reports for fiscal periods ending on or after June 15, 2020. All other filers that are subject to the cover page tagging requirements (including foreign private issuers that prepare their financial statements in accordance with IFRS) will be required to comply in reports for fiscal periods ending on or after June 15, 2021. Domestic form filers will be required to comply beginning with their first Form 10-Q for a fiscal period ending on or after the applicable compliance date.

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
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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