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.5
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.”
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.
2 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.
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