On March 20, 2019, the SEC adopted amendments to rules and forms of Regulation S-K to further simplify and modernize disclosure requirements. The final amendments were published in the Federal Register on April 2, 2019, and, except as noted below, become effective on May 2, 2019, 30 days after publication in the Federal Register. The SEC stated that it intends for the amendments to benefit investors by eliminating outdated, redundant and unnecessary disclosure; reducing cost and burdens of SEC reporting companies; and simplifying investors’ access to, and evaluation of, material information. These new rules follow on the heels of the SEC’s prior effort on simplification, which was published in the Federal Register on October 4, 2018. Combined with the earlier effort, these latest changes reflect a concerted push by the SEC to relieve SEC reporting companies of filing obligations that provide little value to investors.
This Alert provides a brief overview of certain of the amendments and practical considerations for SEC reporting companies and does not address parallel amendments to investment company and investment adviser rules and forms.
Redaction of Confidential Information in Material Contract Exhibits without Confidential Treatment Request: Items 601(b)(2) and (b)(10) of Regulation S-K
Perhaps the most notable changes are the amendments regarding how SEC reporting companies redact commercially sensitive provisions in contracts filed as exhibits with the SEC. The amendments allow an SEC reporting company to redact confidential information from filed material contracts without submitting an unredacted copy and a formal confidential treatment request if such omitted information is both (i) not material and (ii) “would likely cause competitive harm” if publicly disclosed. The redacted material contracts are required to be clearly identified with a statement that certain material information has been redacted and must include brackets to show where the information has been redacted. Notwithstanding this new streamlined process, if requested by the SEC, the SEC reporting company must promptly provide an unredacted copy of the material contract and the materiality and competitive harm analyses. Thus, in the event that the SEC does make such a request, it would be helpful for the SEC reporting company to prepare and keep in its files the analysis regarding materiality and competitive harm.
Unlike other amendments, the amendments governing the redaction of confidential information became effective immediately upon publication in the Federal Register on April 2, 2019.
Omission of Schedules and Attachments to Exhibits: Item 601(a)(5) of Regulation S-K
Currently, only acquisition agreements may be filed without schedules or attachments if they are not material. The amendments allow an SEC reporting company to omit schedules and attachments to all exhibits (not just acquisition agreements) if the schedules and attachments do not contain material information and the information is not otherwise disclosed in the exhibit or the disclosure document. The SEC reporting company would instead file with the exhibit a list briefly identifying the contents of the omitted schedules and attachments. Notwithstanding these amendments, if requested by the SEC, the SEC reporting company must provide a copy of the omitted schedules or attachments.
Limit of Two-Year Look-Back for Material Contracts: Item 601(b)(10)(i) of Regulation S-K
SEC reporting companies currently must file every contract not made in the ordinary course of business if the contract is material and either (i) is to be performed at or after the filing of the registration statement or report or (ii) was entered into not more than two years before the filing, even if fully performed. The amendments limit the applicability of the two-year look-back requirement to newly reporting companies. All SEC reporting companies will remain obligated to file as an exhibit every contract not made in the ordinary course of business that is material and is to be performed at or after the filing of the registration statement or report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Omission of Earliest Year: Item 303 of Regulation S-K
Currently, companies generally include in the MD&A two comparative year-to-year discussions of three annual fiscal years. The amendments allow an SEC reporting company to omit the discussion about the earliest of the three years if the SEC reporting company included such discussion in a prior filing that required such disclosure. If the SEC reporting company elects to omit a discussion of the earliest year, it will be required to identify the location in the prior filing where the omitted discussion may be found.
Incorporation by Reference
Elimination of Five-Year Limitation on Incorporation by Reference: Item 10(d) of Regulation S-K
With limited exception, incorporation by reference beyond five years is currently prohibited. The amendments now eliminate this five-year limitation. SEC reporting companies will be required to provide the specific location of the information incorporated by reference and include hyperlinks to incorporated documents that are available on EDGAR.
Description of Property
Inclusion of Materiality Qualifier: Item 102 of Regulation S-K
The amendments included a materiality qualifier with respect to the disclosure of property. SEC reporting companies will be required to only disclose properties that are material and may disclose such properties on a collective basis, if appropriate.
Relocation of Risk Factors: Item 503(c) of Regulation S-K
SEC reporting companies must disclose the most significant factors that make the offering speculative or risky. The amendments relocate this requirement to new Item 105 of Regulation S-K to reflect the application of risk factor disclosure requirements to both periodic reports and registration statements.
Elimination of Enumerated Risks: Item 105 of Regulation S-K
The amendments eliminate enumerated sample risk factors that were not applicable to all SEC reporting companies, which should reduce any misunderstanding that such risk factors were required. Instead, SEC reporting companies should focus on a principles-based approach and focus on its own risk identification process.
XBRL Tagging Requirements
The amendments require that all of the information on the cover pages of periodic or current reports appear in HTML format and be tagged with inline eXtensible Business Reporting Language (XBRL), which requires the SEC reporting company to file a Cover Page Interactive Data File.
Unlike other amendments, those governing XBRL tagging will be phased in depending on the type of SEC reporting company. Large accelerated filers that prepared financial statements in accordance with U.S. GAAP will be subject to XBRL tagging for reports for fiscal periods ending on or after June 15, 2019. Accelerated filers that prepared financial statements in accordance with U.S. GAAP will be subject to XBRL tagging for reports for fiscal periods ending on or after June 15, 2020. All other filers will be subject to XBRL tagging for reports for fiscal periods ending on or after June 15, 2021.
The amendments require that the cover pages of periodic or current reports include the trading symbol and title for each class of the SEC reporting company’s registered securities and the name of the exchange on which such securities are registered.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.