The SEC has adopted an interim final rule implementing a provision of the FAST Act that will expressly allow a company, at its option, to include a summary in its Form 10–K, provided that each item in the summary includes a hyperlink cross-reference to the related material in the Form 10–K. The interim final rule will become effective on publication in the Federal Register.
Not that companies couldn’t have included a summary before. Even the SEC recognizes that there’s nothing in the rules that would prohibit a company from including a summary in its Form 10-K voluntarily. Nevertheless, the SEC had no choice but to adopt an amendment, given that it was directed to do so by Congress in the FAST Act. (See this PubCo post.) The only twist here is that new Item 16 in Part IV of Form 10-K expressly allows an optional brief summary but only if each item in the summary is “presented fairly and accurately” and is accompanied by a hyperlink cross-reference to the related, more detailed disclosure elsewhere in the Form 10-K. The release explicitly recognizes that “it might not be practicable or necessary to summarize every Form 10-K disclosure item.” Instead, to maximize flexibility, the SEC crafted the amendment to be principles-based and does not prescribe the disclosure items that should be covered by the summary, the length of the summary or where the summary must appear. Of course, that could all change: in its request for comment, the SEC asks, among other things, whether the summary should be mandatory and the requirements more prescriptive.
SideBar: Interestingly, the amendment mandates that each item be presented fairly and accurately, not, as stated in the SEC’s earlier guidance on the FAST Act, that the summary fairly represent “the material information in the report,”presumably, as a whole. However, the release does note that any summary included is subject to the antifraud provisions of the federal securities laws and the officer certifications required by Exchange Act rules. The question remains, will a 10-K summary that did not address, for example, “risk factors” become a candidate for staff comment, as was the case with prospectus summaries, leading over time to the current prospectus practice?
With regard to information that is incorporated by reference, no summary is permitted unless the information is included in the Form 10-K at the time the Form is filed. For example, if, as is typical, a company incorporates later-filed proxy statement information into Part III of Form 10-K, the company must indicate that the summary omits the Part III information because that information will be incorporated by reference from a later filed proxy or information statement involving the election of directors; no amendment is required. However, if other information is incorporated and, if required by the Rule 12b-23, an exhibit including that information is filed with the Form 10-K, the company should include a hyperlink from the summary to the discussion in the accompanying exhibit.
SoapBox: Note that the amendment specifies that any summary included be “brief.” But are we even constitutionally capable of being brief? The 12- and 16-page summaries that are currently proliferating in many proxy statements would seem to suggest otherwise. If 10-K summaries do become standard practice, will they actually add benefit or is the new amendment just another invitation to add unnecessary length to a document that some might already characterize as unwieldy?