On July 13, the Securities Exchange Commission proposed and requested comment regarding rule amendments to update and simplify certain disclosure requirements that may have become “redundant, duplicative, overlapping, outdated or superseded” in light of: 1) US Generally Accepted Accounting Principles (GAAP); 2) International Financial Reporting Standards (IFRS); 3) other SEC disclosure requirements; or 4) changes in the information environment. The SEC also solicited comment on certain disclosure requirements that overlap with GAAP, but also require additional information, to determine whether to retain, modify, eliminate or refer them to the Financial Accounting Standards Board (FASB) for potential inclusion in GAAP. The proposals are part of the Division of Corporate Finance’s ongoing disclosure effectiveness initiative aimed at improving disclosure for both investors and companies and the SEC’s efforts to implement the Fixing America’s Surface Transportation (FAST) Act.
A. Redundant or Duplicative Requirements. The SEC proposes the deletion of certain disclosure requirements set forth in Regulation S-X, predominately, and Regulation S-K in a few instances, in light of corresponding redundant or duplicative GAAP, IFRS and other SEC disclosure requirements, with respect to topics such as consolidation; debt obligations; warrants, rights and convertible instruments; related parties; contingencies; earnings per share (EPS); interim financial statements.; equity compensation plans; and ratio of earnings to fixed charges. For example:
- Warrants, Rights and Convertible Instruments: The SEC proposes the deletion of Rule 4-08(i) of Regulation S-X, which requires disclosure of the title and amount of securities subject to warrants or rights, the exercise price and the exercise period, in a manner redundant with certain provisions of Accounting Standards Codification (the ASC).
- EPS: The SEC proposes the deletion of Item 601(b)(11) of Regulation S-K and Instruction 6 to “Instructions as to Exhibits” of Form 20-F, which require disclosure of the computation of EPS in annual filings, and which is redundant with ASC 260-10-50-1a, Rule 10-01(b)(2) of Regulation S-X, and International Accounting Standards 33, paragraph 70.
B. Overlapping Requirements. The SEC proposes the deletion or integration of requirements that (i) convey reasonably similar information to, (ii) are encompassed by disclosures that result from compliance with, or (iii) require disclosure incremental to overlapping requirements of, GAAP, IFRS or other SEC disclosure requirements. Specifically, the SEC proposes deletion of certain overlapping disclosure requirements with respect to topics such as derivative accounting policies; material events subsequent to the end of the most recent fiscal year in interim financial statements; segments; geographic areas; seasonality; research and development activities; and invitations for competitive bids. For example:
- Segments: The SEC proposes the deletion of Item 101(b) of Regulation S-K, which requires disclosure of segment financial information, restatement of prior periods when reportable segments change, and discussion of interim segment performance that may not be indicative of current or future operations and is similar to disclosures required under GAAP and Item 303(b) of Regulation S-K.
- Financial Information by Geographic Area: The SEC proposes the deletion of (i) Item 101(d)(1) of Regulation S-K, which requires disclosure of financial information by geographic area and is similar to GAAP disclosure requirements, and (ii) Item 101(d)(2) of Regulation S-K, which permits issuers to cross-reference between the financial statement notes and the description of the business to avoid duplicative disclosures about geographic area.
The SEC proposes the integration of certain overlapping disclosure requirements with respect to topics such as foreign currency restrictions and restrictions on dividends and related items. For example:
- Restrictions on Dividends and Related Items: Disclosure about restrictions on payment of dividends and related items is currently required in multiple places, namely, Item 201(c)(1) of Regulation S-K and Rules 4-08(d)(2) and 4-08(e) of Regulation S-X. The SEC proposes to streamline these into a single requirement for the disclosure of material restrictions on dividends and related items to which an issuer and its subsidiaries are subject by (i) deleting the requirements in Item 201(c)(1) and Rule 4-08(d)(e)(2) to disclose restrictions, and (ii) revise Rule 4-08(e)(3) to require dividend restrictions and related disclosures in subparagraphs (i) and (iii) thereof when material, rather than when restricted net assets exceed a 25 percent threshold.
The SEC is requesting comment as to whether certain requirements should be retained, modified, eliminated or referred to FASB for potential incorporation in GAAP with respect to topics that include consolidation on shares; assets subject to lien; debt obligations; related parties; common control transactions disclosure in interim financial statements; products and services; major customers; and legal proceedings. For example:
- Products and Services: The SEC seeks comment on the inconsistency between Regulation S-K and GAAP with respect to disclosure of the amount of revenue from products and services. Regulation S-K only requires such disclosure for products and services which account for 10 percent or more of consolidated revenue in each of the last three fiscal years; whereas GAAP requires such disclosure for each product or service, or group of similar products and services, unless impracticable.
- Legal Proceedings: The SEC seeks comment on the inconsistency between Regulation S-K, which requires disclosure of certain legal proceedings (i.e., one type of loss contingency), and GAAP, which more broadly requires disclosure of loss contingencies generally.
C. Outdated Requirements. The SEC proposes the deletion or amendment of requirements that have become obsolete over time or due to regulatory, business or technological changes with respect to topics such as available information; market price disclosure; and exchange rate data. For example:
- Available Information: Various SEC disclosure requirements and forms require issuers to disclose the availability of their filings for reading or copying at the SEC’s Public Reference Room and the Public Reference Room’s physical address and phone number. However, the Public Reference Room is rarely used by the public because paper filings are now only permitted in very limited circumstances.
- Market Price Disclosure: Item 201(a)(1) of Regulation S-K requires various disclosures with respect to market price, for example, the principal US market(s) where an issuer’s common equity is traded, and the high and low sale prices for its common equity for each quarter within the two most recent fiscal years and subsequent interim period. However, these disclosure requirements are outdated in light of the easy accessibility of such information via the Internet. Accordingly, the SEC proposes the elimination of detailed disclosure requirement of sale or bid prices for most issuers whose common equity is traded on an established public trading market and replace it with disclosure of the trading symbol.
D. Superseded Requirements. The SEC proposes the deletion or amendment of requirements that are inconsistent with recent legislation or more recently updated SEC or GAAP requirements with respect to topics that include statement of cash flows; consolidation; discontinued operations; published report regarding matters submitted to vote of security holders; and non-existent or incorrect references. For example:
- Published Report Regarding Matters Submitted to Vote of Security Holders: The SEC proposes the deletion of Item 601(b)(22) of Regulation S-K and its accompanying inclusion in the Exhibit Table within 601, as these requirements to disclose the voting results for matters submitted to shareholders are no longer applicable.
The SEC’s proposing release is available here.