Overview. For the better part of this decade, the U.S. Securities and Exchange Commission (the "SEC") has been assessing and soliciting input on, and proposing and adopting changes to, the public company disclosure regime. A principal goal of this exercise has been to improve the quality of disclosure while reducing compliance costs and other burdens on public companies. Consistent with this goal, on March 20, 2019, the SEC adopted further amendments to its rules and forms1 pursuant to its mandate under the JOBS Act and FAST Act.2 The amendments range from minor tweaks to significant changes in practice and leave in their wake some interesting questions for disclosure lawyers and their clients.3
These amendments provide periodic reporting registrants greater leeway in disclosure matters, in large part without changing the rules of play in any material, substantive manner. In so doing, the SEC's changes in disclosure requirements trace a subtle common thread. Whether intentionally or not, many of the changes reflect a softer "voice," stepping away from instructional examples and suggestions and allowing registrants instead to make judgments more singularly focused on the "materiality" lodestar - that elusive disclosure principle amalgamated from decades of court decisions, SEC guidance, practice conventions and experience. As a result, we believe registrants are incrementally more empowered to tell their stories how they think best.
In a similar regulatory approach, the SEC also restricted its role as gatekeeper for confidential treatment of material agreements, no longer requiring registrants to submit confidential treatment requests to explain the rationale supporting redactions in material contracts.
The amendments relating to confidential treatment requests became effective upon filing in the Federal Register on April 2, 2019. Most other changes will become effective on May 2, 2019, while a new requirement for tagging cover page data will have a delayed implementation period. Many registrants will be filing periodic reports around the effective date. For registrants filing on or after May 2, changes to keep in mind include the updated cover pages for Forms 10K, 10-Q and 8-K, hyperlinking of incorporated information that has been filed on EDGAR and the updated exhibit rules.
The Adopting Release provides a useful table of amendment descriptions and references. For ease of reference, a slimmed-down version is attached to this client alert as Appendix B. Many of the SEC's changes can be understood by quick reference to this table.
We discuss below what we view as some of the most significant changes that affect public company reporting.
The Last Gasp of MD&A's "Out Year?" Item 303(a)(3) of Regulation S-K is the regulatory prompt for the period-to-period analysis of the results of operations virtually all registrants include in their "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"). Generally, registrants are required to file three years of audited income statements in their annual reports on Form 10-K4 and, prior to the Regulation SK amendments, to speak to results of operations for each of these years as part of their "through the eyes of management" MD&A narrative. Instruction 1 to Item 303(a) prompts registrants to discuss and analyze those financial statements and other statistical data that the registrant believes will enhance a reader's understanding of its financial condition, changes in financial condition, and results of operations. This instruction also provides that, generally, the discussion must cover the three years included in the financial statements and either use yearto-year comparisons or another format that in the registrant's judgment would enhance a reader's understanding. Most registrants have defaulted to year-to-year comparisons, perhaps preferring not to test the limits of when a different format might "enhance a reader's understanding."
The amendments, as initially proposed, would have permitted the registrant to omit altogether Item 303 disclosures regarding the earliest of the three years because, except in the case of IPOs and other newly-minted registrants (which would not be eligible to omit the earliest-year information), investors could refer to prior-year filings to find this disclosure. However, omitting discussion of the earliest year would not have been permitted if this information was "material to an understanding of the registrant's financial condition, changes in financial condition and results of operations." During the comment period, a debate developed over the merits of this disqualifying factor. In addition, some commenters voiced concerns with definitional matters, including the meaning of "material to an understanding" and the significance (if any) of variations in usage of the term "material" and its derivatives in Item 303 and elsewhere in Regulation S-K.
After weighing commenter concerns, the SEC opted to allow registrants to omit disclosures regarding the earliest year so long as (i) that disclosure is contained in any of the registrant's prior EDGAR filings that required disclosure in compliance with Item 303 and (ii) the registrant identifies, in the current filing, the location in the prior filing where the omitted discussion may be found.5 As adopted, therefore, the amendment to Item 303 will permit registrants to omit the earliest-year information regardless of its materiality, provided the conditions mentioned above are met.6