Congress passed the Fixing America’s Surface Transportation Act (known as the “FAST Act”) at the end of 2015. Among other things, the FAST Act directed the SEC to modernize and simplify its disclosure requirements by eliminating provisions of Regulation S-K that are duplicative, overlapping, outdated or unnecessary.
On August 17, 2018, the SEC adopted amendments in response to the FAST Act’s mandate. The amendments are intended to simplify compliance with disclosure requirements and facilitate the disclosure of information to investors without significantly altering the total mix of information provided. In addition, the SEC anticipates that the amendments may reduce investor search costs, which may result in more efficient investment decision-making, and may reduce issuer compliance costs, which may encourage capital formation. The amendments address four categories of disclosure that the SEC identified as needing to be updated in light of other SEC disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) or changes in the environment of available information:
- Redundant or duplicative requirements. The SEC identified a number of disclosure requirements that require substantially similar disclosures as U.S. GAAP, International Financial Reporting Standards (“IFRS”) or other SEC disclosure requirements. In the final rule, the SEC eliminated several of the redundant SEC requirements.
- Overlapping requirements. The SEC also identified disclosure requirements that are related to, but not the same as, U.S. GAAP, IFRS or other SEC disclosure requirements. The amendments seek to delete disclosure requirements that may no longer be useful to investors because they convey reasonably similar information to or are encompassed by disclosures in response to other requirements, or require disclosures incremental to the overlapping requirements. The SEC combined and integrated its disclosure requirements that overlap with, but require information incremental to, U.S. GAAP. Finally, the SEC referred several of the incremental overlapping requirements to the Financial Accounting Standards Board (FASB) for potential incorporation into U.S. GAAP.
- Outdated requirements. The amendments also update disclosure requirements that the SEC identified as outdated due to the passage of time or changes in the regulatory, business or technological environment.
- Superseded requirements. As accounting, auditing and disclosure requirements have changed over time, inconsistencies have arisen between the newer requirements and existing SEC disclosure requirements. Amendments in this category update SEC disclosure requirements to reflect more recently updated U.S. GAAP or other SEC requirements, and also include technical fixes to non-existent or incorrect references and typographical errors.
While the majority of the amendments are to Regulation S-X, several of the amendments affect the business description and other disclosure requirements of Regulation S-K, and corresponding changes to SEC forms, including Form S-1, Form S-3 and Form 10-K. The changes to Regulation S-K include eliminating:
- The requirement to disclose the ratio of earnings to fixed charges (Item 503(d) and Item 601(b)(12)), as investors have more useful information readily available to them in an issuer’s financial statements;
- The requirement to disclose the frequency and amount of cash dividends declared (Item 201(c)(1)), as this information is required elsewhere by Regulation S-X;
- The requirement to provide financial information about segments in the business description section (Item 101(b)), as that information will continue to be available in the notes to the financial statements;
- Disclosure of financial information by geographic area (Item 101(d)) from the description of business;
- Seasonality disclosures in the MD&A (Instruction 5 to Item 303(b)), as reasonably similar disclosure results from compliance with U.S. GAAP;
- Detailed disclosure of stock sale prices for issuers with common equity traded on an established public trading market (Item 201(a)(1)); the SEC now requires disclosure of the issuer’s trading symbol, as stock price information is readily available to investors on the Internet;
- The requirement to identify the Public Reference Room and to disclose its physical address and phone number (Item 101(e)(2) and Item (101(h)(5)), as investors rarely use this information; and
- References to “extraordinary items” and “cumulative effect of a change in accounting principle” (Item 302(a)(1)), as these items were removed from U.S. GAAP in 2015 and 2005, respectively.
The SEC also added a new requirement for all issuers to disclose their Internet addresses, if they have one (Item 101(e)(3) and Item 101(h)(5)).
The amendments become effective 30 days after publication in the Federal Register. The complete Final Rule adopting the amendments is available at: https://www.sec.gov/rules/final/2018/33-10532.pdf.