The SEC recently proposed rule and form amendments that would modernize and simplify certain disclosure requirements in Regulation S-K, and related forms, to implement Section 72003 of the FAST Act. The amendments are aimed at implementing the SEC’s overarching goals of reducing immaterial and duplicative disclosure, easing disclosure burdens on registrants and improving investor access to information through better readability and navigability of disclosure documents. The more significant highlights of the proposal are discussed below.
Proposed amendments to reduce immaterial and duplicative disclosure
S-K Item 102 (Description of Property):
As currently drafted, Item 102 requires disclosure of the location and general character of “principal” plants, mines and other “materially important” physical properties. The proposed change to Item 102 would modify the rule to require disclosure of physical properties only to the extent they are material to the registrant (which would include those properties that are material to the registrant’s business), and disclosure may be provided on a collective basis. By applying a uniform materiality threshold for non-industry specific triggers for disclosure, the SEC hopes to reduce the number of immaterial disclosures made by registrants, such as disclosure of immaterial corporate headquarters by companies in the services or information technology industries, which may not have material physical properties. However, the SEC noted that, given the significance of Item 102 disclosure for registrants in the mining, real estate, and oil and gas industries, the proposed changes will not modify any of the instructions to Item 102 specific to those industries.
S-K Item 303 (Management’s Discussion and Analysis):
Item 303(a) currently requires disclosure of a registrant’s financial condition, changes in financial condition and results of operations. In particular, Instruction 1 to Item 303(a) requires the discussion to cover the three-year period covered by the financial statements using year-to-year comparisons or another format that in the registrant’s judgment enhance a reader’s understanding. The instruction also requires that reference to five years of selected financial data may be necessary, where relevant, to show trends.
The proposed modification would require disclosure only of the year-to-year comparison of the most recent two years where (1) discussion of the earlier year-to-year comparison (i.e. the prior year to the year before the prior year) is not material to an understanding of the registrant’s financial condition, change in financial condition or results of operations, and (2) the registrant has filed its prior year Form 10-K on EDGAR, which contains the earlier year-to-year comparison. The proposed modification, however, does not allow the registrant to simply hyperlink to the earlier year-to-year comparison in lieu of its discussion. Instead, the SEC encourages companies to re-evaluate the earlier year-to-year comparison to determine whether such disclosure remains material.
Further, the SEC proposes to modify the instruction to Item 303(a) to emphasize that registrants can utilize presentations other than year-to-year comparisons, noting that, although year-to-year presentation remains the predominantly utilized disclosure method by registrants, there are alternative presentation methods, such as a narrative discussion, which may be a more appropriate method to enhance a reader’s understanding. The SEC also proposes to remove the requirement to reference five years of selected financial data where relevant to disclose trends since the disclosure requirements under Item 303 for liquidity, capital resources, and results of operations already each require trend disclosure, where material, to the registrant’s business. The SEC noted that the proposed amendment is intended to eliminate duplication and is not intended to discourage registrants from providing trend disclosure in MD&A.
S-K Item 503(c) (Risk Factors):
Item 503(c) currently requires disclosure of the most significant factors that make an offering speculative or risky. The item gives a list of specific examples of risk factors for registrants to consider in making the disclosure. The SEC has proposed to delete the list of example risk factors in an effort to encourage registrants to focus on their own unique risks and discourage registrant’s responses from being skewed towards addressing the enumerated example list.
Proposed amendments to ease disclosure burdens and improve investor access to information
S-K Item 601 (Exhibits):
Omission of Schedules:
Currently, Item 601 requires a registrant to file in their entirety all material agreements not made in the ordinary course of business. This includes all schedules and exhibits to material agreements. However, under Item 601(b)(2), a registrant may omit schedules and other attachments for a plan of acquisition, reorganization, arrangement, liquidation or succession, unless they contain information that is material to an investment decision and is not otherwise disclosed in the agreement or the disclosure document. The SEC has proposed extending this accommodation to all exhibits. Similar to the requirement under Item 601(b)(2) registrants would be required to provide with each exhibit a list briefly identifying the contents of any omitted schedules and attachments and provide, on a supplemental basis, a copy of such omitted schedules and attachments to the SEC staff upon request.
Securities Act Rule 406 and Exchange Act Rule 24b-2 permit registrants to request confidential treatment of information included in an exhibit to a filing or any other document required to be filed under either the Securities Act or the Exchange Act. The SEC proposes to permit registrants to omit confidential information from material contracts where such information is both (1) not material, and (2) competitively harmful if publicly disclosed, even where the registrant has not submitted a confidential treatment request to the SEC. Under the proposed amendment registrants would be required to mark the exhibit index indicating that portions of the exhibit(s) have been omitted, mark each section of the exhibit(s) that have been omitted with brackets within the exhibit where the information has been omitted, and include a prominent statement on the first page of each redacted exhibit that information in the exhibit has been omitted from the filed version. Although the registrant is not required to submit a confidential treatment request at the time of filing, the SEC staff could request a copy of the unredacted exhibit and a confidential treatment analysis as part of a future review of the registrant’s filings. The proposed amendments also codify the existing SEC staff practice of allowing registrants to exclude personally identifiable information such as bank account numbers, social security numbers, home addresses and similar information without a formal confidential treatment request.
Item 601 also requires a registrant to file as an exhibit all material contracts that were not made in the ordinary course of business where (1) the contract will be performed at or after the filing of the report, or (2) the contract was entered into not more than two years prior to the filing. As a result, registrants have to file material contracts entered into in the past two years even if they are no longer effective or have been fully performed. The SEC has proposed removing the two-year lookback period for all but “newly reporting registrants.
Description of Securities:
S-K Item 202 requires registrants to provide a brief description of their registered capital stock, debt securities, warrants, rights, American Depositary Receipts, and other securities, in registration statements, but not on Form 10-K or 10-Q. The SEC has proposed requiring registrants to provide a description of securities registered under Section 12 of the Exchange Act as an exhibit to the registrant’s Form 10-K.
A complete copy of the SEC’s 253-page proposal can be found here, and the proposed amendments are summarized in the attached Appendix. Comments on the proposal are due 60 days after publication in the Federal Register.