This morning, the SEC voted to propose amendments to Reg S-K and related rules and forms based primarily on the staff’s recommendations in its Report to Congress on Modernization and Simplification of Regulation S-K (required by the FAST Act). (See this PubCo post.) That Report, in turn, was premised on the review that the SEC conducted as part of its Disclosure Effectiveness Initiative. (See this PubCo post and this PubCo post.) The proposal also includes a new approach intended to “streamline” the confidential treatment process. Although the rule proposal has not yet been posted, the staff indicated at the meeting that the proposal largely follows the recommendations in the Report and seeks to clarify ambiguous requirements, update or streamline the rules by eliminating duplication and outdated references, simplify the rules where possible and improve navigability through the use of technology. The SEC also voted to propose certain parallel amendments to investment company and investment adviser rules and forms. Here is the press release. Stay tuned for further details once the proposal has been posted (and digested).
Among the key proposed changes highlighted at the meeting:
- Limit the period-to-period comparison required in MD&A (Item 303(a)) to only the two most recent fiscal years presented in the financial statements, so long as the earlier period discussion is no longer material to understanding the financial statements and it has been included in the previous 10-K. The proposal would also revise instruction 1 to eliminate reference to five-year trend disclosure. According to SEC Chair Jay Clayton, the change “would encourage registrants to take a fresh look at their MD&A to determine whether a discussion of the oldest year remains material to investors, and should discourage repetition of disclosure that is no longer material.”
- Allow registrants to omit or redact from material contract exhibits confidential information that is not material and would cause competitive harm if publicly disclosed, without having to submit an unredacted copy and prior formal request to the staff, as is currently required. The staff emphasized that the change was a change to process only and was not intended to change the substantive requirements (e.g., that the redacted information is not material, has not been previously disclosed and is commercially sensitive information the disclosure of which would cause competitive harm). Schedules and attachments could be omitted if not material and not otherwise disclosed. (Hopefully, this change is a general one that is not limited to CTRs, as recommended in the Report.) Personal identifying information could also be redacted without the need for a CTR at all. Registrants would be required to provide supporting rationales supplementally upon request. Clayton stressed that “exhibits would continue to be subject to filing reviews, and the staff would selectively assess whether redactions appear to be appropriate.”
The process may turn out to be somewhat similar to that for a Rule 83 CTR, where the company would not be required to prepare and submit the typical letter exhaustively detailing its rationale for confidentiality at the time of submission of the request; rather, the rationale substantiating the request would be required only if the staff made a request (in the context of Rule 83, the request is typically made if there is a FOIA request). Although the rumor is that the staff is less likely to challenge Rule 83 requests, in seeking confidential treatment, even under Rule 83, companies are still supposed to craft the request narrowly. For example, historically, in connection with confidentiality of response letters, the staff has said that it will “question a request for confidential treatment under Rule 83 that is on its face overly broad. We also remind companies and their counsel that there must be an appropriate basis for a request for confidential treatment.” Given the staff’s admonition at the meeting that no substantive change in the requirements for confidential treatment is intended, as well as Clayton’s emphasis on the continuation of staff review, presumably, the same narrowness and other requirements would continue to apply. Only time will tell how strictly that would be enforced.
- Limit the two-year look back requirement for exhibits to apply only to newly reporting companies. Currently, Item 601(b)(10)(i) requires companies to file every contract not made in the ordinary course of business if the contract is material and (i) to be performed after the filing of the registration statement or report or (ii) was entered into not more than two years before the filing. Companies that have been reporting companies would have previously filed those contracts, and they would be available on EDGAR.
- Clarify that disclosure regarding properties is required only to the extent that the property is material (Reg S-K, Item 102).
- Require inline XBRL tagging of all cover page information. Require the cover page to include the (tagged) ticker symbol for each class of securities registered under the Exchange Act.
- Require disclosure of legal entity identifiers (“LEIs”) for the company and the significant subsidiaries identified on Exhibit 21 (Item 601(b)(21)). LEIs are 20-character, alpha-numeric codes that permit unique identification of entities engaged in financial transactions.
In her remarks, Commissioner Stein observed that LEIs were an important aspect of modernization. They function like SKUs in retail and allow global markets to identify companies, especially where there may be hundreds of subsidiaries, and better understand the interconnections among companies.
- Require hyperlinks to information incorporated by reference from previously filed documents.
After thanking a cast of thousands, SEC Chair Jay Clayton—chairing his first open meeting—commented that “these proposals embrace an approach to disclosure that is important. Corporate leaders should respond to our disclosure requirements by conveying information to investors in a way that captures how they assess and manage their businesses.” He also observed that the proposed amendments “are intended to improve the quality and accessibility of disclosure in filings by simplifying and modernizing our requirements. These proposed rule changes should result in significant savings of time and money for registrants without any reduction in material information and with increased accessibility.”
In his remarks, Commissioner Piwowar—once again getting all literary on us, with all these allusions and metaphors—referred to the proposal as an effort to “prune the regulatory orchard. I choose the word ‘prune’ carefully. The object of these amendments is to shear away dead limbs and overgrown branches, thereby improving the fruitfulness and health of the trees. Today’s amendments are not an exercise in slash-and-burn clearcutting. They are incremental changes—a snip here, a snip there—designed to shape and guide the healthy plant so that our disclosure regime will continue to bear fruit.”