On October 11, 2017, the U.S. Securities and Exchange Commission ("SEC") released its much-anticipated proposed amendments (available here) to Regulation S-K, and related rules and forms, for public comment. The proposed amendments address recommendations previously published in the SEC’s "Report on Modernization and Simplification of Regulation S-K" issued last November (available here), pursuant to Congressional mandate under the Fixing America’s Surface Transportation Act of 2015 (the "FAST Act"). The FAST Act required the SEC to simplify Regulation S-K to eliminate duplicative or unnecessary requirements and to conduct a study of ways to reduce the costs and burdens on registrants while continuing to provide all material information to investors.
What are the proposed amendments?
The SEC’s 253-page release contemplates changes to numerous Regulation S-K items and related rules and forms. The proposing release states that the amendments are intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information. Some of the proposed amendments that could have a more significant impact on a registrant’s disclosure practices are described below:
Several of the proposed amendments, if adopted, would impact a reporting company’s exhibits-filing practice across a wide range of SEC forms. For instance:
- Confidential Treatment Requests ("CTRs"): The proposed amendments would significantly streamline the process for redacting confidential information from material contracts by allowing a registrant to redact the confidential information or excerpts from its filed version and proceed with filing, so long as the information (1) is not material and (2) would be competitively harmful if publicly disclosed, without seeking formal SEC approval through a confidential treatment request. The registrant would still be required to mark the exhibit index to indicate that portions of the exhibit have been omitted, and include a prominent statement on the first page of the redacted exhibit indicating that information has been omitted from the filed version. Registrants would also still be required to indicate with brackets where the information has been omitted within the exhibit. If the SEC requests, the registrant would then be required to produce confidentially a full, unredacted version of the document and submit its written analysis of the materiality and competitive harm considerations at such time. It is important to note that the SEC has made clear the proposed amendments would modify the CTR process only, and not the underlying substantive requirements for determining whether redacted information is eligible for confidential treatment.
- Omission of Schedules and Attachments to Exhibits: Currently, registrants may omit schedules or similar attachments to plans of acquisition, reorganization, arrangement, liquidation, or succession under Item 601(b)(2) of Regulation S-K, unless they contain material information that is not otherwise disclosed in the exhibit or underlying disclosure document. The proposed amendments would expand this accommodation to all exhibits filed under Item 601.
- Personally Identifiable Information ("PII") in Exhibits: The SEC staff generally has not objected where a registrant omits PII from an exhibit filing to avoid disclosure of confidential or sensitive personal information, such as bank account numbers, social security numbers, addresses, and other similar information, without submitting a CTR, despite the lack of express guidance permitting such practice. The proposed amendments would formalize the existing practice and expressly allow registrants to omit such information without submitting a CTR.
- Filing Material Contracts: Currently, registrants must include as exhibits to their Annual Report on Form 10-K, and their registration statements, every material contract not made in the ordinary course of business if either (1) the contract will be performed in whole or in part at or after the filing of the registration statement or report, or (2) the contract was entered into during the two-year period before the filing. The proposed amendment would limit the two-year lookback to newly reporting registrants only (for instance, a registrant filing its first registration statement in connection with an initial public offering). This would allow reporting companies to avoid unnecessarily filing old exhibits when investors could easily access agreements previously filed on EDGAR, and streamline the exhibit index for reporting companies to only list material contracts with ongoing obligations.
Management’s Discussion and Analysis ("MD&A")—Item 303
Currently, Instruction 1 to Item 303(a) generally requires that MD&A cover a registrant’s financial condition, changes in financial condition, and results of operations for the last three fiscal years as covered by the financial statements. The proposed amendment would allow registrants to shorten the lookback to the two most recent fiscal years presented in the financial statements (eliminating the earliest of the three years) so long as "(i) that discussion is not material to an understanding of the registrant’s financial condition, changes in financial condition, and results of operations, and (ii) the registrant has filed its prior year Form 10-K on EDGAR containing MD&A of the earliest of the three years included in the financial statements of the current filing." The proposed rules would also eliminate the reference to five-year selected financial data trends in Instruction 1 to avoid redundancy where disclosures of liquidity, capital resources, and results of operations already require trend disclosure.
The release emphasizes that this proposed amendment is not an automatic and permanent shortening of the required period; rather, the SEC wants companies to take a "fresh look" each year and assess whether the earliest of the last three fiscal years is material to the current filing.
Description of Property—Item 102
Under the proposed amendment to Item 102, registrants would be required to describe property only to the extent that such physical property is "material" to its business. The proposed amendment specifically notes that the SEC is not proposing to modify any of the instructions in Item 102 specific to the mining, real estate, and oil and gas industries at this time, given the particular significance of Item 102 disclosures to registrants in those industries.
Corporate Governance—Item 407
The proposed amendments include a clarification which would expressly exclude emerging growth companies from the Item 407(e)(5) requirement that a registrant’s compensation committee state whether it has recommended to its board of directors that the Compensation Discussion and Analysis be included in the current filing.
What comes next?
The proposed amendments, if adopted, do not dramatically alter the landscape of public company disclosure but would represent a welcome step forward in the SEC’s efforts to streamline and modernize disclosure. The proposing release includes 97 numbered requests for comment, and the comment period will expire 60 days after the proposed rules are published in the Federal Register. The SEC release requests interested stakeholders to submit written comments and encourages commenters to include supporting data and analysis in favor of (or against) the proposed amendments.