Legal Update October 24, 2017 SEC Proposes Modernization and Simplification of Regulation S-K Background On October 11, 2017, the US Securities and Exchange Commission (SEC) proposed amendments intended to modernize and simplify certain disclosure requirements of Regulation S-K and related rules and forms.1 The proposed amendments are designed to enhance the readability and navigability of SEC filings, to discourage repetition and disclosure of immaterial information and to reduce the burdens on registrants, all while still providing material information to investors. The Fixing America’s Surface Transportation (FAST) Act required the SEC to prepare a report on modernizing and simplifying the disclosure requirements of Regulation S-K, which it did in November 2016.2 The FAST Act also required the SEC to issue a proposal to implement the recommendations in that report. The SEC promulgated the proposed amendments to Regulation S-K and related rules and forms in accordance with this FAST Act mandate. Comments on the proposal are due 60 days after publication in the Federal Register. Overview of the Proposal The proposed amendments cover many provisions within Regulation S-K and affect various disclosure documents that rely on the integrated disclosure requirements of Regulation S-K. Many of the proposed amendments are technical in nature. Some amendments eliminate redundant or obsolete requirements or streamline the applicable rules. For consistency purposes, parallel amendments have been proposed to rules other than Regulation S-K, as well as to forms for registration statements and reports. Some of the proposals are designed to streamline or otherwise improve disclosure requirements. Others update rules to reflect developments since their adoption or last amendment. In some cases, the proposed amendments require additional disclosure or use of new technology. This Legal Update presents an overview of selected highlights of the proposal. MD&A. The current instructions for management’s discussion and analysis of financial condition and results of operations (MD&A), set forth in Item 303(a) of Regulation S-K, generally specify that discussion of the three-year period covered by the financial statements shall either use year-to-year comparisons or other formats that, in the registrant’s judgment, would enhance a reader’s understanding of a company’s financial condition, changes in financial condition and results of operations. The instructions to Item 303(a) also state that where trend information is relevant, reference to five-year selected data may be necessary. The proposed amendments would eliminate the need to discuss the earliest year in certain circumstances so that if financial statements included in a filing cover three years. The discussion of the earliest year would not be required in the MD&A if: 2 Mayer Brown | SEC Proposes Modernization and Simplification of Regulation S-K • That discussion is not material to understanding a registrant’s financial condition, changes in financial condition and results of operations and • The registrant has filed its prior year Form 10-K on the SEC’s Electronic Data Gathering and Retrieval system (EDGAR) containing the MD&A of the earliest of the three years included in the financial statements in the current filing. The proposed elimination of the earliest (i.e., the third) year discussion in the MD&A does not impact smaller reporting companies or emerging growth companies. This amendment would not change the existing rule allowing smaller reporting companies to limit their MD&A to the two-year period covered by their financial statements. Nor would it change the ability of emerging growth companies to limit their MD&A to audited periods presented in the financial statements when they provided two years of audited financial statements in an initial public offering of common equity securities. The MD&A proposal would also eliminate the current reference to discussion of the five-year selected financial data being needed when trend information is important. This change is intended to eliminate duplication and is not intended to discourage companies from providing trend disclosure in the MD&A. The proposal would permit a registrant to use any presentation that, in its judgment, would enhance a reader’s understanding (as opposed to expressly specifying a year-to-year comparison). The proposed amendments would make conforming changes to the MD&A requirements for foreign private issuers contained in the instructions to Item 5 of Form 20-F. However, because the MD&A contained in Form 40-F, which is used by Canadian issuers, is prepared in accordance with applicable Canadian requirements, the proposal did not suggest corresponding revisions to that form. Confidential Portions of Exhibits. The SEC proposed several changes to Item 601 of Regulation S-K relating to confidential information contained in exhibits. The proposal would revise Item 601(b)(10) to permit registrants to omit confidential information from material contracts filed as exhibits without submitting a confidential treatment request to the SEC if such information is both not material and would be competitively harmful if disclosed. When relying on this provision, registrants would be required to limit the redacted information to that no more than necessary to prevent competitive harm, to mark the exhibit index to indicate that portions have been omitted and to include a prominent statement on the first page of each redacted exhibit indicating that information in the marked sections of the exhibit has been omitted. In addition, upon request of the SEC staff, registrants would be required to provide supplemental materials to the SEC staff, including both an unredacted paper copy of the exhibit in question and an analysis of why the redacted information satisfies the test for nondisclosure. In addition, the SEC proposed a new paragraph (a)(5) of Item 601 of Regulation S-K to allow registrants to omit entire schedules and similar attachments to exhibits unless they contain material information that is not otherwise disclosed in the exhibit or the disclosure document. A list briefly indentifying the contents of omitted schedules would have to be contained in the exhibit and would need to be submitted to SEC staff on a supplemental basis upon request. The similar requirement currently contained in Item 601(b)(2) of Regulation S-K relating only to plans of acquisition, reorganization, arrangement, liquidation or succession would be deleted. The SEC also proposed a new paragraph (a)(6) of Item 601 of Regulation S-K that would allow registrants to omit personally identifiable 3 Mayer Brown | SEC Proposes Modernization and Simplification of Regulation S-K information from exhibits without submitting a confidential treatment request. Other Exhibit Amendments. Item 601(b)(10) of Regulation S-K requires material contracts to be filed not only when the contract must be performed in whole or in part at or after the filing of the registration statement or report but also when the contract was entered into not more than two years before the filing. The proposed amendments would eliminate the twoyear look-back for material contracts for all but newly reporting registrants. Investors in more seasoned issuers would continue to have access to previously filed material contracts through EDGAR. The proposed amendments would also require registrants to provide an exhibit to Form 10-K containing the description required by Items 202(a)-(d) and (f) of Regulation S-K for each class of their securities that is registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act). Currently, a description of securities is required by Item 202 in registration statements, but not in Form 10-K or Form 10-Q. The proposed new requirement would not change existing disclosure obligations under Form 8-K or Schedule 14A, which currently require registrants to disclose certain modifications to the rights of their security holders and amendments to their articles of incorporation, or the current requirement to file a complete copy of amended articles of incorporation or bylaws. The proposed amendments would require registrants to include in the exhibit listing of their subsidiaries the legal entity identifier (LEI) of the registrant and each subsidiary listed if LEIs have been obtained. The proposed amendments would not require registrants to obtain LEIs. The proposed amendments would make conforming changes from Item 601 of Regulation S-K to the exhibit requirements for foreign private issuers in Form 20-F, which continues a long-standing attempt to conform the exhibit requirements for Form 20-F with the exhibit requirements for registration statements filed by domestic issuers. However, the SEC is not proposing similar changes to Form 40-F. Property. The SEC has proposed amending Item 102 of Regulation S-K to emphasize materiality by requiring disclosure of principal physical properties to the extent material to the registrant. These disclosures may be provided on a collective basis if appropriate. However, the current proposal would not modify instructions to Item 102 that are specific to the oil and gas industry. Section 16 Disclosure. The proposed amendments would revise Item 405 of Regulation S-K to clarify that registrants may rely on Section 16 reports filed on EDGAR (as opposed to copies furnished to the registrant) to determine if there are any late filings. Also, the heading for such disclosure would be changed to “Delinquent Section 16(a) Reports” from the current “Section 16(a) Beneficial Ownership Reporting Compliance.” The instruction would encourage this caption to be excluded if there are no delinquencies to report. The amendments would also eliminate the checkbox on the cover page of Form 10-K relating to late Section 16 filing disclosure. Registration Statement/Prospectus Requirements. The proposed amendments would amend Item 501 of Regulation S-K to expressly allow registrants to state on a prospectus cover page that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus. This disclosure would require a cross reference to the offering price method or formula disclosure, including a page number that is highlighted by prominent type or another manner. The proposal also would amend Item 501 of Regulation S-K so that the cover page of the prospectus would disclose the principal US 4 Mayer Brown | SEC Proposes Modernization and Simplification of Regulation S-K markets for the securities being offered and their corresponding trading symbols rather than limiting such information to listings on a national securities exchange. The amendments would limit disclosure relating to markets that are not national securities exchanges to those principal US markets where the registrant, through the engagement of a registered brokerdealer, had actively sought and achieved quotation. The proposed amendments would permit registrants to exclude the portion of the “Subject to Completion” legend relating to state law if the offering is not prohibited by state blue sky law. Risk Factors. The SEC’s risk factor disclosure amendments reflect regulatory streamlining rather than any change in the principles-based requirement of risk factor disclosure. The proposed amendments would move the requirements for risk factor disclosure out of Item 503 of Regulation S-K into a new Item 105. To streamline the disclosure requirements, the examples of risk factors would be eliminated to encourage registrants to focus on their own risk identification process. Incorporation by Reference. The proposed rules would amend Rule 12b-23(b) under the Exchange Act, which addresses incorporation by reference, to prohibit financial statements from incorporating by reference, or cross-referencing, information that is contained outside of the financial statements unless otherwise specifically permitted or required by the SEC’s rules. According to the SEC, such incorporation by reference from outside the financial statements can raise questions as to the scope of an auditor’s responsibilities. On the other hand, the SEC did not propose changes to the ability of registrants to cross-reference to or incorporate information from the financial statements to satisfy the narrative disclosure requirements of Regulation S-K. The proposed amendments would eliminate provisions in Rule 12b-23 under the Exchange Act and Rule 411 of the Securities Act of 1933 that currently require information incorporated by reference to have been filed as an exhibit, with limited exceptions. In addition, the proposed amendments would eliminate the requirement currently contained in Item 10(d) of Regulation S-K that generally prohibits registrants from incorporating documents by reference that have been on file with the SEC for more than five years. Additional Hyperlinks. Some of the proposed changes require incorporation of technology developments. For example, the SEC already requires that the exhibit index of specified SEC filings be hyperlinked to the location of the relevant exhibit on EDGAR. The proposal would expand the use of hyperlinking by requiring registrants to provide hyperlinks to information that they incorporated by reference, whether or not the information is in a document filed as an exhibit, if that information is available on EDGAR. (Unlike the exhibit hyperlink requirement, a registrant would not be required to correct inaccurate hyperlinks in an effective registration statement by including a corrected hyperlink in a subsequent periodic report or post-effective amendment.) Exchange Act Filings. Currently, registrants are require to tag in XBRL certain data points, such as form type, company name, filer size and public float, on the cover page of a Form 10-K. A technology-inspired amendment would require all information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F and 40-F to be tagged in Inline XBRL, HTML format with embedded XBRL data. The Inline XBRL requirement is similar to a recent SEC rule proposal to require Inline XBRL for operating company financial statements. If the Inline XBRL requirement for financial statements is not adopted, registrants would be required to use traditional XBRL to tag the cover page, which would require the filing of an additional exhibit—a “Cover Page Interactive Data File”—to the identified forms. 5 Mayer Brown | SEC Proposes Modernization and Simplification of Regulation S-K In addition, the proposal would require the cover pages of Forms 10-K, 10-Q, 8-K, 20-F and 40-F to include the trading symbol for each class of the registrant’s registered securities. The SEC also proposed amendments to Forms 10, 10-K and 20-F permitting registrants to exclude item numbers and captions or to create their own captions tailored to their disclosure. However, these amendments would not affect any caption that is expressly required by the forms or Regulation S-K. Updating Regulation S-K. The proposed amendments would eliminate a reference to an outdated auditing standard contained in Item 407(d) of Regulation S-K relating to audit committee discussions with independent auditors, replacing it with a general reference to the applicable requirements of the Public Company Accounting Oversight Board. The amendments would also update Item 407(e) to specifically exclude emerging growth companies from the requirement to provide a compensation committee report because they are not required to provide a compensation discussion and analysis. In addition, the SEC has proposed that certain obsolete undertakings contained in Item 512 of Regulation S-K be eliminated. Requests for Comment. The SEC has expressly requested comments through approximately 100 specific questions raised in the proposing release. For example, the SEC has asked whether instead of allowing registrants to eliminate the earliest of three years of MD&A disclosure, it should instead allow registrants to hyperlink to the prior year’s annual report for that disclosure. The SEC has also asked for comment on whether registrants should be permitted to omit confidential information from exhibits without submitting confidentiality requests. Another request for comment asks whether public companies acquiring or merging with non-public companies should be required to apply the two-year look-back test for material contracts to agreements entered into by the nonpublic company prior to the transaction date. The SEC also asks if rather than eliminating examples of risk factors, it should provide different or additional examples. Practical Considerations The SEC’s proposed amendments provide the opportunity for registrants to have input on disclosure topics that they have faced on either a regular basis or under particular circumstances. Public companies should review the proposal and consider submitting comments on topics on which they have opinions. This is the time to become part of the conversation on the future of disclosure. It seems likely that at least some of the proposed amendments will be adopted by the SEC. Therefore, public companies should follow developments in this area, even if they choose not to submit comments; once adopted, these amendments would impact many aspects of disclosure. Because the amendments to modernize Regulation S-K are at the proposal stage, it is not yet known when any final rule changes will be made, let alone what the effective date for any such amendments would be. Although it is unlikely that any such amendments would affect annual reports on Form 10-K or 20-F for the year ended December 31, 2017, for calendar year companies, this is an area that should be closely monitored because even if the amendments do not affect 2017 calendar-year filings, once adopted, the amendments could impact many different types of filings throughout the year. Some of the proposed amendments are designed to encourage companies to take a “fresh look” at prior year disclosures and to focus on what is material, rather than what may be prescribed. This should result in a review of applicable disclosure controls and procedures. This is particularly true for the proposed changes to the MD&A and risk factor disclosure rules. Even if no amendments are adopted in time to be effective for upcoming annual reports, the 6 Mayer Brown | SEC Proposes Modernization and Simplification of Regulation S-K release serves as a timely reminder that registrants should review upcoming disclosures to emphasize what is currently material. The proposal does not contain amendments to the executive compensation disclosure requirements contained in Item 402 of Regulation S-K. For more information about the topics raised in this Legal Update, please contact the author, Laura D. Richman, at +1 312 701 7304, any of the following lawyers or any other member of our Corporate & Securities practice. Laura D. Richman +1 312 701 7304 firstname.lastname@example.org David S. Bakst +1 212 506 2551 email@example.com Jason T. Elder +852 2843 2394 firstname.lastname@example.org Robert F. Gray, Jr. +1 713 238 2600 email@example.com Michael L. Hermsen +1 312 701 7960 firstname.lastname@example.org Philip J. Niehoff +1 312 701 7843 email@example.com Endnotes 1 Available at https://www.sec.gov/rules/proposed/ 2017/33-10425.pdf. 2 See Report on Modernization and Simplification of Regulation S-K (Nov. 23, 2016), available at https://www.sec.gov/reportspubs/sec-fast-act-report- 2016.pdf. Mayer Brown is a global legal services organization advising clients across the Americas, Asia, Europe and the Middle East. Our presence in the world’s leading markets enables us to offer clients access to local market knowledge combined with global reach. We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. 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