The SEC has adopted final amendments to certain disclosure requirements that had become redundant, overlapping, outdated or superseded, in light of other SEC disclosure requirements, US GAAP, or changes in the information environment. The amendments are part of the SEC's initiative to review and improve disclosure requirements for the benefit of investors and issuers.
The amendments are largely technical and intentionally avoid "altering the total mix of information available to investors" – but they are extensive. The SEC's release adopting the amendments spans 314 pages, changing 102 rules and 17 forms that impact disclosure requirements applicable to issuers of securities, broker-dealers, investment advisors, investment companies, nationally recognized statistical rating organizations, and others. The SEC is also referring certain disclosure requirements to the FASB for consideration for potential incorporation into US GAAP. The release discussing the amendments in detail can be found here and an unofficial redline of the changes can be found here.
Despite the volume of amendments, the changes that matter to most companies are fairly simple. Below is a high-level summary of the noteworthy changes.
NOTEWORTHY CHANGES TO REGULATION S-K DISCLOSURE
Item 101 – Description of Business
The amendments eliminate requirements in Item 101 of Regulation S-K to provide business disclosure regarding:
- Segment financial information
- Research and development spending and
- Financial information by geographic area, including risks associated with an issuer's foreign operations and any segment's dependence on foreign operations.
The amendments also eliminate the requirement to disclose in registration statements that SEC filings are available in the public reference room at the SEC headquarters. Additionally, issuers are now required to disclose their website address, if they have one. The previous rule merely encouraged disclosure of an issuer's website.
Item 201 – Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters
The amendments update certain disclosures about market information required under Item 201 of Regulation S-K. Specifically, the amendments:
- Require the identification of trading markets for common equity securities to be accompanied by disclosure of the trading symbols for such securities
- Eliminate the requirement to disclose the high and low sales prices for each full quarterly period within the two most recent fiscal years and any applicable subsequent period and
- Eliminate the requirement for issuers filing a Form S-1 or Form 10 relating to common equity for which at the time of filing there is no established US public trading market to disclose the amounts of common equity that is subject to outstanding options or warrants to purchase, or securities convertible into the issuer's common equity.
The amendments also streamline various redundant and overlapping requirements in Regulations S-X and S-K to discuss dividends. Specifically, the amendments eliminate:
- The requirement to state the frequency and amount of any cash dividends declared on each class of common equity for the two most recent fiscal years and any applicable subsequent interim period and
- The requirement to disclose (or cross-reference to the relevant discussion in the MD&A section) any restrictions that materially limit the future payment of dividends on an issuer's common equity.
Item 303 – Management's Discussion and Analysis of Financial Condition and Results of Operation
The amendments add specific reference in Item 303 to geographic areas (now deleted from Item 101) as an example of a topic that issuers may determine is appropriate to an understanding of their business. The amendments also eliminate instruction 5 to Item 303(b) requiring issuers to discuss seasonal aspects of an issuer's business that have had a material effect on the issuer's financial condition or results of operation.
Item 503 – Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges
The amendments eliminate the requirement in Item 503(d) to disclose the ratio of earnings to fixed charges, and ratio of combined fixed charges and preference dividends, in connection with the registration of debt securities and preference equity securities, respectively. The amendments make corresponding deletions in Item 601(b)(12) to remove the requirement to file the exhibit setting forth the ratio calculations (and deletions in various Securities Act form items).
NOTEWORTHY CHANGE TO REGULATION S-X DISCLOSURE
Rule 8-03/Rule 10-01 – Interim Financial Statements
While the amendments generally reduce disclosure requirements that are covered by other items, some provisions add new disclosure requirements. One such notable addition is a requirement to provide, in interim financial statements or in the notes thereto, the changes in each caption of stockholders' equity and non-controlling interests, accompanied by dividends per share and in the aggregate for each class of shares. Similar disclosure is already required in annual financial statements, and providing the disclosure quarterly should not be burdensome because it is derivative of information necessary for preparing a balance sheet.
This change created timing questions: should it apply to periods or to filings after the amendments become effective? The SEC has clarified that it will not object if an issuer begins complying with this change in its Form 10-Q for the quarter that begins after the amendment becomes effective.
For example, assuming the amendments become effective in October 2018, an issuer with a December 31 fiscal year end may omit presentation of the changes in shareholders' equity from its Form 10-Q for its quarter ending September 30, 2018, even though this is filed after the effective date of the new amendments (and from its annual report on Form 10-K, which does not include interim financial statements). The first filing in which this new quarterly presentation would be required is its Form 10-Q for the quarter ending March 31, 2019.
Similarly, an issuer with a June 30 fiscal year end may omit such disclosure in its Forms 10-Q for the quarters ending September 30, 2018 and December 31, 2018 (neither of which would begin after the assumed October 2018 effectiveness date) and start complying with this new presentation requirement beginning with its Form 10-Q for the quarter ending March 31, 2019.
The amendments will become effective 30 days after publication in the Federal Register, which is expected to occur soon.
While the amendments are largely technical in nature and consciously avoid "significantly altering the total mix of information available to investors," they contain positive, incremental simplifications to current disclosure requirements in an effort to reduce compliance burdens. Companies should begin reviewing and discussing the amendments with their legal and accounting professionals, and update their disclosure controls and procedures to reflect the amendments.
Additionally, the relocation of certain disclosure from outside to inside the financial statements (or vice versa) affects the availability of the safe harbor under the Private Securities Litigation Reform Act of 1995 for forward-looking statements. Companies should consider with their advisers the potential loss (or gain) of safe harbor protections and the opportunity to develop non-safe harbor "bespeaks caution" defenses.