On August 17, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments (available here) to certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), International Financial Reporting Standards (“IFRS”) and changes in the information environment. The SEC also adopted amendments to certain disclosure requirements that overlap with, but require information incremental to, U.S. GAAP, and referred other disclosure requirements to the Financial Accounting Standards Board (“FASB”) for potential incorporation into U.S. GAAP.
The amendments are an effort to streamline the SEC’s disclosure requirements and do not significantly alter the total mix of information currently provided to investors or otherwise implement the substantive revisions to Regulation S-K discussed in the SEC’s April 2016 concept release, “Report on Review of Disclosure Requirements in Regulation S-K.” The amendments are a result of the SEC’s Disclosure Effectiveness Initiative, a comprehensive evaluation of the SEC’s disclosure requirements with the objective of improving the disclosure regime for both investors and companies and also implement a requirement under the Fixing America’s Surface Transportation Act (the “FAST Act”) that the SEC eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated or unnecessary.
In several cases, the amendments will result in the relocation of disclosures within a filing—often from the non-financial portion of the filing to the financial statements—potentially changing the prominence or context of both the relocated disclosures and the remaining disclosures. Certain amendments will replace existing rules that have bright line disclosure thresholds with rules that do not, potentially changing the disclosure provided to investors.
Disclosure moved into the financial statements as a result of the amendments will be subject to an annual audit or interim review by the issuer’s auditors and to internal control over financial reporting, together with XBRL tagging requirements. Consequently, this disclosure will no longer benefit from the safe harbor protections of the Private Securities Litigation Reform Act (“PSLRA”) for forward-looking statements, which may cause companies to be less likely to voluntarily supplement those disclosures with forward-looking information. The converse is also true, and information moved from the financial statements to the text of a registration statement or report will not be subject to annual audit or interim review by the issuer’s auditors and to internal control over financial reporting, together with XBRL tagging requirements, and will benefit from the PSLRA safe harbor.
The amended disclosure requirements, discussed below, are generally technical in nature and will be effective 30 days after publication in the Federal Register. Companies, together with their outside auditors, should carefully consider the new disclosure requirements in connection with the preparation of periodic reports and registration statements anticipated to be filed on or after that date.
The amendments address a variety of disclosure requirements under Regulation S-K and Regulation S-X.
Redundant or Duplicative Requirements
A number of the amendments eliminate requirements contained in Regulation S-K and Regulation S-X that duplicate requirements under U.S. GAAP, IFRS or other disclosure requirements. The deleted items include various rules under Regulation S-K and Regulation S-X regarding the consolidation of a registrant’s financial statements; income tax disclosures; warrants, rights and convertible instruments; related party transactions; contingencies; earnings per share; and changes in accounting principles and interim financial statements, together with related and other exhibits.
Several of the amendments delete or integrate overlapping disclosure requirements, which are related to, but not the same as U.S. GAAP, IFRS or other disclosure requirements.
Deletion of Duplicative Requirements. The amendments eliminate a number of requirements that provide for disclosures that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with the overlapping U.S. GAAP, IFRS or SEC rules, or provide for disclosure incremental to the overlapping U.S. GAAP, IFRS or other SEC disclosure requirements that are no longer useful to investors. The deletions include certain disclosure requirements relating to:
- Derivative accounting policies;
- Spending on research and development activities (although material trend information regarding spending on research and development activities will continue to be required by the MD&A rules (Item 303 of Regulation S-K));
- Warrants, rights and convertible instruments;
- The frequency and amount of cash dividends;
- Earnings per share and certain pro forma information in interim financial statements; and
- Business section disclosure in respect of segments, geographic areas and seasonality, which are required to be disclosed in a substantially similar form in the MD&A, risk factors or the financial statements.
In a change from the proposed rules, the SEC is retaining the seasonality disclosure requirements in annual reports due to a concern about potential loss of information in the fourth quarter about the extent to which the business of a registrant or its segments is or may be seasonal, as U.S. GAAP may not elicit this disclosure. The final rules also remove the requirement for issuers of registered debt securities to disclose the ratio of earnings to fixed charges and for issuers of registered preferred equity securities to disclose the ratio of dividends to earnings. As noted in the release, many of the components of these ratios are already included in the financial statements and there are a variety of analytical tools available to investors that accomplish a similar objective as the ratio of earnings to fixed charges.
Integration of Duplicative Requirements. In other instances, the rules integrate disclosure requirements that overlap with, but require information incremental to, other disclosure requirements. Rules subject to integration include disclosure requirements regarding foreign currency restrictions, restrictions on the payment of dividends and performance by geographic area. The SEC noted that changes to foreign currency restrictions (namely the expansion of Rule 3-20(b) of Regulation S-X) did not intend to expand the instances in which a reporting currency other than the U.S. dollar would be permitted. Domestic issuers and foreign issuers that do not meet the definition of foreign private issuer must present their financial statements in U.S. dollars. Such issuers, however, may continue to request waivers to present their financial statements in currencies other than U.S. dollars in appropriate circumstances. The SEC noted that such circumstances would include situations where the issuer has few or no assets and operations in the United States, substantially all the operations are conducted in a single functional currency other than the U.S. dollar, and the reporting currency selected is the same as the functional currency. The SEC declined to adopt recommendations that all registrants have the flexibility to select their reporting currency.
Disclosure Requirements Referred to the FASB. The SEC is referring a number of disclosure requirements to the FASB for potential incorporation into U.S. GAAP, including disclosure requirements regarding repurchase and reverse repurchase agreements, equity compensation plans, currency requirements for foreign private issuers, the effect of derivatives on the statement of cash flows, discounts on shares (e.g., reflecting stock issuance costs, which are recognized as a reduction in equity), income tax disclosures and major customers, in respect of which the Regulation S-K disclosure requirements are more expansive than those under U.S. GAAP.
Notably, in response to concerns expressed by commenters on the proposed rules, the SEC is retaining its existing disclosure requirements regarding legal proceedings without amendment and is not referring these disclosure requirements to the FASB for potential incorporation into U.S. GAAP. The SEC noted that many commentators opposed the integration of Item 103 and U.S. GAAP, as the objectives of Item 103 and U.S. GAAP differ. Many commenters also indicated that, if the SEC were to move forward with the integration, the American Bar Association policy statement regarding lawyers’ responses to auditors’ requests for information and Public Company Accounting Oversight Board auditing standards should be revisited as they both incorporate the U.S. GAAP disclosure requirements. Some commenters indicated that integration would also expand audit and interim review requirements, as well as XBRL tagging requirements, which would be burdensome and costly to issuers. These commenters further expressed concern that the integration could lead to increased disclosure of immaterial items and could eliminate the safe-harbor protections currently afforded to forward-looking statements related to legal proceedings disclosed under Regulation S-K.
Outdated and Superseded Requirements
In the proposing release, the SEC noted that it had identified for removal outdated disclosure requirements that have become obsolete as a result of the passage of time or changes in the regulatory, business or technology environment. These include references to the availability of company filings at the SEC’s Public Reference Room, detailed disclosure requirements of sale or bid prices for most registrants whose common equity is traded in an established public trading market and, in the case of foreign private issuers, the disclosure of exchange rate data where the financial statements required to be provided in the Form 20-F are prepared in a currency other than the U.S. dollar. These amendments are being adopted substantially as proposed. The SEC declined to require disclosure of trading symbols for issued instruments, as well as CUSIP and ADR ratios when applicable.
The SEC also adopted, as proposed, an amendment to Form 20-F (the provisions of which are incorporated into the Form F-1 requirements) to provide that foreign private issuers not be required to seek a waiver from the SEC in instances where the audited financial statements for an initial public offering are more than 12 but less than 15 months old. A foreign private issuer can comply with only the 15-month requirement if it is able to represent that it is not required to comply with the 12-month requirement in any other jurisdiction outside the United States and that complying with the 12-month requirement is impractical or involves undue hardship. This representation is to be filed as an exhibit to the relevant registration statement.