The Securities and Exchange Commission (SEC) issued a long-awaited rule proposal in mid-October implementing many of the SEC staff’s recommendations in its November 2016 Report on Modernization and Simplification of Regulation S-K under the Fixing America’s Surface Transportation Act’s (FAST Act) directive to modernize and simplify the requirements in Regulation S-K (FAST Act Report). The proposed rules are intended to reduce, streamline or eliminate disclosure in a number of areas, but the changes also propose additional disclosure requirements and the use of technology to improve the readability and navigability of disclosure documents. The proposed changes are designed to reduce compliance costs and burdens on public companies while continuing to provide all material information to investors. The rule proposals were informed by the staff’s broader study of disclosure effectiveness, however, they do not go significantly beyond the staff’s recommendations in the FAST Act Report. While the proposed changes, if adopted, will have the welcome effect of streamlining some disclosure requirements and improving the readability of disclosure documents, they do not mark a significant departure from the current disclosure regime.

Many of the proposals are clarifying or technical in nature, but a number of the proposals, if adopted, will necessitate that public reporting companies “take a fresh look” at some of their disclosures and the way in which they present information. The proposals that are likely to have the most impact on disclosure documents are described below and the tables that follow summarize the proposed amendments to various items of Regulation S-K and related rules and forms.

Proposed changes that are likely to have the most impact on disclosure documents

Management’s Discussion and Analysis of Financial Condition and Results of Operations —Moving away from three years of year-to-year comparisons

The proposed rules would amend Item 303(a) of Regulation S-K Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) to eliminate a discussion of the earliest year of the three-year period covered by the financial statements in a filing if (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 on EDGAR its prior year Form 10-K containing MD&A of the earliest of the three years included in the financial statements in the current filing. The proposals would also change Instruction 1 to Item 303(a) of Regulation S-K to delete the references to the use of year-to-year comparisons and five-year selected financial data where trend information is relevant, which is intended to give registrants more flexibility to tailor the presentation to their particular circumstances. The SEC is not proposing to require a hyperlink to the earliest-year MD&A or to eliminate or revise the table of contractual obligations as the staff had recommended in the FAST Act Report. The proposed changes to MD&A are consistent with the staff’s prior interpretative guidance and reflect a continued move toward more principle-based disclosure. The SEC is proposing similar changes to Form 20-F.

Description of registrant’s securities to be included in an exhibit to annual reports on Form 10-K

Currently, a description of the registrant’s registered securities required under Item 202 of Regulation S-K is only applicable to registration statements filed under the Securities Act of 1933 but is not required in Form 10-Ks or 10-Qs. The proposed rules will require a registrant to disclose information about its securities required under Item 202(a)-(d) and (f) of Regulation S-K in its Form 10-K by means of a new exhibit filing containing the Item 202 disclosure related to its listed securities. Modifications to the rights of security holders and amendments to articles of incorporation and by-laws are still required to be reported on Form 8-K and in Schedule 14A, and an updated Item 202 exhibit reflecting any modifications or changes during the fiscal year would be required to be filed with the registrant’s next annual report. The change is intended to make an investor’s access to information about its rights as a security holder easier by collecting the information in one place rather than requiring investors to search through previously filed registration statements and reports. While there is likely to be a one-time cost associated with creating this new exhibit, the proposals allow incorporation by reference and a hyperlink to a previously filed exhibit when the information has not changed during the fiscal year.

Redaction of confidential information in material contract exhibit filings—Confidential Treatment Requests are no longer necessary

The SEC is proposing to permit registrants to redact confidential information from material contracts filed as exhibits without submitting a formal request for confidential treatment or the detailed and time-consuming analysis of the basis for each redaction, if the information is both (i) not material, and (ii) competitively harmful if publicly disclosed. The registrant would be solely responsible for determining whether all material information has been disclosed and whether they may redact any particular piece of information. As part of its selective review of filings, the staff would selectively assess whether redactions from exhibits appear to be limited to information that is not material and that would subject the registrant to competitive harm if publicly disclosed. The staff could also request a registrant to promptly provide supplemental materials, including an unredacted copy of the agreement and an analysis of the basis for the redactions as is the current practice. This change virtually eliminates the need to formally file a confidential treatment request under Rule 406 and Rule 24b-2 and should save registrants a significant amount of time and expense.

Omitting schedules or similar attachments in all exhibit filings

Perhaps one of the most welcome of the proposed changes is the elimination of the requirement to file all schedules, exhibits and other attachments to material agreements and other documents required to be filed as exhibits to a registration statement or period report. Under the existing rules, material agreements filed as exhibits must include all schedules, exhibits and other attachments to the agreement. The existing rules do not apply to material plans of acquisition, reorganization, arrangement, liquidation, or succession. The proposed rules would extend this accommodation to any exhibit required to be filed and allow the omission of the entirety of schedules and other attachments unless they contain information material to an investment or voting decision and the information is not otherwise disclosed in the exhibit or the disclosure document. Registrants would be required to provide with each exhibit in which schedules and other attachments are excluded, a list briefly identifying the contents of any omitted schedules and would be required to provide, on a supplemental basis, the omitted schedules to the staff upon request. The new rules will also permit registrants to redact personally identifiable information (such as bank account numbers, social security numbers, home addresses and similar information) from any exhibit required to be filed by Item 601 of Regulation S-K without making a formal confidential treatment request under Rule 406 or Rule 24b-2, which is consistent with current staff practice.

Comments on the proposed rules are due 60 days from the date of publication of the proposing release in the Federal Register. The SEC is not likely to adopt final rules based on these proposals until at least mid-2018.

Part I: Changes designed to update, streamline or improve the existing disclosure framework

Existing Disclosure Requirement

Highlights of Proposed Amendments

Description of Property  (Item 102)

Requiring disclosure only for properties that are material to the registrant (not the registrant's business) and focused only on principal physical properties. Disclosure can be provided on a collective basis. The SEC is not proposing to combine the description of material physical properties with the description of the business as recommended by the staff in the FAST Act Report.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 303, Instructions to 303(a))

No longer requiring a discussion of the earliest year of the three-year period in MD&A when the discussion of the earliest year is not material to an understanding of the registrant's financial condition, changes in financial condition, and results of operations and the registrant has filed its prior year Form 10-K containing MD&A of the earliest of the 3 years on EDGAR.

Eliminating the reference to 5-year selected financial data in Instruction 1 to Item 303(a). Simplifying Instruction 1 to Item 303(a) to emphasize that registrants may use any presentation that, in their judgment, would enhance a reader's understanding.

Proposing to apply to Form 20-F, but not Form 40-F (Canadian issuers).

Directors, Executive Officers, Promoters, and Control Persons (Item 401)

Clarifying that any disclosure about executive officers' business experience disclosed pursuant to Item 401(e) need not be duplicated in the proxy statement if presented in Part I of Form 10-K by moving this instruction from Item 401(b) to a general instruction to Item 401.

Compliance with Section 16(a) of the Exchange Act (Item 405) and Rule 16a-3

Amending Item 405 and Rule 16a-3(e) to focus on a review of Section 16 reports available on EDGAR rather than reports furnished to the registrant and eliminating the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant.

Proposing adding an instruction to Item 405 that encourages registrants to exclude the heading "Section 16(a) Beneficial Ownership Reporting Compliance" when the registrant does not have Section 16(a) delinquencies to report.

Changing the heading to "Delinquent Section 16(a) Reports.

"Eliminating the checkbox on the cover of Form 10-K relating to disclosure of delinquent Section 16 filings.

Outside Front Cover Page of the Prospectus  (Item 501(b))

Deleting from the instruction to Item 501(b)(1) the portion that discusses when a name change may be required (if the name is the same as a "well-known" company or leads to a misleading inference about the registrant's line of business).

Amending instructions to Item 501(b)(3) (price of the securities being offered) to explicitly allow registrants to include a clear statement that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus and a cross-reference to the page number.

Risk Factors (Item 503(c))

Relocating requirement for risk factor disclosure from Item 503(c) to new Item 105 to make clear that risk factor disclosure is applicable to Form 10 and periodic reports, and not only registration statements.

Eliminating the risk factor examples that are enumerated in Item 503(c) to encourage registrants to focus on their own risk identification processes.

Plan of Distribution  (Item 508)

Amending Rule 405 to add a definition of "sub-underwriter" as a dealer that is participating as an underwriter in an offering by committing to purchase securities from a principal underwriter for the securities but is not itself in privity of contract with the issuer of the securities.

Exhibits (Item 601)

Eliminating the requirement to file all schedules, exhibits and other attachments to material agreements and other documents required to be filed as exhibits to a registration statement or period report.

Permitting registrants to omit personally identifiable information without submitting a confidential treatment request under Rule 406 or Rule 24b-2.

Permitting registrants to redact confidential information from material contracts filed as exhibits without submitting a formal request for confidential treatment under Rule 406 or Rule 24b-2 if the information is both (i) not material, and (ii) competitively harmful if publicly disclosed.

Limiting the two-year look back in Item 601(b)(10)(i) related to material contracts to "newly reporting registrants" to streamline reporting obligations for registrants with a reporting history.

Various rules related to incorporation by reference (Item 10(d) of Reg. S-K); (Securities Act Rule 411, Exchange Act Rule 12b-23 and 12b-32)

Eliminating the prohibition in Item 10(d) on incorporating documents by reference if they have been on file for more than 5 years and do not fall within one of the exceptions provided by the rule.

Moving the remaining part of Item 10(d) related to indirect incorporation by reference.

Consolidating the procedural rules into Regulation C and Regulation 12B to focus Regulation S-K on substantive disclosure requirements.

Eliminating the requirements in Rule 411(b)(4) and Rule 12b-23(a)(3) that copies of information incorporated by reference be filed as exhibits.

Allowing registrants to exclude item numbers and captions from Form 10, Form 10-K and Form 20-F or create their own captions tailored to their disclosure.

Making other non-substantive changes to incorporation by reference rules.

Part II: Changes that would require additional disclosure or incorporation of new technology

New Disclosure Requirement

Highlights of Proposed Amendments

Outside Front Cover Page of Prospectus  (Item 501(b)(4))

Requiring disclosure of the principal US trading markets (whether or not a "national securities exchange", but so long as the registrant has actively sought and achieved quotation) and the corresponding trading symbols.

Description of Registrant's Securities (Item 601(b)(4))

Requiring a registrant to disclose the information about its registered securities required under Item 202(a)-(d) and (f) of Regulation S-K in its Form 10-K by means of a new exhibit filing containing the Item 202 disclosure.

Subsidiaries of the Registrant  (Item 601(b)(21))

Requiring registrants to include in the list of subsidiaries the legal entity identifier (LEI) (an alpha-numeric code that allows for unique identification of entities engaged in financial transactions), if one has been obtained, of the registrant and each subsidiary listed.

Hyperlinks (Rule 411, Rule 12b-23 and Rule 0-4)

Requiring hyperlinks to information that is incorporated by reference if that information is available on EDGAR.

Not proposing any changes to rules or forms to address incorporation by reference from financial statements.

Prohibiting incorporation by reference or cross-referencing in the financial statements to information outside the financial statements.

Tagging cover page data in Inline XBRL format

Requiring operating company registrants to tag in XBRL all data points on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F.

Amending cover pages to include trading symbols

Amending cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F to include the trading symbol for each class of registered securities.

Part III: Changes designed to update rules to reflect developments since their adoption

Existing Disclosure Requirement

Highlights of Proposed Amendments

Corporate Governance  (Item 407)

Updating a reference to AU Section 380, Communication with Audit Committees in Item 407(d)(3)(i)(B), which was superseded by PCAOB Auditing Standard No. 1301, Communications with Audit Committees by referring more broadly to the applicable requirements of the PCAOB and SEC.

Amending Item 407(g) to explicitly exclude emerging growth companies (EGCs) such that it is clear in Item 407(e)(5) that the compensation committee of an EGC is not required to state whether it has recommended to the board of directors that the Compensation Discussion and Analysis (CD&A) be included in the registrant's public disclosure because EGCs are not required to include a CD&A.

Outside Front Cover Page of the Prospectus  (Item 501(b)(10))

Allowing registrants to exclude the portion of the "subject to completion" legend related to state law for offerings that are not prohibited by state blue sky law given that the National Securities Markets Improvement Act (NSMIA) allowed for pre-emption of state blue sky laws in many offerings.

Undertakings (Item 512)

Eliminating Item 512(c) (undertakings included if registering a warrant or rights offering to existing security holders and the securities not purchased by those securities holders will be reoffered to the public); Item 512(d) (undertakings included if securities being registered are to be offered at competitive bidding); Item 512(e) (undertaking to deliver the latest annual report or quarterly report with the prospectus as required by former Form S-2); and Item 512(f) (undertaking to deliver securities certificates to underwriters in IPOs), in each case because they are obsolete.

Client Alert 2017-259