On Oct. 11, the Securities and Exchange Commission proposed rules to modernize and simplify certain disclosure requirements in Regulation S-K and related rules and forms in order to reduce the costs and burdens on registered companies while continuing to provide all material information to investors. The proposed amendments also are intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.
Here is a list of some of the key changes the SEC is proposing:
- Year-to-Year Comparisons in MD&A — Allowing omission in the Management’s Discussion and Analysis (MD&A) of the earliest year of results of operations in financial statements covering three years if the discussion is not material and the MD&A in the prior year’s 10-K covered that period.
- Emphasis on Risk Factors Specific to the Company — Eliminating examples of risk factors in Regulation S-K Item 503 so companies do not include those enumerated risks if they are not significant and instead focus their risk factor disclosure on those risks that are specific to their company and business and are not generally applicable to any company or offering.
- Description of Registered Securities — Requiring a brief description of a company’s registered securities as an exhibit to Form 10-K, rather than limiting this disclosure to registration statements.
- More Freedom for Tailored Captions — To eliminate unnecessary cross-references, allowing item numbers and captions in Form 10, Form 10-K and Form 20-F to be omitted unless including the caption or item number is expressly called for (such as the caption for “Risk Factors”), and permitting companies to create captions tailored to their disclosure.
- Other Description of Property — Allowing companies to limit their disclosure about physical properties to the extent material and to provide physical property information on a collective basis, if appropriate.
- Changes Related to Exhibits
- Omitting confidential info in filed material contracts where the information is both (1) not material and (2) competitively harmful if publicly disclosed, even where the company has not submitted a confidential-treatment request to the SEC.
- Omitting entire schedules and similar attachments to material contracts and other agreements filed as exhibits unless the schedules contain material information that is not otherwise disclosed in the exhibit or the disclosure document. Each exhibit would be required to include a list briefly identifying the contents of any omitted schedules and attachments.
- Omitting material contracts that were entered into in the past two years but that were fully performed before the filing of a registration statement or report.
- Section 16(a) Beneficial Ownership Reporting Compliance — Eliminating the checkbox about delinquent Section 16 reports from the Form 10-K cover as well as eliminating any requirement that insiders provide their Section 16 reports to the company and instead requiring companies only to review Section 16 reports available on EDGAR for Section 16 filing delinquencies.
Next Steps for Reporting Companies
While generally none of the individual changes is particularly significant, when taken together, these changes should eliminate uncertainty and reduce the time and expense of complying with outdated, repetitive or irrelevant disclosure requirements. Issuers can take the SEC’s commentary in the proposed rules into account now with upcoming filings. It’s clear that the risk factor disclosures do not need to include the enumerated examples if those factors are not material to the reporting company. Risk factor disclosures can be reviewed and updated to ensure they are specific to the company or offering, are concise and are organized logically.
Reporting companies can also take a “fresh look” at their MD&A to make sure that the disclosure remains material and is tailored to reflect their particular circumstances. Making sure that captions are informative, that descriptions of physical properties emphasize material information, and that other disclosures are not repetitive are other steps issuers can take now. When filing material contracts, issuers can feel somewhat more comfortable about omitting immaterial schedules and attachments and should omit personally identifiable information from their filings. Companies may want to begin voluntarily providing their Legal Entity Identifiers (if they have them), since that information may be helpful to investors. In evaluating whether there are Section 16 reporting delinquencies, companies should check EDGAR filings for compliance with Section 16 requirements, if that is not already part of their process.
Comments on the proposed amendments are due 60 days after publication of the proposal in the Federal Register and may be submitted on the SEC’s website at S7-08-17. Any final amendments to SEC rules based on these proposed rules will require further action by the SEC and, consequently, likely will not become effective before mid-2018.