In recent weeks, the SEC has given public companies some new menu items, including the following:
- On June 1, the SEC adopted an “interim final rule” that permits companies to include a summary of business and financial information in Annual Reports on Form 10-K. The rule implements a provision of the Fixing America’s Surface Transportation Act, or FAST Act, in keeping with the new trend to give statutes names that someone thinks make nifty acronyms. (Of course, the connection between this rule and surface transportation remains a mystery.)
- On June 13, the SEC issued an order permitting companies to file financial statement data in a format known as “Inline XBRL” rather than filing such data in exhibits to a filing.
Here is a quick review of these new menu items.
The new, improved 10-K summary – The rule permitting a 10-K summary is interesting in several respects. First, companies have long been able to provide summaries; in other words, there doesn’t seem to have been any reason for the “new” rule. Second, as noted, it permits but does not require the use of summaries; thus, companies that have not provided summaries in the past and don’t want to now don’t have to.
However, the new rule contains some requirements for companies that decide to provide summaries.
- First, the summary must be brief. (I’m tempted to say “duh”, but seeing the length of some summaries, perhaps it’s not as obvious as one might think.)
- Each item in the summary must be presented fairly and accurately; companies have full discretion as to the items to be addressed in the summary (assuming the “fair and accurate” standard is met); and companies also have discretion as to the placement of the summary (though it’s hard to imagine why a summary at the end of the document would be desirable). So far, so good.
- The possible fly in the ointment (to mix metaphors) is that each item in the summary must include a hyperlink to the more fulsome information included in the body of the document or in an exhibit – and by “hyperlink,” the SEC means just that; footnotes or cross-references won’t satisfy the rule. I’m not really opposed to this approach, but it could complicate summaries and may even make them longer. It also calls into question some recent statements by SEC Staff members suggesting that not every statement in a summary has to be repeated in the body of the document, though perhaps the ability to link to an exhibit will help in this regard.
Inline XBRL – I have yet to meet anyone who works with or for an issuer who thinks that XBRL is a good thing. They may well be out there somewhere, but those I’ve spoken to think it serves very little purpose but to increase costs and the time spent on complying with XBRL requirements. Moreover, it’s questionable whether more than a handful of financial analyst types think XBRL is a good thing. Yet the SEC seems to think that XBRL is the greatest invention since oatmeal and crows about every new requirement relating to XBRL. I suppose we’ll just have to learn to live with it. In fact, perhaps this new technology will simplify things. Time will tell.
The summer is young, and for that and other reasons (including Brexodus), we shouldn’t be surprised to see more items being added to the SEC’s summer menu.