Last year, Congress required the SEC to review the public company disclosure requirements in Regulation S-K and make detailed recommendations as to how those rules might be changed to modernize and simplify the requirements while still requiring disclosure of all material information. The ultimate goal was to reduce burdens on public companies while improving readability and navigation of public company filings, including through reducing repetition in such filings. On November 23, 2016, the SEC released its initial recommendations in a report (the “2016 Report”). The 2016 Report which served as the basis for proposed rules, which were set forth in a 253 page rules release on October 11, 2017. While the proposed rules largely implement the recommendations from the 2016 Report, the proposed rules deviated in certain respects from the recommendations in the 2016 Report. Specifically, the release contains proposed changes to the following provisions under Regulation S-K:
- Description of Property (Item 102);
- Management’s Discussion and Analysis (Item 303);
- Directors, Executive Officers, Promoters, and Control Persons (Item 401);
- Compliance with Section 16(a) of the Exchange Act (Item 405);
- Outside Front Cover Page of the Prospectus (Item 501(b));
- Risk Factors (Item 503(c));
- Plan of Distribution (Item 508);
- Material Contracts (Item 601(b)(10)); and
- Various rules related to incorporation by reference.
Additionally, Some of the proposed amendments would require additional disclosure or incorporation of new technology. These include proposed changes to:
- Outside Front Cover Page of the Prospectus (Item 501(b)(4));
- Description of Registrant’s Securities (Item 601(b)(4));
- Subsidiaries of the Registrant (Item 601(b)(21)(i)); and
- Various regulations and forms to require all of the information on the cover pages of some Exchange Act forms to be tagged in Inline XBRL format.
While somewhat underwhelming with regard to the actual relief provided, the proposed changes are certainly a step in the right direction for improving the disclosure requirements for public companies. Nevertheless, the proposals seem to be relatively minor in nature and won’t likely do much for public companies as far as reducing their disclosure burdens. Below is a summary description of the material changes proposed in the release:
Description of Property (Item 102)
The proposed rules would only require a description of physical properties to the extent such properties were material to a company’s business.
Management’s Discussion and Analysis (Item 303)
Item 303 currently requires period-to-period discussion and analysis for 3 years. Under the proposed rules, when financial statements included in a filing cover three years, discussion about the earliest year would not be required if (i) that discussion is not material to an understanding of the company’s financial condition, changes in financial condition, and results of operations, and (ii) the company has filed its prior year Form 10-K on EDGAR containing MD&A of the earliest of the three years included in the financial statements of the current filing.
Directors, Executive Officers, Promoters, and Control Persons (Item 401)
The proposed rules would clarify that companies would not need to repeat disclosures in their annual proxy statement related to directors, executive officers, promoters and control persons to the extent such information was provided in the annual report on Form 10-K.
Compliance with Section 16(a) of the Exchange Act (Item 405)
The proposed rule will delete the requirement that Section 16 filers deliver a copy of reports filed with the SEC to the company and will permit companies to rely on Section 16 reports filed with EDGAR in determining whether any persons subject to Section 16 failed to timely file reports.
Outside Front Cover Page of the Prospectus (Item 501(b))
Several changes were proposed to allow companies more flexibility in designing a prospectus cover page that is tailored to the business and the particular offering. Some of the changes include revising of the “subject to completion” legend, permitting companies to cross-reference to the formula described in another location in the prospectus that is used to determine the offering price for securities offered, and requiring information for securities that are quoted for trading on a U.S. market that is not a national securities exchange.
Risk Factors (Item 503(c))
The risk factor requirements are proposed to be moved from Subpart 100 to Subpart 100. The proposed rules will also delete example risk factors currently in the rule since those example risk factors may not apply to every company or correspond to the material risks of each company.
Plan of Distribution (Item 508)
The proposed rules provide a definition of the term “sub-underwriter” to clarify the disclosure requirements contained in Item 508.
Material Contracts (Item 601(b)(10))
The proposed rules would only apply the two-year look-back period for material contracts to companies that are “newly public,” thereby eliminating the requirement for existing public companies to include material contracts in their filings entered into within the last two years, but which have been fully performed.
Various rules related to incorporation by reference
The proposed rules would eliminate the prohibition on incorporating certain documents by reference which have been on file with the SEC for greater than five years and would consolidate the incorporation by reference rules under Regulation C and Regulation 12B.
Outside Front Cover Page of the Prospectus (Item 501(b)(4))
The proposed rules would require disclosure of information about markets that are not a national securities exchange on which the company’s securities being offered are traded or quoted for trading and the corresponding trading symbols.
Description of Registrant’s Securities (Item 601(b)(4))
Under the proposed rules, companies will be required to include the description of the company’s securities as required under Item 202(a)-(d) and (f) as an exhibit to the annual report on Form 10-K. Under the current rules, this information is only required in registration statements.
Subsidiaries of the Registrant (Item 601(b)(21)(i))
The proposed rules would require registrants to the legal entity identifier (“LEI”) of the company and its subsidiaries in Exhibit 21. An LEI is a 20-character, alpha-numeric code that allows for unique identification of entities engaged in financial transactions. LEIs are intended to improve market transparency by providing clear identification of participant.
Inline XBRL tagging of Exchange Act Form Cover Pages
The proposed rules would now require Inline XBRL tagging of all information on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F, as well as filing a “cover page interactive data file” exhibit for each such filing under Item 601.
The proposed rules are largely consistent with the recommendations contained in the 2016 Report, so there were no big surprises in the new proposed rules release. While the proposed rules will certainly help eliminate duplicative disclosures in filings, we don’t expect that they will materially reduce the burdens on public companies. However, expect the SEC to continue reviewing its various regulations to seek out opportunities to improve the content of public company filings and incorporate new technologies in the disclosure process.
Public companies should consult with their legal counsel and other advisors about how the proposed changes may affect the content of their future reports and other filings. The comment period on the proposed rules will remain open for a period of 60 days following publication in the Federal Register and comments can be submitted to the SEC electronically here. In any event, the proposed changes offer public companies the opportunity to review the contents of their periodic reports with an eye toward improving readability and disclosure effectiveness.