SEC Adopts Disclosure Modernization Amendments

By Thomas Palmer and Elizabeth Schultz

The US Securities and Exchange Commission recently adopted useful housekeeping rule amendments that reduce outdated, redundant, and unnecessary disclosures. The amendments are intended to reduce costs to public companies and improve the readability of public documents. The amendments were required by the 2015 Fixing America’s Surface Transportation or FAST Act and largely track the amendments proposed by the SEC in October 2017 to Regulation S-K, the SEC’s basic disclosure rule. The amendments will generally become effective on May 2, 2019.

The table below briefly highlights and describes the more significant amendments for domestic public companies. All references to rules are to Regulation S-K.  The complete text of the March 20, 2019 SEC adopting release may be found here.

Streamlined MD&A Disclosure
  • Where three years of financial statements are presented, no year-over-year MD&A comparison to the earliest year is required if such discussion was included in a prior MD&A filed on EDGAR. Registrants are to use a materiality judgment in omitting such discussion and where a liquidity issue or a restatement has occurred, the earliest year discussion may need to be included.  The company must include a statement identifying the location of the omitted discussion in the prior filing.
  • The SEC also added a new instruction clarifying that the traditional MD&A format of a year-over-year comparison is not required if, in the company’s judgment, a different form of presentation would enhance investor understanding. For example, the SEC noted a three-year comparison of particular line items, such as revenue or net income, may be useful to investors.
    (Item 303)
Revised Process for Confidential Treatment of Exhibits
  • Unlike the former burdensome process of submitting a confidential treatment request to omit confidential information in a material contract filed as an exhibit, companies will now be permitted to omit such information in an initial filing if the company determines that the information is not material and that it would likely cause competitive harm if disclosed. As a subset of material agreements, plans of acquisition, reorganization, arrangement, liquidation, or succession are included in the revised process.
  • Exhibits must be marked to indicate information has been omitted and brackets used to indicate where information has been omitted.
  • The SEC staff will selectively review the redacted exhibits and may request supporting information similar to that previously provided in confidential treatment requests.
  • As a matter of regulatory relief from the prior confidential treatment request rules, these amendments became effective on April 2, 2019.
    (Items 601(b)(10) and 601(b)(2))
Reduced Burden of Other Exhibit Requirements
  • The new rules amend the current exhibit requirements by eliminating the two-year look-back for filing material contracts other than for “newly reporting” registrants that are not currently subject to the Exchange Act or are public shell companies. As a result, most companies will only be required to file material contracts currently being performed. Investors will continue to have access to material agreements previously filed on EDGAR.
    (Item 601(b)(10)(i))
  • Immaterial schedules and attachments may now be omitted from all contracts, not just M&A agreements. As with M&A agreements currently, under the new rule the contract filed as an exhibit must contain a list identifying the contents of any omitted schedules and attachments.
    (Item 601(a)(5))
  • The revised rules expressly confirm that personally identifiable information, such as bank account numbers, social security numbers and home addresses, may be omitted from exhibits without filing a confidential treatment request.
    (Item 601(a)(6))
  • The new rules enhance disclosure by requiring the “Description of Securities,” previously required only in registration statements, to be filed as an exhibit to Form 10-K, facilitating its incorporation by reference where required.
    (Item 601(b)(4))
Disclosure of Delinquent Section 16 Filings
  • In proxy statements, the new rules eliminate the section for “Section 16(a) Beneficial Ownership Compliance” unless the company has delinquent filers, in which case the new heading is “Delinquent Section 16(a) Reports.”
  • In related simplifications:
    • the delinquent filer checkbox on the cover of Form 10-K is eliminated;
    • the requirement for reporting persons to furnish a paper copy of Section 16(a) reports (Forms 3, 4 and 5) to the company is eliminated; and
    • in determining compliance, registrants are permitted to rely on Section 16 reports filed on EDGAR rather than only on reports furnished to them.
      (Item 405)
Modernized Description of Property
  • In recognition of the modern economy, disclosure of properties is now only required to the extent physical properties are material to the business of the company, such as for manufacturing.
    (Item 102)
Changes to  Incorporation by Reference
  • The new rules clarify that all of the Item 401 disclosures in a company’s proxy statement of identifying and background information about its directors, executive officers and significant employees, and not only those disclosures required by Item 401(b),  may be incorporated by reference to Part I of the company’s Form 10-K. The required caption for such disclosure in the company’s Form 10-K is amended from “Executive officers of the registrant” to “Information about our Executive Officers.”
    (Item 401)
Generalized Audit Standard Reference
  • The new rules updated the requirement for a company’s audit committee to state in a proxy statement whether it has discussed with the independent auditor the matters required by the obsolete auditing standard “AU section 380, Communications with Audit Committees” with a general reference to “the applicable requirements of” the PCAOB and the Commission. This change was intended to accommodate any future changes to audit committee communication requirements.
    (Item 407(d)(3)(i)(B))

Registration Statements and Prospectuses
The newly adopted rules make a number of other technical changes of interest to specialist practitioners, including (a) without intending any substantive change, the elimination of the risk factor examples in Item 503(c) (also applicable to Form 10-K and Form 10-Q) to emphasize the SEC’s principles based approach to more tailored risk factors, and moving the risk factor rule to new Item 105; (b) revising the red herring legend on prospectus cover pages to eliminate references to state law prohibitions where applicable; (c) eliminating obsolete or duplicative undertakings in Rule 512; (d) permitting companies to cross-reference on the cover of the prospectus to a full explanation elsewhere in the prospectus of the pricing formula for a formula price offering of securities; and (e) requiring companies to hyperlink to any information that is incorporated by reference into a registration statement or prospectus any information that is available on EDGAR.

Revisions to Exchange Act Form Cover Pages
The amendments additionally require that all information on the cover pages of Forms 10?K, 10?Q, 8?K and certain other forms be tagged inline XBRL and filed as a new exhibit. The effectiveness of this amendment is subject to a three-year phase in, beginning for large accelerated filers for fiscal periods ending after June 15, 2019, for accelerated filers ending after June 15, 2020, and for all other filers after June 15, 2021. Effective May 2, 2019, companies will also now be required on the cover pages of these forms to include the trading symbol for each class of registered securities, the title of each class, and the exchange on which traded.

This client update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact the attorney with whom you normally consult or Tom Palmer, Sherrill Corbett, or Drea Schmidt, attorneys in our Corporate Finance Practice Group.