On October 11, 2017, the Securities and Exchange Commission (SEC) proposed amendments^[1] to Regulation S-K designed to simplify and streamline disclosures made by public companies and reduce compliance costs while continuing to provide all material information to investors. The proposed amendments also seek to reduce duplicative and immaterial disclosure, leverage technology and improve the readability and navigability of disclosure documents. The amendments are part of the SEC’s ongoing disclosure effectiveness review and implement a mandate under the Fixing America’s Surface Transportation (FAST) Act. Many of the proposed amendments were part of report prepared by the SEC staff mandated under the FAST Act.^[2]

Comments on the release are due 60 days after its publication in the Federal Register. Disclosure requirements will not change until the adoption of final rules by the SEC.

Key Takeaways

While the proposed amendments improve the SEC disclosure regime, on balance we do not expect that these amendments alone will result in meaningful changes to the amount of disclosures made by public companies or the time and costs associated with preparing them. The proposed amendments will, however, incrementally advance the SEC’s goals of moving towards a more streamlined and readable end product for users.

More importantly, the proposed amendments must be looked at within the context of the SEC’s broader effort to improve public company disclosures. The SEC has made it clear that it is a priority to move forward on a number of initiatives related to its disclosure effectiveness project.^[3] It also appears the SEC and the Division of Corporation Finance is assembling a series of incremental reform initiatives to improve the information that public companies provide to investors. We expect these initiatives to include (a) final rules designed to eliminate outdated, redundant and overlapping disclosure requirements among Regulations S-X and S-K and US GAAP requirements, which were first proposed in July 2016^[4], (b) a rule proposal related to amendments to the financial statement requirements required in connection with a significant acquisitions and in other instances where financial statements are required for entities other than the issuer^[5], and (c) updated disclosure requirements for mining companies and bank holding companies.^[6]

These incremental initiatives indicate that the SEC is not intending, at this time, to make comprehensive changes to the disclosure requirements of public companies, or to review and update disclosure requirements on a wholesale basis. The Division of Corporation Finance had previously recommended such a comprehensive review, taking into account the appropriateness of substantive requirements as a whole along with presentation and delivery issues.^[7] It appears the SEC is instead taking a targeted approach, which allows it to selectively analyze specific disclosure issues and, most importantly, move much more quickly than it would be the case in a comprehensive review. As a result, we should not expect this initiative to result in any fundamental changes in the overarching disclosure framework that public companies have been subject for decades.

Key Proposals

Highlighted below are the proposed amendments that are likely to have a practical impact on public companies:

• Omission of Confidential Information Without a Confidential Treatment Request. The proposed amendment to Item 601(a)(10) would permit the omission of confidential information from material contracts without submitting a confidential treatment request to the SEC staff. When redacting a material contract exhibit, a company would still have to make a determination that information redacted from a contract was not material to investors and that its public disclosure would be competitively harmful to the company. The company, however, would not have to present its analysis to SEC staff when the redacted material contract is filed. Companies would be required to indicate with brackets where information has been omitted and include a prominent statement on the first page of the material contract. If this proposed change is adopted, it could eliminate the time consuming process of seeking SEC staff’s concurrence on the confidential treatment request before filing a material contract. This could have meaningful impact on the IPO process as it would remove the risk of any delay in the SEC’s declaring the registration statement effective while the review of the confidential treatment request is in progress. Please note that the SEC staff will, as part of its selective review of a company’s filings, assess whether redactions from material contracts are limited to information that is not material and that would subject the registrant to competitive harm if publicly disclosed. If the SEC staff disagrees with the company, they could ask the company to refile the material contract without those redactions. SEC Chairman Clayton and the SEC staff both noted that this proposal is just a change in process and not in the substantive requirements related to assertions of confidentiality. As such, companies should continue to craft their redactions narrowly and record the reasons for the redactions.
• Year-Over-Year Comparisons in the MD&A—Elimination of the Earliest of the Three Years Included in the Financial Statements. Under the proposed amendments, when financial statements included in a filing cover three years, a year-over-year discussion regarding the earliest year would not be required if (1) that discussion is not material to an understanding of the registrant’s current financial condition, changes in financial condition and results of operations, and (2) the registrant has filed its prior year Form 10-K on EDGAR containing MD&A of the earliest year. A company would not be required to cross reference or hyperlink to the earlier discussion in a prior Form 10-K. This proposal is intended to discourage repetition of immaterial disclosures and enhance readability. Elimination of the earliest year could make the greatest difference for companies that have had to restate or recast their annual financial statements for a change in segment reporting or accounting principle as it could meaningfully reduce work for companies and auditors if all parties are comfortable with the materiality analysis. This change would not affect IPO companies that are required to show three years of financial statements.
• Omitting Schedules and Exhibits From Exhibit Filings. Proposed Item 601(a)(5) would permit companies to omit entire schedules and similar attachments to filed exhibits unless the schedules or attachments contain material information that is not otherwise disclosed in the exhibit or the disclosure document. This would be similar to the existing accommodation in Item 601(b)(2) for plans of acquisition, reorganization, arrangement, liquidation or succession.
• Expanded Hyperlinking. While public companies are currently required to hyperlink to exhibits that are incorporated by reference from other filings, the proposed amendments include a proposal to expand hyperlinking by also requiring hyperlinks to information that is incorporated by reference in a periodic report or registration statement if that information is available on EDGAR. The intent is to improve readability and navigability of disclosure documents and discourage repetition.
• Tagging Cover Page Data. Currently, operating companies are required to file only their financial statements in eXtensible Business Reporting Language (XBRL) format as an exhibit to their periodic reports and Securities Act registration statements. The proposed amendment would require all data points found on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F to be provided in XBRL (inline or as an exhibit) and also increase the number of data points companies are required to tag. The rules would not apply when Form 20-F and Form 40-F are used as registration statements. The amendment is intended to allow investors to automate their use of this information and enhance their ability to identify, count, sort and analyze companies and disclosures. In addition, the cover page of the impacted forms would be required to include the trading symbol for the registrant’s listed securities. Forms that do not currently require disclosure of the class of securities and the exchange on which they are registered on the cover page would also be revised to include such information (Form 10-Q and Form 8-K).
• Inclusion of Legal Entity Identifiers. The proposal is to require the inclusion of the legal entity identifier (LEI), if one has been obtained, of the company and each subsidiary that is listed in the exhibit listing subsidiaries of the registrant. An LEI is a 20-character, alpha-numeric code that allows for unique identification of entities engaged in financial transactions. The proposal is intended to modernize disclosure as LEIs are easily accessed and utilized by investors. The SEC also requested comment on whether LEIs should be required for companies and their subsidiaries.

Summary of Other Proposed Amendments

• Description of Property (Item 102). Requires a description of property only to the extent that physical properties are material to the registrant, which includes those properties that are material to the registrant’s business. This proposal aims to reduce immaterial disclosure on properties and enhance readability.
• Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Instruction 1 to Item 303(a)).
  • Elimination of the Reference to the Five-Year Selected Financial Data. The SEC proposes to further streamline Instruction 1 to Item 303(a) by eliminating the instruction to include trend related disclosure, where relevant, with respect to the five-year selected financial data, given trend disclosure is already required for liquidity, capital resources and results of operations. This proposal is intended to eliminate duplication and not intended to discourage providing trend disclosure.
  • Provide Flexibility in Presentation. The proposal also seeks to simplify Instruction 1 to Item 303(a) to emphasize that companies may use any presentation that would enhance a reader’s understanding. This provides flexibility to choose a narrative format or other format that it deems appropriate to supplement or substitute the current year-over-year comparison that is ubiquitous in MD&A discussions. The goal of this proposal is to allow and encourage public companies to tailor the presentation of their disclosure to their particular circumstances.
  • Application to Foreign Private Issuers. To maintain a consistent approach, similar changes are being proposed for foreign private issuers that use Form 20-F.
• Management, Security Holders and Corporate Governance.
  • Directors, Executive Officers, Promoters and Control Persons (Item 401(b)). Clarify that if a registrant discloses information on executive officers required by Item 401(b) in the Form 10-K, it is not required to repeat this information in its proxy statement or information statement. In addition, the SEC proposes to revise the required caption for the disclosure to “Information about our Executive Officers” to reflect a plain English approach.
  • Section 16(a) Compliance (Item 405). The SEC proposes to amend Item 405 to permit public companies to rely on a review of Section 16 reports available on EDGAR and any written communications to them from reporting persons rather than having to rely on reports furnished to the registrant for disclosure under Item 405. The proposal will also eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant. In addition, the SEC proposes to change the heading to “Delinquent Section 16(a) Reports” to more precisely describe the required disclosure, and allow the exclusion of the heading and related disclosure when there are no delinquent filings to report. Lastly, the SEC proposes to eliminate the checkbox on the cover page of Form 10-K relating to disclosure under Item 405.
  • Corporate Governance—Audit Committee Discussions with Independent Auditor (Item 407(d)(3)(i)(B)). The current item requires a company to disclose whether its audit committee has discussed with the independent auditor certain matters required by AU section 380, which was part of the interim standards previously adopted by the Public Company Accounting Oversight Board (PCAOB). As the referenced auditing standard is now outdated and there are other auditing standards that also require communications between the registrant and the independent auditor, the SEC proposes to update the reference by referring more broadly to the applicable requirements of the PCAOB and the SEC.
  • Corporate Governance—Compensation Committee Report (Item 407(e)(5)). Explicitly excludes EGCs from the requirement since EGCs are not required to provide a compensation committee report.
• Registration Statement and Prospectus Provisions.
  • Outside Front Cover—Name (Item 501(b)(1)). Streamlines the instruction to Item 501(b)(1) by eliminating the portion that discusses when a name change may be required and the exception to that requirement.
  • Outside Front Cover—Offering Price of the Securities (Item 501(b)(3)). Amends Instruction 2 to 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.
  • Outside Front Cover—Market for Securities (Item 501(b)(4)). Requires disclosure of the principal United States market or markets for the securities being offering and the corresponding trading symbols. The disclosure is limited to markets where the registrant has actively sought and achieved a quotation.
  • Outside front cover—‘Subject to Completion’ Legend (Item 501(b)(10)). Allows registrants to exclude the portion of the legend relating to state law for offerings that are not prohibited by state blue sky law.
  • Risk Factors (Item 503(c)). The SEC proposes to move the risk factors requirement to a new standalone Item 105 to reflect that risk factors are required in periodic reports and registration statements on Form 10. Eliminates the example risk factors that are currently provided in Item 503(c). The SEC believes that eliminating the examples will “encourage registrants to focus on their own risk identification processes.”
  • Plan of Distribution (Item 508). Clarifies the rule to define the term “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.
  • Undertakings (Item 512). Eliminates Item 512(d) (securities offered at competitive bidding), Item 512(e) (delivery of the incorporated annual and quarterly reports) and Item 512(f) (physical delivery of securities certificates) which are duplicative or no longer applicable.
• Exhibits.
  • Description of Registrant’s Securities (Item 601(b)(4)). The proposal is to amend Item 601(b)(4) to require public companies to provide a brief description of their registered securities as an exhibit to Form 10-K, rather than limiting such disclosure to registration statements. This change is intended to increase investors’ ease of access to information about the rights and obligations of each class of registered securities.
  • Information Omitted From Exhibits (Items 601(a)(5)–(a)(6)). The SEC proposes adding new paragraphs (a)(5) and (a)(6). Proposed Item 601(a)(6) would permit the omission of personally identifiable information without a confidential treatment request and formalizes current SEC staff guidance.
  • Material Contracts (Item 601(b)(10)(i)). Eliminates the two year look back on material contracts not made in the ordinary course, except for newly reporting companies (i.e., those companies that at the time of filing are not subject to the reporting requirements and any registrant that has not filed an annual report since the revival of a previously suspended reporting obligation).
  • Application to Foreign Private Issuers. The proposed amendments would also apply to Foreign Private Issuers who file on Form 20-F.
• Incorporation by Reference.
  • Item 10(d). Eliminate the limit on incorporating by reference to documents that have been on file with the SEC for more than five years to reflect the current practice of retaining documents electronically.
  • Securities Act Rule 411, Exchange Act Rule 12b-23 and Rule 12b-32.
    • Exhibit and Other Filing Requirements. The SEC proposes to eliminate the requirements to file information incorporated by reference as exhibits (Item 601(b)(99)(ii)). In addition, the SEC proposes to eliminate the requirement (Item 601(b)(13)) to file a Form 10-Q as an exhibit when it is specifically incorporated by reference into a prospectus.
    • Financial Statements. The SEC is not proposing any amendments to clarify the use of information found in the financial statements, but has proposed an amendment to its rules and forms to prohibit financial statements from incorporating information by reference or cross referencing to information from outside the financial statements.
    • Other Amendments. The other proposed amendments would eliminate several redundant provisions in Rule 411 and Rule 12b-23.
  • Forms. The SEC proposes amending the forms to conform to the proposed amendments and asks for comment on whether removing the requirement to Item numbers and captions would lead to disclosure that is less clear or less comparable, or if the resulting flexibility would lead to less repetitive disclosure.
  • Parallel Updates to the Rules for Investment Companies. The proposed amendments include proposals to make conforming updates to the rules and forms for investment company disclosures.