On March 20, 2019, the United States Securities and Exchange Commission (SEC) amended a variety of its rules to modernize and simplify disclosure requirements for public companies, investment companies and investment advisers. The amendments were adopted largely as originally proposed in October 2017 (see our previous post). The amendments were intended to benefit investors by eliminating outdated and unnecessary disclosure and by making it easier for investors to access and analyze material information. The amendments revised the SEC's requirements relating to (i) Management’s Discussion and Analysis (MD&A); (ii) redaction of confidential information and other exhibit-related matters; (iii) incorporation by reference; and (iv) other disclosure-related items.
The amendments will become effective 30 days after they are published in the Federal Register. However, amendments relating to the redaction of confidential information in certain exhibits will become effective immediately upon publication in the Federal Register. The new requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in, depending on the nature of the filer, as outlined below.
Management’s Discussion and Analysis
Instruction 1 to Item 303(a) of Regulation S-K previously required discussion of the three-year period covered by the financial statements in a filing. Discussion about the earliest of the three years may now be omitted if such discussion was already included in a registrant’s prior filings on EDGAR that required disclosure in compliance with Item 303 and a statement is included identifying the location in the prior filing where the omitted discussion may be found. This amendment does not affect (i) smaller reporting companies (SRCs) since they already may limit disclosure to the two-year period covered by their financial statements or (ii) emerging growth companies providing only two years of audited financials in their initial public offering.
In addition, instruction 1 to Item 303(a) of Regulation S-K was also amended to eliminate the reference to year-to-year comparisons to avoid the suggestion that any one mode of presentation is preferable to another.
Corresponding amendments were made to the comparable requirements of Item 5 of Form 20-F for foreign private issuers.
Redaction of Confidential Information and Other Exhibit-Related Matters
Redaction of Confidential Information from Certain Exhibits
Item 601(b)(2) (relating to plans of acquisition, reorganization, arrangement, liquidation or succession) and Item 601(b)(10) (relating to material contracts) of Regulation S-K have been revised to permit registrants to omit or redact confidential information from exhibits filed pursuant to these items if the information is not material and would likely cause competitive harm if publicly disclosed. Prior to the amendments, a registrant was required to submit a detailed confidential treatment request to the SEC for these exhibits. Now, companies can simply (i) mark the exhibit index to indicate that portions of the exhibit(s) have been omitted; (ii) include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm if publicly disclosed; and (iii) indicate with brackets where the information has been omitted from the filed version of the exhibit. The adopting release indicates that the Commission's staff will assess, as part of its ongoing selective review of registrants' filings, whether redactions being made meet the required standard and may request a registrant's justification for the redactions.
Item 1.01 of Form 8-K (relating to material definitive agreements) was also revised to permit these redactions in an exhibit if a registrant elects to file an exhibit relating to that item with the intent to incorporate it by reference in a future filing to satisfy Item 601(b)(10) of Regulation S-K.
A new paragraph (a)(5) was added to Item 601 of Regulation S-K to permit the omission of schedules and similar attachments to all exhibits filed under Item 601, so long as they do not contain material information and the information is not otherwise disclosed in the exhibit or the disclosure document. Companies are instead required to file with each exhibit a list briefly identifying the contents of the omitted schedules.
Two-Year Look Back for Material Contracts
The amendments limit the two-year look back requirement for Regulation S-K Item 601(b)(10)(i) material contract exhibits to apply only to "newly reporting registrants." "Newly reporting registrants" are:
- companies that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 at the time of filing;
- companies that have not filed an annual report since the revival of a previously suspended reporting obligation; and
- shell companies, other than business combination related shell companies, immediately before completing a transaction causing it to cease being a shell company if they have not filed a registration statement or a Form 8-K since the completion of that transaction.
As a result, companies that are not newly reporting registrants will only be required by Item 601(b)(10)(i) to file material contracts not made in the ordinary course of business that are to be performed in whole or in part at or after the filing of a registration statement or report.
Exhibit Requirements for Foreign Private Issuers
Form 20-F has been amended to conform the exhibit requirements for foreign private issuers to the changes that are being made to the exhibit requirements under Item 601 of Regulation S-K.
Required Hyperlinking of Documents Incorporated by Reference
Rule 411 and Rule 12b-23 are being amended to require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. The requirements for incorporating hyperlinks are similar to the requirements for exhibit hyperlinks, including requiring documents that are subject to hyperlinking to be filed in HTML.
Other Disclosure-Related Items
Description of Property (Item 102)
The amendments clarify that Item 102 of Regulation S-K requires disclosure regarding a property only if that property is material to the company. The industry specific requirements for mining, real estate, and oil and gas companies were not revised by these amendments.1
Compliance with Section 16(a) of the Exchange Act (Item 405)
The amendments eliminate the requirement for insiders to furnish Section 16 reports to the company on paper. Furthermore, the caption related to Section 16 reporting delinquencies is changed from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports.” Companies are encouraged to exclude this heading altogether when they have no Section 16(a) delinquencies to report. The checkbox on the cover page of Form 10-K relating to Item 405 disclosures has been removed and registrants may now rely only on Section 16 reports filed on EDGAR (as well as any written representations from the reporting persons) to determine whether there are any Section 16 delinquencies to disclose.
Risk Factors (Former Item 503(c))
The amendments relocate “Risk Factors” from Item 503(c) to a new item (Item 105) as Subpart 100 of Regulation S-K covers a broad category of business information and is not limited to offering-related disclosure. Also, the current enumerated examples of potential risk factors were eliminated to reinforce the item’s principles-based approach and to encourage companies to focus on the risks significant to their specific businesses.
Tagging Cover Page Data
The amendments require that all of the information on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F appear in HTML format and be tagged in Inline XBRL, requiring companies to file with each of those forms a “Cover Page Interactive Data File.” The amendments also require that the cover pages of these forms include the trading symbol for each class of registered securities and added to the cover page disclosure for Form 10-Q and Form 8-K the same information on a company's securities that had previously only been required on the cover pages of Form 10-K, Form 20-F, and Form 40-F.
The SEC has provided for phased compliance dates for the requirements to tag data on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F in Inline XBRL. Domestic filers will be required to comply beginning with their first Form 10-Q for a fiscal period ended on or after the applicable compliance date described below. As an example, a Form 10-Q filer in the first phase-in group with a calendar fiscal year end will be required to begin compliance with its Form 10-Q for the period ending June 30, 2019. As a further example, a Form 10-Q filer in the first phase-in group with a June 30 fiscal year end will be required to begin compliance with its Form 10-Q for the period ending September 30, 2019. The date of compliance depends on the category of filer as follows:
Large accelerated filers that prepare their financial statements in accordance with U.S. GAAP
Reports for fiscal periods ending on or after June 15, 2019
Accelerated filers that prepare their financial statements in accordance with U.S. GAAP
Reports for fiscal periods ending on or after June 15, 2020
All other filers
Reports for fiscal periods ending on or after June 15, 2021
Prohibition of Incorporation by Reference in Financial Statements
The amendments prohibit incorporating by reference or cross-referencing into financial statements information outside of the financial statements unless otherwise specifically permitted or required by the SEC's rules or by United States Generally Accepted Accounting Principles or International Financial Reporting Standards, whichever is applicable.
The amendments also made a variety of minor changes to disclosures relating to corporate governance (Item 407 of Regulation S-K), registration statement and prospectus provisions (Items 501, 508, and 512 of Regulation S-K), and to the requirement to file documents incorporated by reference as exhibits (Securities Exchange Act Rule 12-23(a)(3), Securities Act Rule 411(b)(4), and Item 601(b)(13) of Regulation S-K).
- The SEC recently amended the property disclosure requirements for mining companies in Securities Act Release No. 33-10570 (October 31, 2018).