On October 11, 2017, the U.S. Securities and Exchange Commission (SEC) voted to propose amendments to modernize and simplify disclosure requirements in Regulation S-K and related rules and forms to reduce the costs and burdens on public companies while still providing all material information to investors. As required by Section 72003 of the Fixing America’s Surface Transportation (FAST) Act, on November 23, 2016, the SEC staff initially published the Report on Modernization and Simplification of Regulation S-K to provide recommendations on modernizing and simplifying Regulation S-K. The proposed amendments largely implement these recommendations with the intention of saving time and money for public companies without any reduction in material information in disclosure filings.
The proposed amendments cover a broad range of changes to SEC rules and items to Regulation S-K that affect ongoing disclosure obligations. The following are some of the more significant changes being proposed.
The proposed amendments would revise Item 303 of Regulation S-K related to MD&A by eliminating the year-to-year discussion involving the earliest of the three years of financial statements included in a filing if (i) that discussion is not material to investors, and (ii) the company has filed its prior year Form 10-K on EDGAR containing MD&A related to the earliest of the three years included in the financial statements of the current filing.
Omission of Schedules and Attachments to Exhibits. The proposed amendments would permit companies to omit entire schedules and similar attachments to exhibits unless they contain material information that is not otherwise disclosed. This exception would extend the existing accommodation that is limited to plans of acquisition, reorganization, arrangement, liquidation, or succession to all exhibits. Companies would be required to provide with each exhibit a list briefly identifying the contents of any omitted schedules and attachments.
Omission of Personally Identifiable Information. The proposed amendments would permit companies to omit personally identifiable information such as bank account numbers, social security numbers, home addresses and similar information without submitting a confidential treatment request. Furthermore, companies would not be required to provide an analysis in order to redact personally identifiable information from exhibits. The proposed amendment would codify the SEC’s current practice of generally not objecting to a confidential treatment request to omit personally identifiable information without the need of submitting such a request.
Omission of Information in Material Contracts Exhibits Without Confidential Treatment Request. The proposed amendments would permit companies to omit confidential information from material contract exhibits without submitting a confidential treatment request to the SEC if such information is both (i) not material and (ii) would cause competitive harm to the company if publicly disclosed. If redacted, the company is required to mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of each redacted exhibit that information in the marked sections of the exhibit has been omitted because it is both not material and would cause competitive harm to the company if publicly disclosed. The company must also indicate by brackets where the information is omitted from the filed version of the exhibit. The SEC staff would continue to selectively assess whether such redactions appear to be appropriate and may request companies to promptly provide an unredacted paper copy of the exhibit on a supplemental basis.
Two-Year Look Back Test For Material Contracts. The proposed amendments would remove the two-year look back test to file completed material contracts not made in the ordinary course of business unless the company is a newly public company. While all companies would still be required to file as exhibits material, non-ordinary course contracts not fully performed prior to the filing date, the proposed amendments limit the requirement to file a contract that has been fully performed but was entered into less than two years before a filing to newly public companies.
Description of Company’s Securities. The proposed amendments included certain new disclosure requirements, including that companies would be required to provide a brief description of their securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as an exhibit to Form 10-K; currently companies are only required to provide such descriptions in registration statements. This proposed requirement is intended to increase investors’ ease of access to information about the rights and obligations of registered securities. Companies will be permitted to incorporate the required information by reference and provide a hyperlink to the previously filed exhibit.
Legal Entity Identifiers (LEI). Another new disclosure requirement in the proposed amendments requires the disclosure of LEIs, if one has been obtained, of the company and any significant subsidiary. A LEI is a 20-character, alpha-numeric code that allows for unique identification of entities engaged in financial transactions. Though companies and significant subsidiaries with LEIs would be required to disclose their LEI, the proposed amendments do not require all companies and significant subsidiaries to obtain LEIs.
The proposed amendments would clarify that disclosure of company property is only required to the extent those properties are material to the company and allow the description of property to be provided on a collective basis, if appropriate. The proposed amendments also state that the determination of materiality should take into account both quantitative and qualitative factors, which compares to current rules, which require disclosure of the location and general character of “principal” plants, mines and other “materially important” physical properties. The proposed amendments would not change disclosure rules that are specific to the mining, real estate and oil and gas industries.
Market for the Securities. The proposed amendments would require disclosure on the prospectus cover page of the “principal United States market or markets” for the securities being offered and the corresponding trading symbols, which compares to current rules that only require disclosure of the “national securities exchange” that lists the securities being offered and the trading symbols for those securities. Given companies often do not have control or notice of trading on the over-the-counter market, the proposed amendments limit disclosure to only those principal U.S. markets where a company has actively sought a quotation.
“Subject to Completion” Legend. The proposed amendments will permit companies to exclude from the prospectus the part of the “Subject to Completion” legend relating to state law for offerings not prohibited by state blue sky law. Additionally, the proposed amendments would also require the “Subject to Completion” legend to be included if a company relies on Rule 430A to omit pricing information and the prospectus is used after the effectiveness of the registration statement but before the public offering price is determined.
Elimination of Obsolete Undertakings. The proposed amendments would eliminate various undertakings that a company must include in Part II of its registration statement because they have become obsolete.
Hyperlinks. The proposed amendments would revise Rule 411 under the Securities Act of 1933, as amended (the “Securities Act”), Rule 12b-23 under the Exchange Act and Rule 0-4 under the Investment Company Act to require hyperlinks in HyperText Markup Language (HTML) format to information that is incorporated by reference if that information is available on EDGAR. Rule 411 governs incorporation by reference for registration statements filed under the Securities Act, while Rule 12b-23 governs incorporation by reference for registration statements filed pursuant to Sections 12(b) and 12(g) of the Exchange Act and reports filed pursuant to Sections 13 and 15(d) of the Exchange Act. Rule 0-4 governs incorporation by reference for investment company registration statements, applications and reports filed with the SEC. The proposed amendment expands the rules adopted on March 1, 2017 regarding exhibit hyperlinking (please see our Legal News Alert for additional information concerning these requirements). The proposed requirements for hyperlinking would not require companies to file an amendment solely to correct an inaccurate hyperlink unless that hyperlink was included in a pre-effective registration statement. Therefore, an inaccurate hyperlink alone would not render a filing materially deficient nor affect a company’s eligibility to use Form S-3 or Form F-3. Furthermore, unlike exhibit hyperlinking, companies would not be required to correct inaccurate hyperlinks in an effective registration statement by including a corrected hyperlink in a subsequent periodic report or a post-effective amendment.
Exhibit Hyperlinks and HTML Format for Investment Companies. The proposed amendments would revise Rules 102 and 105 of Regulation S-T to require investment companies to include hyperlinks to each exhibit identified in a filing’s exhibit index and require those filings to be made in HTML format. The proposed amendment would be an expansion of the recently adopted rules requiring hyperlinks and exhibits in HTML format to now apply to registration statements on Form S-6, Form N-1A, Form N-2, Form N-3, Form N-4, Form N-5, Form N-6, Form N-14 and to reports on Form N-CSR.
The proposed amendments would require the trading symbol to be included on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F. Currently, the cover pages for Form 10-K, Form 20-F and Form 40-F only require disclosure of the title of each class of securities registered pursuant to Section 12(b) of the Exchange Act, while there are no such requirements for the cover pages of Form 10-Q and Form 8-K. Therefore, to ensure companies and their registered securities are identified in a consistent manner across forms, the proposed amendments would also revise the cover pages of Form 10-Q and Form 8-K to include the title of each class of securities and each exchange on which they are registered in addition to the new requirement of including the trading symbol.
The proposed amendments would revise Item 405 to encourage companies to exclude the heading of Section 16(a) reporting delinquencies if they have no delinquencies to report and to change the heading to “Delinquent Section 16(a) Reports” instead of “Section 16(a) Beneficial Ownership Reporting Compliance.”
The proposed amendments demonstrate the SEC’s continuing commitment to improve the disclosure-based regulatory system by removing redundancies through the use of technology while still maintaining investor protection objectives. The public has 60 days after publication in the Federal Register to comment on the proposed rule. Companies should evaluate the potential impact of these proposed amendments with their legal counsel and other advisors to determine whether to submit comments during this period.