The SEC published the final rules on March 20, 2019 to amend a wide variety of disclosure rules, primarily under Regulation S-K, in an effort to modernize and simplify disclosure requirements for public companies, investment advisers and investment companies.  The rules implement the Congressional mandate under the Fixing America’s Surface Transportation (FAST) Act. 

The changes were originally proposed in October 2017, as discussed in our client alert.  The proposal resulted from recommendations in the SEC staff’s FAST Act Report and arose from the Commission’s broader disclosure review reflected in its 2016 Concept Release.  

The following table and accompanying discussion highlight some of the more significant changes. They do not reflect all of the amendments or forms or rules affected and do not address parallel changes for investment companies and investment advisers. All changes are discussed within the adopting release, which can be found here

Rule

Caption

Description of Change

Item 303 of Regulation S-K

MD&A

Permits exclusion of earliest of three years if already included in prior filing

Item 405 of Regulation S-K

Delinquent Section 16 Reporting Persons

Revised caption; elimination of 10-K box; simplified diligence procedures; encourages omission when no late filings

Item 512 of Regulation S-K

Undertakings

Eliminates certain undertakings that were duplicative or obsolete

New Item 601(a)(5) of Regulation S-K

Exhibits generally

Ability to omit immaterial schedules and attachments if not otherwise disclosed

New Item 601(a)(6) of Regulation S-K

Personally identifiable information

Permits omission of personally identifiable information from exhibits

Items 601(b)(2) and (10) of Regulation S-K

Exhibits -- material M&A agreements and contracts

Companies may redact confidential information from filed material contracts without submitting a confidential treatment request, if information is immaterial and disclosure would likely result in competitive harm

Item 601(b)(4) of Regulation S-K

New Exhibit -- Description of Security

Requirement to provide description of registered securities

Item 601(b)(10) of Regulation S-K

Exhibits – material contracts

Only newly reporting companies are required to file material contracts that were entered within two years of the filing, if the contract has been fully performed

Forms 8-K, 10-K, 10-Q, 20-F and 40-F

Cover Page

Adds national exchange or principal U.S. market, trading symbol and class of securities

Forms 8-K, 10-K, 10-Q, 20-F and 40-F

Cover Page

Data tagging of specified information in Inline XBRL format

Rules 411(b)(4); 12b-23 and 12b-32; Regulation S-T Rules 102 and 105

Incorporation by reference rules

Eliminates five-year cut-off and requirement to file copy of incorporated information as exhibit (except for ARS); requires hyperlinks

 

Various clarifying and technical amendments were also made to Regulation S-K Items 102 (description of property), 401 (executive officers), 407 (corporate governance), 501(b) (prospectus cover page), 503 (risk factors), and 508 (plan of distribution), as described in more detail below.

Effective Date

Most of the amendments are effective May 2, 2019, which is 30 days after publication in the Federal Register on April 2, 2019, except for changes to rules relating to redactions of confidential information in exhibits which are effective as of April 2, 2019. Rules governing data tagging the cover pages of SEC forms will be mandatory in the first Form 10-Q for a fiscal period ending on or after the applicable compliance date, as follows:

  • Large accelerated filers that utilize GAAP -- fiscal periods ending on or after June 15, 2019
  • Accelerated filers that utilize GAAP -- fiscal periods ending on or after June 15, 2020
  • All other filers -- fiscal periods ending on or after June 15, 2021

Description of Amendments 

Description of Property (Item 102).  Item 102 requires disclosure of “principal” plants, mines and other “materially important” physical properties.  The new rules provide that disclosure of principal physical properties is only needed if those properties are material, and may be provided on a collective basis, if appropriate. Separate instructions for mining, real estate and oil and gas industries remain unchanged. 

Management’s Discussion and Analysis (Item 303).  Item 303(a) generally required a discussion of the three-year period covered by the financial statements using a year-to-year comparison of each of the three years. The new rules: 

  • Allow companies providing customary three years of financial statements to omit discussion of the earliest year if (i) that was included in any prior EDGAR filing that required MD&A disclosure and (ii) the location of the prior filing is identified. In contrast to the original proposal, the omitted discussion of the earliest year is not expressly required to be immaterial. However, as stated in the adopting release, “[m]ateriality remains, as always, the primary consideration.”  The SEC points out that discussion of the earliest year would not need to be repeated “if, in management’s view, that discussion is not necessary to understand the financial condition, changes in financial condition and results of operations.”  It also affirmed its 2003 guidance to focus MD&A on material information, and reduce or omit discussion of immaterial information “to make the continuing relevance of an issue more apparent.”
  • No longer explicitly require referencing five-year selected financial data when relevant, in light of the existing general requirement to disclose known trends and uncertainties.
  • Allow companies to use any presentation that it believes would enhance readability of the comparison. As a result, a company may determine that a narrative discussion is more appropriate for one or more years and forego the year-to-year comparison.

Conforming changes were approved to Instruction 5 to Form 20-F for foreign private issuers. 

Directors, Officers, Promoters and Control Persons (Item 401).  Item 401 requires disclosure relating to directors, executive officers, control persons and key employees.  The rules clarify that any information about a company’s executive officers as set forth in Item 401 need not be included in the proxy statement if it is set forth in the Form 10-K. The required heading in Part I of the Form 10-K disclosure now reads “Information about our Executive Officers” (previously, “Executive Officers of the Registrant”). 

Compliance with Section 16(a) Reporting (Item 405).  Item 405 requires issuers to disclose each Section 16 insider who failed to file on a timely basis a Form 3, 4 or 5 required under Section 16(a) in the preceding fiscal year.  The disclosure is required to appear under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”  The item provides that issuers must make the required disclosure based “solely” on a review of the copies of Forms 3, 4 and 5 which are required to be provided to them and any written representation by insiders that no Form 5 is required. 

The new rules eliminate the requirement that insiders furnish copies of Section 16 reports to the company.  In light of EDGAR, the SEC believes there is no reason to impose such a delivery requirement.  The SEC also revised the language of Item 405 to provide that companies may rely on Section 16 reports filed on EDGAR (as opposed to providing the disclosure based “solely” on a review of those forms) and a written representation by the reporting person.  The new rules clarify that companies are not required to limit their inquiry to Section 16 filings.  Accordingly, if a company is aware of an incomplete, inaccurate or missing filing on EDGAR, the company may make an Item 405 disclosure. 

In addition, the SEC added an instruction to Item 405 to allow and encourage omission of the disclosure, including the heading, if there are no delinquencies to report and changed the heading to “Delinquent Section 16(a) Reports.”  Finally, the new rules eliminate the “check box” on the cover of the Form 10-K relating to Item 405 disclosure.

Corporate Governance (Item 407).  The SEC adopted two technical changes to Item 407.  The first is to correct a reference to a now outdated auditing standard in Item 407(d)(3)(i)(B), from “AU section 380” (Communication with Audit Committee) to refer more broadly to applicable requirements of the PCAOB and the SEC.  Second, the new rules amend Item 407 to explicitly exempt emerging growth companies (EGCs) from the Item 407(e)(5) requirement relating to the Compensation Committee Report because EGCs are not required to include a CD&A in their proxy statements. 

Registration Statement and Prospectus Provisions (Items 501, 503, 512). 

Outside Front Cover Page of the Prospectus.  The SEC is making several changes to the disclosure requirements for the outside front cover page of the prospectus. The first is to eliminate an instruction addressing when a company may be required to change its name. The SEC indicated that this change was to streamline the instructions and does not signal a change in its policy when it evaluates how to address potentially misleading names.

Another change to Item 501(b)(3) relates to disclosure of the price of the securities being offered.  In those cases where the offering price to the public is determined by a formula or particular method, cover page disclosure can be cumbersome.  As revised, the instructions now explicitly allow a registrant to include on the cover page only a statement that the offering price will be determined by a method or formula that is more fully explained in the prospectus, with a cross reference to the page where that disclosure appears. 

In addition, the new rules include an amendment to Item 501(b)(4) to require disclosure of the principal U.S. market or markets for the securities being offered and the corresponding trading symbols.  The existing rule only requires the name of any national securities exchanges that list the securities being offered.  

The SEC also adopted a change to the red herring legend.  Item 501(b)(10) requires a company to include a legend on a preliminary prospectus that the information is not complete and will be amended, and that the prospectus is not an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted.  The SEC eliminated the latter statement relating to compliance with state laws to allow for more tailored prospectus cover page disclosure in recognition of the changes to securities laws under the National Securities Markets Improvement Act (NSMIA). 

Risk Factors (Item 503(c); new Item 105).  Item 503(c) requires disclose of risk factors and includes a list of specific examples that could make an offering speculative or risky.  Because risk factors now are included not only in registration statement prospectuses (covered by Items 501-512), the SEC moved Item 503(c) to a new Item 105 to reflect the application of risk factor disclosure to periodic reports and Form 10.  The list of example risk factors has been eliminated to encourage issuers to focus on their particular risks and not necessarily those listed in the Item. 

Plan of Distribution (Item 508).  Item 508 requires disclosure about the plan of distribution for securities in an offering, including information about the underwriters.  Paragraph (h) references payment to a dealer for acting as a “sub-underwriter” in the offering.  The SEC amended Rule 405 to add a definition of “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).  The SEC eliminated Item 512 undertakings relating to warrants and rights offerings, competitive bids, incorporated annual and quarterly reports and equity offerings of non-reporting companies, as duplicative or obsolete. 

Exhibits (Item 601).  The SEC adopted several changes to Item 601, including: 

Filing redacted agreements without need for concurrent request for confidential treatment.  The new rules permit companies to omit confidential information from exhibits pursuant to either Item 601(b)(2)(M&A contracts) or Item 601(b)(10)(material contracts) and file redacted versions without the need to submit a confidential treatment request, provided that the omitted information is both immaterial and “would likely cause competitive harm” if publicly disclosed.  Companies must continue to clearly mark the exhibit index and exhibits to indicate where such information has been omitted. SEC staff will continue to review filings selectively, and assess whether redactions appear to be limited as required by the rules.  Upon request, a company must provide supplemental materials to the staff similar to that currently required in a confidential treatment request.  Current SEC guidance about how redactions should be reflected -- and appropriately limited -- remains in effect.    Conforming changes were adopted to Item 1.01 of Form 8-K.

As mentioned above, the rule changes relating to confidential treatment requests became effective on April 2, 2019 upon publication of the new rules in the Federal Register.  Companies may, but are not required to, withdraw outstanding confidential treatment requests. Companies may also voluntarily continue to use prior confidential treatment request procedures.

SEC staff issued additional guidance on these rules on April 1, 2019, including relating to the procedures that will be followed when SEC staff reviews redacted exhibits.  Among other things, SEC clarifies that it will not declare registration statements effective in the event it does review redacted exhibits and any issues remain unresolved.

Material contracts with completed performance – the two-year look back.  Currently, Item 601(b)(10) requires that a contract not made in the ordinary course of business be filed if one of two tests is met: either the contract is to be performed in whole or in part after the filing or the contract was entered into not more than two years before the filing.  As amended, the rule now requires only newly reporting companies to file contracts that have been performed before the filing but that were entered into within the past two years.  Companies with established reporting histories would not be required to comply with the two-year look back as investors would have access to material agreements previously filed.    

New exhibit required:  description of security (Item 601(b)(4)).  This Item has been amended to require companies to file a new exhibit to their Form 10-K with the description of their registered securities that is required in registration statements pursuant to Item 202 of Regulation S-K.  Accordingly, this would cover capital stock, debt securities, warrants, rights, American Depositary Receipts and other securities that are registered under Section 12 of the Securities Exchange Act of 1934.  This exhibit would be in addition to the current requirement to file a complete copy of the company’s articles of incorporation and/or bylaws under Item 601(b)(3).

To the extent a company has previously filed an exhibit to a Form 10-K containing Item 202 disclosure, it can incorporate that exhibit by reference and hyperlink to the previously filed exhibit in future Form 10-K filing, assuming the information remains unchanged.  The new requirement does not change existing obligations under Form 8-K and Schedule 14A to disclose certain modifications to the rights of security holders and amendments to articles or bylaws.

Personally identifiable information omitted from exhibits.  The SEC added new Item 601(a)(6) to permit the omission of personally identifiable information, such as bank account numbers, social security numbers or home addresses, in required Item 601 exhibits without submission of a confidential treatment request. This codifies an informal practice permitted by the SEC staff for some time.  Conforming changes were adopted to Regulation M-A and certain other forms.

Omitting schedules and attachments to exhibits.  New Item 601(a)(5) permits the omission of entire schedules and related attachments to any exhibits, including material contracts, unless they contain material information and unless that information is not otherwise disclosed in the exhibit or the disclosure document.  Previously, the rules allowed this practice only in the case of M&A and similar agreements filed as Exhibit 2. The change reverses a long-standing SEC staff position which resulted in numerous comment letters in recent years.  As with M&A agreements, a list of omitted schedules will be required, unless such information is already included within the exhibit itself.  In contrast to prior practice, the filing need not contain an undertaking to provide supplementally such schedules to the SEC staff upon request. The SEC may, however, request a copy of such schedules.  Comparable provisions have been added to the exhibit requirements of Regulation M-A and certain other forms.

Application to foreign private issuers.  The amendments will include conforming amendments to the exhibit requirements in Form 20-F. 

Incorporation by Reference.  The rules and instructions relating to incorporation by reference are included in a variety of regulations.  The amendments revise certain items and rules and a number of forms in an effort to simplify and modernize these rules.  The amended rules eliminate the limit on incorporation by reference of documents that have been on file with the SEC for more than five years, currently included in Item 10(d). They also eliminate the requirement that copies of information incorporated by reference must be filed as an exhibit to the report (other than the Exhibit 13 annual report to shareholders, which would still need to be filed as an exhibit to the Form 10-K).  The amended rules require hyperlinking to information incorporated by reference, if available on EDGAR. 

The rules continue to prohibit incorporation by reference if the disclosure would be incomplete, unclear or confusing. The revised rules include as examples of such prohibited practices incorporation by reference to a physical document that has been destroyed, or incorporation by reference from a document that itself incorporated information pertinent to disclosure by reference, which were also prohibited under existing rules.

The rule change prohibits incorporating by reference information in filed financial statements, nor may financial statements include cross-references to information outside the financial statements, in each case unless otherwise specifically permitted or required by other SEC rules or by GAAP or IFRS.    

Tagging Data; Cover Pages.   The SEC adopted amendments to require 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 be tagged in Inline XBRL.  This follows the adoption of recently announced rules requiring the use of Inline XBRL in which XBRL data is embedded in the HTML document, as discussed in our December 2018 Newsletter. The SEC believes that increasing the capacity for automation of the data gathering process will enhance investors’ and the agency’s use of interactive data and the ability to compare and analyze companies.

To implement the data tagging requirement, a new Rule 406 has been added to Regulation S-T, and a new Item 601(b)(104) and new instructions to Forms 20-F and 40-F are included.  In addition, the SEC amended the cover pages of these forms to require the trading symbol for each class of registered securities and the cover pages of the Form 10-Q and Form 8-K to require disclosure of the title of each class of securities and each exchange on which they are registered (currently only on the Form 10-K).  The precise format of the cover page will be published by the SEC in the future. 

Amendments Not Adopted

The SEC did not adopt the following amendments that had been proposed:

  • A proposal to allow companies to eliminate most item numbers and captions in SEC reports. The SEC concluded that investors value the consistency among companies in order to use and navigate among different filings.
  • A proposal to require companies to include an exhibit listing of the legal entity identifiers (“LEI”), where one has been obtained, for the company and each subsidiary listed. The SEC concluded the benefits did not outweigh the time and costs to acquire and maintain LEIs, particularly for global enterprises.

For further information on this topic, please contact Taavi Annus, Brian Feezel, Randy Wang or any other BCLP Securities and Corporate Governance lawyer. You may also contact us through the direct link to our Website, BCLP Securities and Corporate Governance Practice. Bryan Cave Leighton Paisner LLP makes available the information and materials in its Website for informational purposes only. The information is general in nature and does not constitute legal advice. Further, the use of this site, and the sending or receipt of any information, does not create any attorney-client relationship between us. Therefore, your communication with us through this Website will not be considered as privileged or confidential.