David M. Lynn, Scott Lesmes, and Marty Dunn
Corporate Finance | Capital Markets, Public Companies Counseling + Compliance, and REITs
On March 20, 2019, the Securities and Exchange Commission (the “Commission”) adopted rule amendments to modernize and simplify certain disclosure requirements in Regulation S-K and related rules and forms. These amendments were adopted pursuant to a directive from the 2015 Fixing America’s Surface Transportation Act (the “FAST Act”), and were based in part on the SEC’s report to Congress under the FAST Act, which was published on November 23, 2016. The amendments are part of the SEC’s broader effort to improve the effectiveness of public company disclosure by revisiting many disclosure rules and forms. The SEC proposed these amendments on October 11, 2017.
In addition to seeking to improve the quality and accessibility of disclosures in filings, the Commission has indicated that the rule changes “clarify ambiguous disclosure requirements, remove redundancies, and further leverage the use of technology.” The principal rule changes affect disclosures required in registration statements, prospectuses and periodic and current reports.
The amendments will be effective on May 2, 2019, with the following exceptions: (i) the new rules providing for the filing of redacted material contracts without submitting a request for confidential treatment were effective on April 2, 2019; and (ii) the Inline XBRL requirements for cover pages will have a three-year phase-in period. Under this phase-in period, the Inline XBRL requirements are effective: (i) for reports for fiscal periods ending on or after June 15, 2019, for large accelerated filers that report in U.S. GAAP; (ii) for reports for fiscal periods ending on or after June 15, 2020, for accelerated filers that report in U.S. GAAP; and (iii) for reports for fiscal periods ending on or after June 15, 2021, for all other filers.
Item 102 of Regulation S-K: Description of Property
The SEC amended Item 102 to clarify that disclosure is required only to the extent that physical properties are material to the issuer, and that the issuer’s property information may be disclosed on a collective basis. The rule retains the specific instructions for property disclosures of issuers in the mining, real estate and oil and gas industries. In adopting the amendments to Item 102, the Commission noted that “disclosure elicited in response to this item may not have been consistently material.”
Item 303 of Regulation S-K: Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
The Commission adopted a revision to Instruction 1 to Item 303(a) of Regulation S-K to allow issuers to omit the discussion of the earliest of the three years in the MD&A, if such discussion was already included in any of the issuer’s prior filings on EDGAR that required Item 303 disclosure. When opting to exclude the third year, issuers must identify the location in such prior filing where the omitted discussion may be found. The amendments do not affect smaller reporting companies or emerging growth companies, both of which already provide a discussion covering only two fiscal years, based on the financial statements that they are required to provide.
The amendments also revise Instruction 1 of Item 303 to eliminate the reference to presenting year-to-year comparisons to explain the financial information presented in the MD&A. Issuers may use any presentation that, in the issuer’s judgment, enhances a reader’s understanding of the issuer’s financial condition, changes in financial condition, and results of operations.
In addition, the reference to five-year selected financial data in Instruction 1 to Item 303(a) was deleted. The adopting release indicates that, because Item 303(a)(3)(ii) already requires disclosure of known trends and uncertainties, the Commission does not anticipate that the removal of this wording will impact the level of disclosure concerning trends, or otherwise reduce disclosure of material information.
The Commission also adopted similar revisions to Item 5 of Form 20-F for foreign private issuers.
Item 401 of Regulation S-K: Directors, Executive Officers, Promoters and Control Persons
Form 10-K permits issuers to incorporate the information required by Part III of Form 10-K, including the disclosure regarding the identity and background information of an issuer’s directors, executive officers, and significant employees, by reference to their definitive proxy or information statement. Alternatively, Instruction 3 to Item 401(b) allows issuers to disclose this information in Part I of Form 10-K. The Commission amended Item 401 to confirm that any disclosure required by Item 401 does not need to be repeated in an issuer’s proxy statement if it is already included in the Form 10-K.
The Commission also adopted a revision to the required caption for the Item 401 disclosure if it is included in Part I of Form 10-K to reflect a “plain English” approach. The required caption is “Information about our Executive Officers,” instead of “Executive officers of the registrant.”
Item 405 of Regulation S-K: Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires officers, directors, and specified types of security holders to report their beneficial ownership of an issuer’s equity securities by filing forms prescribed by the Commission.
The Commission has eliminated the requirement in Rule 16a-3(e) that such reporting persons provide Section 16 reports to the issuer. Rather, issuers may rely on EDGAR filings in determining whether the issuer’s reporting persons have been delinquent in filing reports required under Section 16(a), but issuers are not required to limit their inquiry to those filings. Item 405 was also amended to change the disclosure heading required by Item 405(a)(1), from “Section 16(a) Beneficial Ownership Reporting Compliance” to the more specific “Delinquent Section 16(a) Reports,” and encourage issuers to exclude this heading from their disclosures when they have no Section 16(a) delinquencies to report. The Commission also removed the checkbox from the cover page of Form 10-K indicating that there is no disclosure of delinquent filers in Form 10-K and, to the best of the issuer’s knowledge, will not be included in a definitive proxy statement or information statement incorporated by reference.
Item 407 of Regulation S-K: Corporate Governance
The Commission amended Item 407(e)(5) to explicitly exclude emerging growth companies (“EGCs”) from the requirement to provide a Compensation Committee Report, because EGCs are not required to provide a Compensation Discussion and Analysis in their disclosures.
The Commission also amended Item 407(b)(3)(i)(B), which requires an issuer’s audit committee to state in the proxy statement whether it has discussed with the independent auditor the matters required under applicable auditing standards, to now include a general reference to “the applicable requirements of the Public Company Accounting Oversight Board (PCAOB) and the Commission,” rather than reference an outdated auditing standard.
Item 501 of Regulation S-K: Forepart of the Registration Statement and Outside Cover Page of the Prospectus
The Commission amended the instruction to Item 501(b)(1), which requires disclosure of an issuer’s name on the cover page of the prospectus. This instruction had specified that, if an issuer’s name is the same as that of a well-known company, or if the issuer’s name leads to a misleading inference about the issuer’s line of business, then the issuer must include information to eliminate any potential confusion or misleading inference and, in some circumstances, disclosure may not be sufficient and the issuer may be required to change its name, subject to certain exceptions. The Commission deleted the portion of the Instruction to Item 501(b)(1), which indicated that disclosure may not be sufficient in certain circumstances and the issuer would need to change its name, recognizing that clarifying disclosure can typically address the potential confusion or misleading inference associated with an issuer’s name.
Item 501(b)(3) requires that the front cover page of the prospectus include the price of the securities being offered, the underwriter’s discounts and commissions, and the net proceeds that the issuer and any selling security holders will receive, and dictates that the information be provided on an aggregate and per share basis. When it is not practicable to provide a price for the securities, Instruction 2 to Item 501(b)(3) has permitted issuers to explain on the cover page the method by which the price is to be determined. The Commission adopted amendments to Instruction 2 to Item 501(b) to now permit issuers to include a clear statement on the cover page that the offering price will be determined by a particular method or formula that is more fully explained elsewhere in the prospectus, along with a cross-reference (including the page number) to that more detailed explanation of how the offering price will be determined.
Item 501(b)(4) requires an issuer to name any “national securities exchange” that lists the securities being offered, and to disclose the trading symbol for the securities. As amended, Item 501(b)(4) will require disclosure on the prospectus cover page of the principal United States market or markets for the securities being offered, in addition to the issuer’s symbols for the securities. In adopting this change, the Commission stated that the information about markets where the offered securities will be traded could be important to investors, even when such markets are not “national securities exchanges.”
Item 501(b)(10) requires that an issuer using a preliminary prospectus before the effectiveness of a registration statement must include a “Subject to Completion” legend, which advises readers that the information will be amended or completed. The Commission amended Item 501(b)(10) so that issuers may exclude the portion of the legend which states 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, when the legend is included in a preliminary prospectus for an offering that is not prohibited by state blue sky laws. The Commission also combined paragraphs (b)(10) and (b)(11) of Item 501 without substantive change to the requirement that the “Subject to Completion” legend also be included if an issuer 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.
Item 503 of Regulation S-K: Prospectus Summary and Risk Factors
The Commission adopted amendments that relocate Item 503(c), which requires disclosure of the most significant factors that make an offering speculative or risky, to new Item 105 in Subpart 100 of Regulation S-K. The Commission noted that this change is warranted because the risk factor disclosure covers a broad category of business information, and is not limited to offering-related disclosure. The Commission also eliminated the specific risk factor examples enumerated in the Item 503, in line with the Commission’s long-standing policy to discourage “boiler plate” risk factors and to better align with the principles-based objectives of the disclosure requirement.
Item 508 of Regulation S-K: Plan of Distribution
Item 508 of Regulation S-K requires disclosure in the prospectus about the plan of distribution for the securities being offered and sold, including specific information about dealers who are participating in the offering as “sub-underwriters,” a term which is not defined in the Item. The Commission adopted an amendment to Rule 405 of Regulation C (which defines the term “principal underwriter”) to also define a “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.
Item 512 of Regulation S-K: Undertakings
The Commission adopted amendments to Item 512 to eliminate undertakings that, in the Commission’s view, are duplicative of other rules or have become unnecessary due to developments since their adoption. The undertaking required by Item 512(c), which was required for an offering of warrants and rights when securities not purchased are reoffered to the public, was eliminated because it is no longer necessary. The undertaking required by Item 512(d), which was required for offerings involving competitive bidding, was eliminated because it is obsolete. The undertaking required by Item 512(e), which was required when incorporating an annual report into a prospectus, was eliminated because it is obsolete. The undertaking required by Item 512(f), which was required in equity offerings by issuers not subject to the Exchange Act reporting requirements, was eliminated because it is obsolete.
Item 601 of Regulation S-K: Exhibits
The Commission adopted amendments that now permit issuers to file redacted material contracts under Item 601(b)(10) without applying to the Commission for confidential treatment of the redacted information, provided that the redacted information: (i) is not material; and (ii) would be competitively harmful if publicly disclosed. Issuers are required to identify where information has been omitted from a filed exhibit by:
The Commission adopted parallel amendments to Item 601(b)(2), Form 20-F and the registration forms used by investment companies.
In an announcement published when the new rules became effective, the Commission’s Division of Corporation Finance (the “Division”) indicated that it will review filings for compliance with the new rules. These reviews will be conducted separately from regular filing reviews. The Division plans to separate its requests for supplemental information about the redacted exhibits, and will request that issuers provide their responses to those requests separately from the regular filing review comment and response process, in order to “minimize the risk of inadvertent public disclosure of competitive information.” The Division will initiate its review by sending a letter with a request that the issuer provide a paper copy of the unredacted exhibit, marked to highlight the redacted information. Once the Division reviews the unredacted materials, the Division may or may not ask for further substantiation. If the review of the unredacted exhibit does not lead to comments, the Division will send a letter indicating that the review is complete. If the review of the unredacted exhibit leads to questions about whether redacted information is material or whether there is a basis for the claim of competitive harm, the Division will provide the issuer with comments separate and apart from comments on any associated filing. When the Division’s comments are resolved, the Division will send the issuer a letter indicating that the review is complete. Consistent with past practice, the Division will ask issuers to resolve any questions relating to redacted exhibits in registration statements before submitting a request for acceleration of the effective date.
The Division intends to release the initial request for an unredacted exhibit and the closing letter publicly on the EDGAR system in connection with posting the other correspondence related to the filing review, if applicable. The Division will not make public the Division’s comments regarding redacted exhibits, as well as the responses from issuers. Issuers may request confidential treatment of supplemental materials while they are in the Division’s possession pursuant to Rule 83. Upon completion of a compliance review, the Division will destroy or return all supplemental materials, as long as the issuer has complied with the procedures outlined in Rules 418 or Rule 12b-4.
The new rules have not changed an issuer’s ability to request confidential treatment pursuant to Rule 406 or Rule 24b-2, and the Division will continue to process new applications, as well as pending applications that are not withdrawn, following established procedures.
If an issuer has a confidential treatment request pursuant to Rule 406 or Rule 24b-2 pending at the time the new rules became effective, the issuer may, but is not required to, withdraw its pending application. Issuers who elect to withdraw their confidential treatment requests and rely on the new rules must amend their filing to conform to the new rule requirements. If an issuer has received an order granting confidential treatment and the order is still in effect, the grant of confidential treatment will continue until the date stated in the order.
In addition to the new rules governing the omission of information from material contracts because it is not material and disclosure would be competitively harmful, the Commission codified the Staff’s practice of permitting the omission of personally identifiable information, such as social security numbers, bank account numbers, home addresses or telephone numbers. New paragraph (a)(6) of Item 601 expressly permits the omission of such information without requiring the submission of a confidential treatment request. The Commission adopted comparable amendments to Form 20-F to align the requirements of that form.
The Commission also adopted an amendment to Item 601(b)(10) that will require only “newly-reporting companies” to file material contracts that were entered into within two years of the registration statement or report. This new limitation on the two-year look back test includes a definition of which issuers will be considered “newly-reporting registrants.” The adopting release states that this change is intended to help ensure that investors receive access to agreements containing material information, while the Commission also recognizes that issuers with established reporting histories no longer need to be subject to the two-year look-back requirement, because investors will continue to have access to any material agreements previously filed. The Commission adopted comparable amendments to Form 20-F to align the requirements of that form.
The Commission adopted new paragraph (a)(5) to Item 601, which provides that issuers will no longer be required to file attachments to material agreements, as long as the attachments do not contain material information and are not otherwise disclosed in the exhibit or disclosure. The issuer must provide with each exhibit a list briefly identifying the contents of any omitted schedules and attachments, unless that information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. Issuers are also required to provide, on a supplemental basis, a copy of any omitted schedule or attachment to the Staff upon request. The Commission adopted comparable amendments to Form 20-F to align the requirements of that form.
The existing requirements under Item 202 of Regulation S-K require an issuer to provide a brief description of its registered capital stock, debt securities, warrants, rights, American Depositary Receipts in the prospectus offering such securities, and other securities. Under amendments to Item 601, issuers will now be required to provide the information required by Item 202(a)-(d) and (f) as an exhibit to their Form 10-K. The Commission adopted comparable amendments to Form 20-F to align the requirements of that form.
Incorporation by Reference
The Commission consolidated the procedural requirements governing the incorporation of information by reference into Regulation C and Regulation 12B. The Commission eliminated the prohibition that had been set forth in Item 10(d) of Regulation S-K on incorporating documents by reference if such documents had been on file with the Commission for more than five years, subject to certain exceptions. Under the new rules, an issuer will no longer be required to file as an exhibit any document or part thereof that is incorporated by reference in a filing, and instead the issuer will provide a hyperlink to the document that is incorporated by reference. The Commission eliminated a requirement in Item 601(b)(13) that issuers file a Form 10-Q as an exhibit when it is specifically incorporated by reference into a prospectus. The Commission’s amendments also prohibit incorporating by reference, or cross-referencing to, information outside of the financial statements into the issuer’s financial statements, unless otherwise specifically permitted or required by the Commission’s rules or by U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards as issued by the International Accounting Standards Board. The Commission also amended Rule 0-4 to, except as provided in Commission rules, restrict the incorporation of financial information required to be given in comparative form for two or more fiscal years or periods unless the information incorporated by reference includes the entire period for which comparative data is given.
Periodic and Current Report Cover Pages
The amendments include changes impacting the cover page disclosure of Forms 8-K, 10-Q, 10-K, 20-F and 40-F.
Issuers will be required to tag specific cover page data using Inline XBRL, such as the form type, the issuer’s name, the type of filer and the issuer’s public float. The requirement to tag information on the cover page of Form 20-F or 40-F only applies when the form is being used as an annual report (rather than as a registration statement). Issuers will be required to file with each of the specified forms a “Cover Page Interactive Data File.” These requirements are subject to the phase-in schedule described above.
Under the amendments, the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F and Form 40-F will require disclosure of the trading symbol for each class of registered securities. Further, the cover pages of Form 10-Q and Form 8-K will require disclosure of the title of each class of securities registered under the Exchange Act and each exchange on which the securities are listed.
Exhibit Hyperlinks and HTML Format for Investment Companies
The Commission adopted amendments that extend the rules requiring hyperlinks to exhibits to investment companies. Under these requirements, filers under the Investment Company Act of 1940, as amended, will need to provide hyperlinks to previously filed exhibits, and filers who submit filings in ASCII will need to begin submitting filings in HTML, effective for filings on or after April 1, 2020.
The Commission’s FAST Act amendments will require the immediate attention of issuers as they prepare for upcoming filings. The amendments will change the form and content of many filings, including registration statements, prospectuses, and current and periodic reports, while relieving some burdens that issuers currently face, such as submitting requests for confidential treatment of information included in material contracts.
 FAST Act Modernization and Simplification of Regulation S-K, SEC Release No. 33-10618; 34-85381 (March 20, 2019).
 A “national securities exchange” is defined in the Exchange Act as a securities exchange that has registered with the Commission under Section 6 of the Exchange Act. The New York Stock Exchange and Nasdaq are national securities exchanges.
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