Public companies will soon receive a bit of relief from reporting requirements under the Securities Exchange Act of 1934, courtesy of amendments recently adopted by the Securities and Exchange Commission (SEC).
The SEC adopted the final form of proposed amendments to the FAST Act Modernization and Simplification of Regulation S-K to modernize and simplify certain disclosure requirements in Regulation S-K, Regulation M-A, Regulation AB and Regulation S-T on March 20, 2019. The final amendments, which contain about 30 specific rule changes in all, were largely consistent with the SEC’s proposed rules issued in October 2017 and recommendations in the “2016 Report on Modernization and Simplification of Regulation S-K.”
Management Discussion and Analysis Changes
The new amendments will provide public companies with some flexibility in the management discussion and analysis (MD&A) section of periodic reports filed with the SEC, primarily by reducing repetitive disclosure. The MD&A is one of the most labor-intensive sections of periodic reports and companies are currently required to discuss a registrant’s financial condition, changes in financial condition and results of operation for the last three fiscal years covered by the financial statements.
Under the amendments, a company can omit narrative discussions about the earliest of the three years if that discussion was already included in any of its prior filings, so long as the company specifies the location in the prior filing where the omitted discussion can be found. The final rules dropped the proposed requirement permitting a company to drop the earliest year only if such omission was not material to an understanding of the company’s financial condition, changes in financial condition and results of operation.
The final rules also revise instruction 1 to the MD&A rules by eliminating the reference to five-year selected financial data for trend information and stating that an issuer may use any presentation that, in its judgment, would enhance a reader’s understanding of the company’s financial condition, changes in financial condition and results of operations, in lieu of specifying the use of year-to-year comparisons. As a practical matter, the SEC acknowledges that many companies will probably continue to provide year-to-year comparisons, notwithstanding the additional flexibility.
Other changes that will likely have the most immediate impact are those designed to reduce disclosure of immaterial information when filing exhibits with the SEC. Currently, a company seeking to exclude confidential information from filed exhibits is required to file a confidential treatment request (CTR) with the SEC prior to redacting the confidential information. A company can now omit immaterial confidential information from exhibits without first submitting a CTR if the redacted information would likely cause competitive harm to the company if publicly disclosed.
In addition, companies were previously required to file schedules and similar attachments to exhibits in virtually all situations, with a limited exception for certain acquisition agreements. The final rules permit companies to omit schedules and similar attachments to exhibits unless they contain material information and unless that information is not otherwise disclosed in the exhibit or disclosure document, so long as the company provides a list of omitted schedules and exhibits and agrees to furnish such information to the SEC on a supplemental basis upon request.
Changes Ahead for Next Year
While proxy season is in the rearview mirror for many public companies whose fiscal year-ends line up with the calendar year, a few of the changes will impact next year’s proxy statement and annual reports. For instance, late Section 16 reports will now be required to be disclosed under a new heading called “Delinquent Section 16(a) Reports” and the SEC encourages public companies to exclude the heading when there are no delinquencies to report.
The SEC also eliminated the checkbox on the cover page of Form 10-K denoting whether the annual report or the proxy statement discloses any delinquent Section 16(a) reports. Also, the properties section of the annual report will now only require disclosure about physical property to the extent such property is “material” to a public company.
It’s Not All About Simplification
However, it isn’t all good news for public companies looking to reduce the overall length of their periodic reports and the amount of time spent on periodic reporting. The final rules will require some updates to the cover pages of Forms 8-K, 10-Q, 10-K, 20-F and 40-F as companies will now be required to disclose the national exchange or principal U.S. market for their securities, as well as the trading symbol and the title of each class of securities.
In addition, companies will also be required to tag all cover page data in Inline XBRL. These amendments were made to enhance investors’ use of interactive data and to help investors in their efforts to search news websites and stock market databases.
When the Rules Will Become Effective
Generally, the rules will become effective 30 days after they are published in the Federal Register, except for:
- (a) the amendments relating to the redaction of confidential information in certain amendments, which will become effective immediately upon publication in the Federal Register, and
- (b) the requirements to tag data in Inline XBRL, which are subject to a three-year phase-in with
- large accelerated filers required to comply for fiscal periods ending on or after June 15, 2019,
- accelerated filers required to comply with these requirements in reports for fiscal periods ending on or after June 15, 2020, and
- all other filers required to comply with these requirements in reports for fiscal periods ending on or after June 15, 2021.