The SEC is proposing amendments to modernize and simplify certain disclosures requirements in Regulation S-K. These changes are based on the recommendations made in the staff’s Report on Modernization and Simplification of Regulation S-K, as required by Section 72003 of the Fixing America’s Surface Transportation Act (FAST Act). While modernizing Regulation S-K requirements and improving readability and navigability of related forms, these rules are also intended to reduce costs and burdens on registrants and discourage repetition and disclosure of immaterial information.
Wednesday, October 18. 2017
In addition, the SEC is also proposing parallel amendments to several rules and forms that are applicable to investment companies to improve referencing, tagging, and hyperlinking among related documents. These new rules would require certain filings to be submitted in HTML and/or Inline XBRL (iXBRL).
SEC staff published its Report on Modernization and Simplification of Regulation S-K (the “FAST Act Report”) last year in November. In addition to these recommendations, the Commission took into consideration comment letters submitted in response to its Concept Release regarding business and financial disclosure requirements. These proposed amendments focus on the implementation of section 72003(d) of the FAST Act and include changes to:
Description of Property (Item 102)
Currently, Item 102 of Regulation S-K requires disclosure of “principal” plants, mines, and other “materially important” physical properties. However, this instruction was leading to some registrants disclosing information that is not material, such as information relating to corporate headquarters and office space, for example. In addition, Item 102 can cause duplicative disclosure. To address these and other concerns, the SEC is proposing to revise Item 102 to emphasize materiality to the registrant and harmonize some non-industry-specific triggers for disclosure.
Management’s Discussion and Analysis (Item 303)
Item 303(a) requires registrants to discuss their financial condition, changes in financial condition, and results of operations, and this discussion should cover a three-year period and may employ year-to-year comparisons. This can result in duplicative and distracting disclosure, given content may be covered in a previous EDGAR filing. The SEC is proposing amending Item 303 to eliminate discussion of the earliest year if that discussion is not material to an understanding of the registrant’s current financial condition and the registrant has filed its prior year Form 10-K containing MD&A of the earliest of the three years included in the financial statements of the current filing. Instruction 1 to Item 303(a) would be simplified accordingly.
Directors, Executive Officers, Promoters, and Control Persons (Item 401)
Item 401 concerns the disclosure of identifying and background information about a registrant’s directors, executive officers, and significant employees. This information must be included in several forms, including Part III of the annual report on Form 10-K. General Instruction G of Form 10-K permits this Part III disclosure to be incorporated into the Form 10-K by reference to the registrant’s definitive proxy or information statement. However, this can lead to confusion, and the SEC is proposing to clarify the instructions pertaining to Item 104.
Compliance with Section 16(a) of the Exchange Act (Item 405)
Currently Rule 16a-3(e) requires reporting owners to furnish a duplicate of Section 16 reports from recent or prior fiscal years to allow the registrant to disclose pertinent information to the SEC. The Commission is considering removing this requirement as most Section 16 information is freely and easily available on through the EDGAR System. This will shift reliance onto previously electronically filed Section 16 reports, which will streamline registrant compliance. Item 405(b) would also be revised to state that registrants need not rely on only Section 16 reports in their disclosure, and there would be changes in how delinquent Section 16 reports should be disclosed.
Outside Front Cove Page of the Prospectus (Item 501(b))
The FAST Act report made several recommendations to streamline the requirements related to the forepart of the registration statement and the outside front cover page of the prospectus. These changes would permit the registrant greater flexibility in designing a cover page tailored to their business and the particular offering.
Risk Factors (Item 503(c))
Item 503(c) entails disclosure of the most significant factors that make the offering risky. The SEC is proposing to relocate this item and, in doing so, eliminate discussion of examples within the risk analysis. The Commission believes removing these examples would encourage registrants to focus on their own risk identification process.
Plan of Distribution (Item 508)
Item 508 requires discussion about the plan of distribution for an offering. This discussion includes underwriters, and the term “sub-underwriter” is not currently defined. The SEC is proposing to formally define the term 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”.
Material Contracts (Item 601(b)(10)(i))
This item stipulates that registrants should file every material contract not made in the ordinary course of business provided that the contract is either performed in whole or in part at or after the filing of the registration statement, or if the contract was entered into not more than two years before that filing. The SEC is proposing to limit this two-year look back test to newly reporting registrants as well as placing other restrictions on how material contracts are disclosed.
In addition to these and other changes, some of the proposed amendments would require incorporation of new technology or additional disclosure. Importantly, the SEC is proposing to require all of the information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F, and 40-F to be tagged in the Inline XBRL format in accordance with the EDGAR Filer Manual. With these amendments, instead of submitting a separate XBRL report, the cover page will appear in HTML format with embedded XBRL data. Specifically, the SEC is proposing to add new Rule 406 to Regulation S-T, new Item 601(b)(104) to Regulation S-K, new paragraph 104 to the “Instructions as to Exhibits” of Form 20-F, and new paragraph B.17 to the “General Instructions” of Form 40-F to require registrants to file with each of the specified forms a “Cover Page Interactive Data File”. When Forms 20-F and 40-F are used as registration statements, these changes would not apply. It is the SEC’s belief that providing tagged data will allow investors and other interested parties the capacity to more easily analyze that data, which will promote efficiency, competition, and capital formation.
These propositions, as well as others, are discussed more fully in the Proposed Rule here. The SEC is interested in public comments on these topics. The public comment period will remain open for the next sixty days. You can submit comments using the form available on the SEC’s website or by e-mailing firstname.lastname@example.org with File Number S7-08-17 in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send
your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, be sure to reference File Number S7-08-17.