April 10, 2019Client Alert

SEC Releases Final Rules Required by the FAST Act Modifying Disclosure Rules Under Regulation S-K

On March 20, 2019, the SEC released final rules that ease certain disclosure requirements under Regulation S-K in response to the Congressional mandate in the FAST (Fixing America’s Surface Transportation) Act. The amendments were adopted in substantially the same form as originally proposed in October of 2017. The release fits into the SEC’s larger Disclosure Effectiveness Initiative, a program designed to make company disclosures more helpful and accessible to the changed landscape of modern investors, and, according to SEC Chairman Jay Clayton in the release, “demonstrate [the SEC’s] focus on modernizing [its] disclosure system to meet the expectations of today’s investors while eliminating unnecessary costs and burdens.”

The amendments are more substantive than the August 2018 disclosure simplification amendments. Some of the more significant amendments are discussed below.

Item 601 –Treatment of Confidential Information Redactions in Exhibits

The revised rules significantly alter the process for a registrant to omit confidential information from exhibits to acquisition agreements filed under Item 601(b)(2) and material contracts filed under item 601(b)(10). Registrants previously were required to prepare and file a separate confidential treatment requests (CTR) laying out the justification for omissions, but now can redact most confidential information without filing a request. The SEC also codified its current practice of allowing companies to omit personally-identifiable information, or information the disclosure of which would be a clearly unwarranted invasion of personal privacy, from exhibits without filing a CTR.

Under the revised rules, a registrant can redact information from material contracts, acquisition agreements, and associated exhibits and schedules if the information redacted: (1) is not material; and (2) would likely cause the registrant competitive harm if disclosed. If it makes a redaction, a registrant is required to indicate on the exhibit index that exhibits or portions of exhibits were omitted, and include on the first page of any redacted exhibit a prominent statement that certain identified information has been excluded because it is not material and would likely cause competitive harm if disclosed. A registrant is also required to indicate with brackets where information was omitted.

Though these changes significantly affect the confidential information redaction process, the SEC has stressed that the standard for the information that may be redacted has not changed. Under the new regime, SEC staff could selectively require registrants to provide analysis supporting a redaction decision, and could require registrants to later refile unredacted versions of filed agreements and exhibits.

But SEC Commissioner Jackson, dissenting from the adoption of the proposed rules, called into question whether the new process would adequately replace the old process, noting that under the new rules, registrants are not required to give the SEC staff information they intend to redact, and that “firms will now feel more free to redact as they wish,” and, as a consequence “investors...will face more uncertainty.”

Item 103 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

The revised rules attempt to both allow a registrant flexibility in discussing historic periods as part of MD&A and to encourage, if not require, a registrant to tailor its MD&A to emphasize reader understanding rather than providing rote and repetitive comparisons of year-over-year financial data.

Prior to the amendments, when a registrant’s financial statements covered three years, the registrant was generally required to provide year-over-year discussions of the last three fiscal years, comparing the current year to the previous year, then the previous year to the first of the three years.

Under the amendments, a registrant may omit the discussion of the first of the three fiscal years if the discussion was already included in another registrant EDGAR filing and the registrant identifies the location of the discussion. A registrant can rely on any prior EDGAR filing for the location of the omitted discussion, not only the registrant’s previous Form 10-K.

In addition, the rules eliminate the reference to year-to-year comparisons, instead allowing a registrant to use any presentation that enhances a reader’s understanding of the registrant’s financial condition, change in financial condition, and results of operations. Registrants can also omit selected five-year financial data that was previously required if relevant for certain trends, but trend information remains required for liquidity, capital resources, and results of operations discussions.

Commentators note, however, that registrants must provide all material information in MD&A and that the SEC had raised the possibility in the proposing release that a registrant may be required to include the omitted first year if there had been a material change to one of the two earlier years due to a restatement or retrospective adoption of a new accounting principal. Though the final version of the rules do not include any mention of a condition under which a registrant would be required to include the first year, registrants should continue to disclose all material information in MD&A.

Item 105 – Risk Factors

Required disclosure for risk factors has received its own item moving from Item 503(c) to Item 105. The SEC also eliminated the enumerated examples of possible risk factors and encouraged companies to place an emphasis on principles-based requirements that encourage registrants to provide risk disclosure that is more precisely calibrated to their particular circumstances and therefore more meaningful to investors.

Item 202 – Description of Securities

Item 202 previously required a registrant to provide a brief description of the registrant’s capital stock, debt securities, warrants, rights, American Depositary Receipts, and other securities only in registration statements, and not in Form 10-K or 10-Q. The revised rules require registrants to provide the required description as an exhibit to Form 10-K.

Trimmed Disclosure

The revised rules trim around the edges of disclosure required for a number of Reg S-K items.

Physical Property Disclosure. Registrants were previously required under Item 102 to provide a description of all physical property. The revised rules adopt a new, non-industry specific disclosure standard for property based on materiality. Under the new standard, a registrant is only required to disclose physical property where the disclosure is material to the registrant, and may disclose physical property individually or in the aggregate depending on the circumstances. 

Two-year lookback for material contracts. Registrants were previously required to file every material contract not made in the ordinary course of business if the contract was to be performed after the filing of the registration statement or report or if entered into two years or less before the filing of the registration or the report, even if the registrant had fully performed the contract. Now, only certain newly-reporting companies need file those agreements, as already-reporting companies would have filed the agreements via EDGAR at the time they were entered into.

Section 16 Filings. Registrants were previously required to disclose under Item 405 any person who failed to file a Section 16 report on a timely basis during the most recent fiscal year or prior fiscal years. The revised rules eliminate Exchange Act Rule 16a-3(e) that required Section 16 filers to provide reports directly to the registrant. Correspondingly, the rules allow the registrant to rely on Section 16 reports filed on EDGAR to determine under Item 405 if there are any Section 16 delinquencies.

Readability and Ease of Use

The SEC also included in the new rules a number of changes directed at the readability and ease of use of SEC filings and EDGAR. The changes include favoring hyperlinking over duplicate inclusion of documents, changes to the layout of filing cover pages, and requiring additional XBRL data tagging.

Trading Symbol and Principal Market. The revised rules require a registrant to disclose on the cover pages of Form 10-K, Form 10-Q, and Form 8-K, the registrant’s trading symbol and national exchange, along with the title of each class of securities registered. Registrants not traded on a national exchange are required to disclose the principal US market for their securities.  

XBRL Tagging. Registrants will be required, on a phased compliance schedule, to tag all, rather than, as is currently required, only some cover page information with Inline XBRL. Large Accelerated Filers are required to comply for reports covering periods ending on or after June 15, 2019, Accelerated Filers for reports covering periods ending on or after June 15, 2020, and all other for reports covering periods ending on or after June 15, 2021.

Material Incorporated by Reference. Registrants are no longer required to include as an exhibit to a filing any document or part of a document incorporated by reference in a filing if that document has already been filed by the registrant on EDGAR. Instead, registrants may include a hyperlink to the document or part of a document incorporated.

Rewording Headings. The SEC revised the title of a number of headings, including changing the heading of Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports,” and the heading for executive officer disclosure required by item 401 to “Information about our Executive Officers” instead of “Executive Officers of the Registrant.” The SEC also asks registrants to eliminate the disclosure of delinquent Section 16(a) reports if there are none.

Removal of Section 16(a) Delinquencies Checkbox. Registrants are no longer required to include a checkbox on the cover page of Form 10-K to indicate whether or not the filing contains disclosure of Section 16 delinquencies.

Application to Investment Advisers and Investment Companies. The amendments apply rules governing incorporation by reference and hyperlinking to investment advisers and investment companies, including amendments that require certain investment company filings to be submitted in HTML format.

Other than as discussed above, the amendments become effective May 2, 2019.

SEC Table

The SEC included with the adopting release a helpful table that summarizes the amended rules. A simplified version of the table is below.


Summary Description of Amended Rules

Regulation S-K, Item 303 and Form 20-F

Registrants will generally be able to exclude discussion of the earliest of three years in MD&A if they have already included the discussion in a prior filing.

Regulation S-K, Items 601(b)(10) and 601(b)(2), and investment company registration form.s

Registrants will be able to omit confidential information in material contracts and certain other exhibits without submitting a confidential treatment request to the Commission, so long as the information is (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.

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

Registrants will be able to omit confidential information in material contracts and certain other exhibits without submitting a confidential treatment request to the Commission, so long as the information is (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.

Regulation S-K, Item 601(a)(5) and investment company forms

Registrants will not be required to file attachments to their material agreements if such attachments do not contain material information or were not otherwise disclosed.

Regulation S-K, Item 102

Registrants will need to provide disclosure about a physical property only to the extent that it is material to the registrant.

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

Registrants will be required to disclose on the form cover page the national exchange or principal U.S. market for their securities, the trading symbol, and title of each class of securities.

Securities Act Rule 411(b)(4); Exchange Act Rules 12b-23(a)(3), and 12b-32; Investment Company Act Rule 0-4; and Regulation S-T Rules 102 and 105

Registrants will no longer be required to file as an exhibit any document or part thereof that is incorporated by reference in a filing, but instead will be required to provide hyperlinks to documents incorporated by reference.

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

Registrants will be required to tag all cover page data in Inline XBRL.

Regulation S-T Rules 102, 105, 201, 202 and 311; Form N-CSR; and investment company registration forms

Investment companies will be required to file reports on Form N-CSR and registration statements and amendments thereto in HTML format and provide hyperlinks to exhibits and other information incorporated by reference.

Contact the experts at Michael Best for additional information on the new SEC Regulation S-K disclosure rules and how they might affect your company’s public disclosures.

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