SEC Streamlines Regulations with FAST Act Rules
The Fixing America’s Surface Transportation Act, or FAST Act, required the SEC to consider ways to streamline SEC regulations. Accordingly, the SEC has adopted final amendments to its rules that are intended to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide all material information to investors. The amendments are also intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information. The new rules will generally be effective 30 days after publication in the Federal Register with special transition provisions for certain items. In addition, amendments to the rules governing redaction of confidential information in material contracts are effective upon publication in the Federal Register.
Required MD&A disclosure is currently set forth in Item 303(a) of Regulation S-K. Instruction 1 to Item 303(a) currently provides that the discussion and analysis shall be of the financial statements and other statistical data that the registrant believes will enhance a reader’s understanding of its financial condition, changes in financial condition, and results of operations. This instruction also provides that, generally, the discussion shall cover the three-year period covered by the financial statements and either use year-to-year comparisons or any other format that in the registrant’s judgment would enhance a reader’s understanding. The instruction also states that reference to the five-year selected financial data may be necessary where trend information is relevant.
Instruction 1 of Item 303 has been revised under the new rules to eliminate the reference to year-to-year comparisons. As revised, Instruction 1 will now state that registrants may use any presentation that in the registrant’s judgment enhances a reader’s understanding of the registrant’s financial condition, changes in financial condition, and results of operations, without suggesting that any one mode of presentation is preferable to another. Instruction 1 has also been revised to delete the reference to five-year selected financial data.
The SEC also revised Instruction 1 to Item 303(a) to allow registrants who are providing financial statements covering three years in a filing to omit discussion of the earliest of the three years if such discussion was already included in any other of the registrant’s prior filings on EDGAR that required disclosure in compliance with Item 303. Registrants electing not to include a discussion of the earliest year in reliance on this instruction must identify the location in the prior filing where the omitted discussion may be found.
Redaction of Confidential Information in Material Contract Exhibits
Current SEC rules allow registrants to redact information from material contracts filed as exhibits if the information is not material and is covered by an exemption from the Freedom of Information Act. However, the registrant must file a confidential treatment request, or CTR, which the SEC must approve.
Under the revised rules, CTRs will no longer be required for material contracts filed pursuant to Item 601(b)(10) of Regulation S-K. Instead, the registrant may redact provisions or terms of exhibits required to be filed if those provisions or terms are both not material and would likely cause competitive harm to the registrant if publicly disclosed. If it does so, the registrant must mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. The registrant also must indicate by brackets where the information is omitted from the filed version of the exhibit. The SEC intends to police this provision through its filing review process.
The SEC also adopted changes to Form 8-K to clarify that the accommodations to the exhibit filing requirements extend to Item 1.01 of Form 8-K as well, to the extent such exhibits are filed with the intention of being incorporated into future filings in satisfaction of Item 601(b)(10).
Description of Property
The SEC revised Item 102 of Regulation S-K to make clear that, unless otherwise specified, disclosure need only be provided about a physical property to the extent it is material to the registrant. The final rules also provide a uniform standard of disclosure based on materiality for non-industry specific properties. In some cases, application of this analysis may result in a description of property on an individual basis or on a collective basis, or may result in no disclosure.
Directors, Executive Officers, Promoters, and Control Persons
Item 401 of Regulation S-K sets forth disclosure requirements about the identity and background information of a registrant’s directors, executive officers, and significant employees. Instruction 3 to Item 401(b) allows registrants to include required information about their executive officers in Part I of Form 10-K. If a registrant chooses this alternative, Instruction 3 states that the registrant is not required to repeat that information in its definitive proxy or information statement.
To make clear that Instruction 3 applies to any executive officer disclosure required by Item 401, and therefore registrants need not duplicate such disclosure in their definitive proxy or information statement if they have already provided it in their Form 10-K, the revised rules clarify the scope of the instruction by moving it from Item 401(b) and making it a general instruction to Item 401. The revised rules also require the caption for the 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.”
Compliance with Section 16(a) of the Exchange Act
Item 405 of Regulation S-K requires registrants to disclose each reporting person who failed to file Section 16 reports on a timely basis during the most recent fiscal year or prior fiscal years. The revised rules eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant. The revised rules also amend Item 405 to:
- Clarify that registrants may, but are not required, to rely only on Section 16 reports that have been filed on EDGAR (as well as any written representations from the reporting persons) to assess whether there are any Section 16 delinquencies to disclose.
- 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”. The SEC also encourages registrants to exclude this heading altogether when they have no Section 16(a) delinquencies to report.
- Eliminate the checkbox on the cover page of Form 10-K (and the related instruction in Item 10 of Form 10-K) whereby the registrant indicates that there is no disclosure of delinquent filers in the Form 10-K and, to the best of the registrant’s knowledge, will not be included in a definitive proxy or information statement incorporated by reference.
Audit Committee Discussions with Independent Auditor
Under existing Item 407(d)(3)(i)(B) of Regulation S-K, when a registrant files a proxy or information statement relating to an annual or special meeting of security holders at which directors are elected or written consents are provided in lieu of a meeting, a registrant’s audit committee must state whether it has discussed with the independent auditor the matters required by AU section 380, Communication with Audit Committees (“AU sec. 380”). The reference to AU sec. 380 has become outdated and the revised rules replace the outdated reference with “the applicable requirements of” the Public Company Accounting Oversight Board (“PCAOB”) and the Commission.”
Description of Registrant’s Securities
Item 202 of Regulation S-K requires registrants to provide a brief description of their registered capital stock, debt securities, warrants, rights, American Depositary Receipts, and other securities. Registrants provide Item 202 disclosure about registered securities in their registration statements, but are not required to provide this disclosure in their Form 10-K or Form 10-Q. The revised rules require registrants to provide the information required by Item 202(a)-(d) and (f) as an exhibit to Form 10-K, rather than limiting this disclosure to registration statements.
Additional Information Omitted From Exhibits
Schedules and Attachments to Exhibits
Under existing rules in Item 601 of Regulation S-K, registrants generally must file complete copies of any required exhibits. Very often, these exhibits include a number of schedules, appendices, and other similar attachments which can be quite lengthy but not necessarily material to investors. Except for paragraph (b)(2) of Item 601, which applies only to material plans of acquisition, reorganization, arrangement, liquidation, or succession, registrants must file every required exhibit under Item 601 in its entirety, irrespective of the materiality of particular information in the exhibits. Because the information in certain schedules or similar attachments to the exhibits may not be material to investors, the SEC believes a uniform filing requirement for this information is not commensurate with the corresponding costs and burden imposed on registrants, particularly when the schedules, appendices, and other attachments contain proprietary or otherwise sensitive information.
In the revised rules Item 601(a)(5) expands the existing accommodation in Item 601(b)(2) to include all exhibits filed under Item 601. Similar to current Item 601(b)(2), proposed Item 601(a)(5) would permit registrants to omit entire schedules and similar attachments to required exhibits, provided:
- they do not contain material information;
- they were not otherwise disclosed in the exhibit or the disclosure document; and
- the filed exhibit contains a list briefly identifying the contents of any omitted schedules and attachments.
Personally Identifiable Information
Exhibits filed pursuant to Item 601 of Regulation S-K may include sensitive personally identifiable information, such as bank account numbers, social security numbers, home addresses, and similar information, or PII. As a matter of practice, the staff generally does not object where a registrant omits PII from exhibits without also submitting a CTR. To codify this current staff practice, the revised rules include new Item 601(a)(6) to allow registrants to omit PII from their required Item 601 exhibits without submitting a CTR.
Item 601(b)(10)(i) requires registrants to file every material contract not made in the ordinary course of business, provided that one of two tests is met:
- the contract must be performed in whole or in part at or after the filing of the registration statement or report; or
- the contract was entered into not more than two years before that filing.
The proposed rules revise Item 601(b)(10)(i) to limit the two-year look back test set forth in the second bullet to “newly reporting registrants,” which is a term that is defined in the new revision to Instruction 1 of Item 601(b)(10).
Incorporation by Reference
Item 10(d). Item 10(d) of Regulation S-K states that where rules, regulations, or instructions to the forms permit incorporation by reference, a document may be incorporated by reference to the specific document and to the prior filing or submission in which that document was physically filed or submitted. Item 10(d) generally prevents registrants from incorporating by reference a portion of a document that itself also incorporates pertinent information by reference. It also prohibits incorporating documents by reference if they have been on file with the Commission for more than five years and do not fall within one of the exceptions provided in the rule. The revised rules eliminate the five-year limit in Item 10(d).
Exhibit and Other Filing Requirements. Rule 12b-23(a)(3) under the Exchange Act requires that copies of any information incorporated by reference must be filed as an exhibit, with limited exceptions. Rule 411(b)(4) under the Securities Act, which is more limited and pertains to non-prospectus information that is incorporated by reference, requires that the incorporated information be filed as an exhibit if it does not comply with the five-year limit in Item 10(d). The revised rules eliminate these provisions, because most Exchange Act filings are made publicly available on EDGAR, and the SEC does not have similar exhibit filing requirements for Securities Act registration statements.
The revised rules also eliminate the requirement in Item 601(b)(13) to file a Form 10-Q as an exhibit when it is specifically incorporated by reference into a prospectus. This provision is no longer necessary because under the revised rules a registrant is required to include a hyperlink to any information that is incorporated by reference to a document available on EDGAR.
Hyperlinks. Rule 411 and Rule 12b-23 have been revised to require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. Registrants are not required to refile information that is incorporated by reference from a document that was previously filed with the SEC in paper given that electronic filing has been required for over two decades and paper filings are currently made in very limited circumstances.
The new rules do not require registrants to file an amendment to a document solely to correct an inaccurate hyperlink, unless that hyperlink was included in a pre-effective registration statement, similar to the existing requirements for exhibit hyperlinking. An inaccurate hyperlink alone would neither render the filing materially deficient nor affect a registrant’s eligibility to use Form S-3. Unlike the requirements for exhibit hyperlinking, a registrant is not required to correct inaccurate hyperlinks to information incorporated by reference in an effective registration statement by including a corrected hyperlink in a subsequent periodic report or a post-effective amendment.
Tagging Cover Page Data
Current rules require certain specific data points on the cover of certain Exchange Act forms to be tagged in XBRL including form type, company name, filer size, and public float. The revised rules require all of the information on the cover pages of Form 10-K, Form 10-Q and Form 8-K to be tagged in Inline XBRL. The revised rules also require the cover pages of these forms to include the trading symbol for each class of securities registered pursuant to Section 12(b) of the Exchange Act. The revised rules also require Form 10-Q and Form 8-K to disclose the title of each class of similarly registered securities and each exchange on which they are registered.
The cover page tagging requirements are subject to phased compliance dates. The dates are the same as the phased compliance dates for Inline XBRL. Accordingly, large accelerated filers must begin compliance with these requirements for fiscal periods ending on or after June 15, 2019.
Registration Statement and Prospectus Provisions
Outside Front Cover Page of the Prospectus
Item 501(b) of Regulation S-K sets forth disclosure requirements related to the outside front cover page of prospectuses. The revised rules eliminate a statement in an instruction to Item 501(b) that indicates that the registrant may be required to change its name if disclosure is insufficient to eliminate confusion because a registrant’s name is the same as that of a “well known” company, or if the name leads to a misleading inference about the registrant’s line of business.
Offering Price of the Securities
Item 501(b)(3) of Regulation S-K requires disclosure on the prospectus front cover page of the price of the securities being offered. In situations where it is not practicable to provide a price for the securities, Instruction 2 to Item 501(b)(1)(3) permits registrants to explain the method by which the price is to be determined. The revised rules amend Instruction 2 to explicitly allow registrants to include a clear statement on the cover page, when applicable, that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus.
Market for the Securities
Item 501(b)(4) of Regulation S-K requires a registrant to disclose on the prospectus cover page the name of any SEC registered national securities exchange that lists the securities being offered and the trading symbols for those securities. The revised rules expand the scope of the disclosure to any principal United States markets where the registrant, through the engagement of a registered broker-dealer, has actively sought and achieved quotation.
Prospectus “Subject to Completion” Legend
Item 501(b)(10) of Regulation S-K requires a registrant that is using a preliminary prospectus to include a legend that states, among other things, 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 revised rules permit registrants to exclude from the prospectus the portion of the legend relating to state law for offerings that are not prohibited by state blue sky laws.
Item 503(c) of Regulation S-K requires disclosure of the most significant factors that make an offering speculative or risky. This risk factor disclosure was initially called for only in the offering context, but in 2005 the risk factor disclosure requirements were extended to periodic reports and registration statements on Form 10. Consistent with this change, the revised rules relocate Item 503(c) to new Item 105, as Subpart 100 of Regulation S-K covers a broad category of business information and is not limited to offering-related disclosure. Because the risk factor rule is principles-based, the revised rules eliminate the specific risk factor examples that are currently enumerated in Item 503(c).
Plan of Distribution
Item 508 of Regulation S-K requires disclosure about the plan of distribution for securities in an offering, and permits disclosure if a dealer is paid any additional discounts or commissions for acting as a “sub-underwriter.” The revised rules define “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 provides undertakings that a registrant must include in Part II of its registration statement, depending on the type of offering. The revised rules eliminate undertakings that are duplicative of other rules or that have become unnecessary due to developments since their adoption.