Everything Public Companies Need to Know About Recent SEC Amendments

April 3, 2019
Firm Publication

Nearly a year and a half after proposing them, the U.S. Securities and Exchange Commission (SEC) recently adopted amendments to disclosure requirements for reporting companies, as mandated by the 2015 Fixing America’s Surface Transportation Act (the FAST Act).  These amendments are a part of an ongoing effort by the SEC to simplify and modernize disclosure obligations.

According to the SEC’s press release, the amendments are expected “to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information.”

For your reference, we have provided an overview of the key changes that were adopted as well as a “cheat sheet” of the specific changes to the regulations.

Overview of the Key Changes

Among many other items, the amendments address the following topics:

Greater Flexibility When Filing Under Item 601 of Regulation S-K

  • Omission of Immaterial Schedules and Exhibits — The amendments revise Item 601 of Regulation S-K to expand the ability of registrants to omit immaterial schedules and similar attachments to required exhibits, which previously was only available to schedules and exhibits to acquisitions agreements being filed under Item 601(b)(2).
  • Easier Confidential Treatment Request Process — The amendments simplify the confidential treatment request process by allowing registrants to omit immaterial confidential information from acquisition agreements filed pursuant to Item 601(b)(2) of Regulation S-K and material contracts filed pursuant to Item 601(b)(10) of Regulation S-K without having to file a concurrent confidential treatment request.  This will generally be permitted where the omitted information is not material and would “likely” cause competitive harm if publicly disclosed.  For example, this change, together with the change mentioned above related to the omission of schedules and exhibits, eliminates the need to file a confidential treatment request for immaterial information included in a material agreement like a credit agreement or as an exhibit to such agreement — a practice that was unnecessary for the protection of investors and burdensome and costly for registrants. When omitting such information, registrants should largely continue to follow the SEC’s existing procedural rules related to labeling confidential information that is omitted from a filing, including marking the exhibit index to indicate that portions of the exhibit or exhibits have been omitted; including 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 (1) not material and (2) would be competitively harmful if publicly disclosed; and indicating with brackets where the information has been omitted from the filed version of the exhibit.
  • For Reporting Companies, Limit the Look-Back Time Period for Material Contract Filing — The amendments limit the required two-year look-back for material contracts under Item 601(b)(10) of Regulation S-K.  Currently, Item 601(b)(10)(i) requires reporting companies to file every contract not made in the ordinary course of business if the contract is material and (1) is to be performed in whole or in part at or after the filing of the registration statement or report or (2) was entered into not more than two years before the filing, even if fully performed.  Revised Item 601(b)(10)(i) effectively deletes clause (2) above for all but newly reporting registrants. The rationale for the change is that companies that are already reporting companies will have previously filed those contracts and they will be available on EDGAR. As a result of the above amendments, registrants and their counsel should review the existing exhibit indexes from their prior filings to determine what exhibits can be removed going forward.

Delinquent Section 16 Reporting Obligations

  • The amendments simplify a reporting company’s diligence and reporting responsibilities regarding Section 16(a) compliance. Section 16(a) relates to the obligations of certain insiders and holders of in excess of 10% of an issuer’s securities to file reports with the SEC detailing transactions in the issuer’s stock. Among other things, the changes eliminate the checkbox on the cover page of Form 10-K relating to Item 405 of Regulation S-K disclosures and the related instruction in Item 10 of Form 10-K.
  • The revised rules also eliminate the requirement that Section 16 filers furnish any delinquent Section 16 reports to the issuer and permit the issuer to rely on a review of the Section 16 reports submitted on EDGAR and any written representations that no Form 5 is required. The amendments also change the caption related to Section 16 reporting delinquencies from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports” and eliminate the need to include this caption when the company does not have Section 16(a) delinquencies to report.

Certain Legending, Undertakings and Risk Factor Updates

  • The amendments simplify certain requirements for registration statements including a shortening of the “subject to completion” legend by eliminating the language regarding state law prohibitions if they do not apply to the issuer.
  • The changes also eliminate several undertakings under Item 512 of Regulation S-K that are considered duplicative or obsolete.  Additionally, the changes relocate “Risk Factors” from Item 503(c) of Regulation S-K to a new, separate Item 105 of Regulation S-K. In particular, this will impact the application of risk factor disclosure requirements to registration statements on Form 10 and periodic reports.  The examples of risk factors previously included in the SEC’s regulations have also been removed reflecting the principles-based nature of risk factor disclosure.

Simplify Property Disclosures

  • The amendments modify the disclosure requirements related to an issuer’s physical properties under Item 102 of Regulation S-K.  Now, registrants will be required to provide disclosure about a physical property only to the extent it is material to the issuer.

Data Tagging and Additional Hyperlinking Requirements

  • The amendments seek to further incorporate technology to improve access to information for investors by requiring data tagging for items on the cover page of certain filings and using hyperlinks for information that is incorporated by reference and available on EDGAR. In essence, the new rules on hyperlinking build and expand on the SEC’s recent rules in this area related to the hyperlinking of exhibits and will now generally require registrants to hyperlink all of the information that is incorporated by reference if that information is available on EDGAR (e.g., the incorporation by reference sections in Form S-3).

When Will The New Rules Become Effective?

The final amendments are similar in many ways to those originally proposed in October 2017.  The amendments relating to the redaction of confidential information in certain exhibits became effective upon publication in the Federal Register, which was April 2, 2019. The remaining amendments will be effective 30 days after publication, which is May 2, 2019.  The only exceptions are that (1) the requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in, and (2) the requirement that certain investment company filings be made in HTML format and use of hyperlinks will be effective for filings on or after April 1, 2020.

Cheat Sheet of the Rule Changes

Item 10 of Regulation S-K  (general)

  • Removes the prior limitation on incorporating documents more than five years old under Item 10(d).  Without the provisions relating to the five-year limit, little substance remained in Item 10(d), so (d) was removed entirely.

Item 102 of Regulation S-K (description of property)

  • Revised to clarify that disclosure about a physical property is only required to the extent that it is material to the registrant.

Item 202 of Regulation S-K (description of registrant’s securities)

  • This previously was only a disclosure requirement for registration statements, but the new rules add a new exhibit requirement to Form 10-K that will require the information required by Item 202(a)-(d) and (f).  The new requirement is found in Item 601(b)(4)(vi), and the stated goal is to help increase investors’ ease of access to information about the rights and obligations of each class of securities registered.

Item 303 of Regulation S-K (management’s discussion and analysis of financial condition and results of operations)

  • Now able to exclude earliest of three years in MD&A if already included in a prior filing.

Item 401 of Regulation S-K (directors, executive officers, promoters and control persons)

  • Revised to make clear that registrants need not duplicate executive officer disclosure in their definitive proxy statement if they have already provided it in Part I of 10-K.
  • Caption also updated to “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)

  • 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
  • Changes 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 encourages registrants to exclude this heading altogether when they have no Section 16(a) delinquencies to report.
  • Other Section 16 changes outside of 405:
    • Eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant.
    • 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.

Item 407 of Regulation S-K (corporate governance)

  • Updated the audit committee report because of an outdated citation to AU sec. 380.  Now, reference is more broadly to “the applicable requirements of” the Public Company Accounting Oversight Board and the Commission.
  • Updated the compensation committee report section to clarify that emerging growth companies (EGCs) are not required to provide the compensation committee report.

Item 501 of Regulation S-K (forepart of registration statement and outside front cover of prospectus)

  • Eliminated certain sentences in the 501 instruction that related to being required to change your name if the name could result in possible investor confusion with another company.
  • When offering price will be determined by a formula, the rule no longer requires the entire formula pricing methodology to be explained on the cover page (as it could be very long and confusing).  Now, a simple statement that the price is determined by a particular method of formula is all that is required on the cover page, with the more fulsome disclosure later in the prospectus.
  • In situations where the stock is traded on something other an exchange (e.g., OTCBB), the cover page should now disclose the name of the principal U.S. market where the registrant, through engagement of a broker-dealer, has actively sought and achieved quotation.
  • The red herring legend was updated to allow the deletion of the portion that relates to “this prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.”  The change was made to allow flexibility in federal offerings that are exempt from state law, in which case the statement is moot.

Item 503 of Regulation S-K (prospectus summary and risk factors)

  • Moves risk factors out of 503 entirely and moves it to new Item 105.
  • Keeps risk factor requirements largely intact, but deletes the boilerplate examples previously included so that companies can better tailor the risks to their circumstances.

Item 503 of Regulation S-K (plan of distribution)

  • Added definition of “sub-underwriter” which was previously mentioned but not defined.

Item 512 of Regulation S-K (undertakings)

  • Eliminated some obsolete undertakings (512(c), (d), (e) and (f)).

Item 601 of Regulation S-K (exhibits)

  • Can now omit immaterial confidential information in acquisition agreements and material contracts without submitting a confidential treatment request (CTR), subject to certain labeling requirements.
  • For existing reporting companies, no longer need to include material contracts that were performed within two years of the registration statement or report, only those active.
  • No longer required to file immaterial schedules and exhibits to material contracts (previously this only applied to acquisition agreements).
  • Codifies staff practice of permitting registrants to omit personally identifiable information (PII) from 601 exhibits without a CTR.

Securities Act Rule 411; Exchange Act Act Rules 12b-23 and 12b-32

  • These sections govern incorporation by reference in ’33 Act and ’34 Act documents, and the rules were amended to require a registrant to include a hyperlink to any information that is incorporated by reference to a document available on EDGAR.
  • These rules are little more flexible than exhibit hyperlinking when it comes to inaccurate hyperlinks.

Increased Tagging of Cover Page Data

  • New rules will 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.  It also revises the cover pages of Forms 10-Q and 8-K to include the title of each class of securities and each exchange on which they are traded, in order to sync with Form 10-K.  This should facilitate better data gathering since the information will be machine-readable.

Have additional questions about the newly adopted amendments? Contact the authors or another Bass, Berry & Sims corporate and securities attorney.