alerts & publications
SEC Proposes to Modernize and Simplify Public Company DisclosuresOctober 25, 2017
The SEC recently proposed rule and form amendments that would modernize and simplify certain disclosure requirements in Regulation S-K and related forms to implement Section 72003 of the FAST Act. The amendments are aimed at implementing the SEC’s overarching goals of reducing immaterial and duplicative disclosure, easing disclosure burdens on registrants, and improving investor access to information through better readability and navigability of disclosure documents. The more significant highlights of the proposal are discussed below.
Proposed amendments to reduce immaterial and duplicative disclosure
S-K Item 102 (Description of Property):
As currently drafted, Item 102 requires disclosure of the location and general character of “principal” plants, mines and other “materially important” physical properties. The proposed change to Item 102 would modify the rule to require disclosure of physical properties only to the extent they are material to the registrant (which would include those properties that are material to the registrant’s business), and disclosure may be provided on a collective basis. By applying a uniform materiality threshold for non-industry specific triggers for disclosure, the SEC hopes to reduce the number of immaterial disclosures made by registrants, such as disclosure of immaterial corporate headquarters by companies in the services or information technology industries, which may not have material physical properties. However, the SEC noted that, given the significance of Item 102 disclosure for registrants in the mining, real estate, and oil and gas industries, the proposed changes will not modify any of the instructions to Item 102 specific to those industries.
S-K Item 303 (Management’s Discussion and Analysis):
Item 303(a) currently requires disclosure of a registrant’s financial condition, changes in financial condition and results of operations. In particular, Instruction 1 to Item 303(a) requires the discussion to cover the three-year period covered by the financial statements using year-to-year comparisons or another format that in the registrant’s judgment enhance a reader’s understanding. The instruction also requires that reference to five years of selected financial data may be necessary, where relevant, to show trends.
The proposed modification would require disclosure only of the year-to-year comparison of the most recent two years where (1) discussion of the earlier year-to-year comparison (i.e. the prior year to the year before the prior year) is not material to an understanding of the registrant’s financial condition, change in financial condition or results of operations, and (2) the registrant has filed its prior year Form 10-K on EDGAR, which contains the earlier year-to-year comparison. The proposed modification, however, does not allow the registrant to simply hyperlink to the earlier year-to-year comparison in lieu of its discussion. Instead, the SEC encourages companies to re-evaluate the earlier year-to-year comparison to determine whether such disclosure remains material.
Further, the SEC proposes to modify the instruction to Item 303(a) to emphasize that registrants can utilize presentations other than year-to-year comparisons, noting that, although year-to-year presentation remains the predominantly utilized disclosure method by registrants, there are alternative presentation methods, such as a narrative discussion, which may be a more appropriate method to enhance a reader’s understanding. The SEC also proposes to remove the requirement to reference five years of selected financial data where relevant to disclose trends since the disclosure requirements under Item 303 for liquidity, capital resources, and results of operations already each require trend disclosure, where material, to the registrant’s business. The SEC noted that the proposed amendment is intended to eliminate duplication and is not intended to discourage registrants from providing trend disclosure in MD&A.
S-K Item 503(c) (Risk Factors):
Item 503(c) currently requires disclosure of the most significant factors that make an offering speculative or risky. The item gives a list of specific examples of risk factors for registrants to consider in making the disclosure. The SEC has proposed to delete the list of example risk factors in an effort to encourage registrants to focus on their own unique risks and discourage registrant’s responses from being skewed towards addressing the enumerated example list.
Proposed amendments to ease disclosure burdens and improve investor access to information
S-K Item 601 (Exhibits):Omission of Schedules:
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