Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has proposed amendments to Regulation S-K and related rules and forms. The proposed amendments are based on SEC staff recommendations in a report that was required by Section 72003 of the Fixing America’s Surface Transportation Act, or the FAST Act. According to the SEC, the proposed amendments are intended to modernize and simplify certain disclosure requirements 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. In this respect, some of the proposed changes go beyond the scope of the staff’s initial recommendations under the FAST Act mandate.

Significant matters addressed by the proposal include:

  • Limiting disclosure about a registrant’s properties to physical properties that are material to the registrant.
  • In certain circumstances, eliminating required discussion in the MD&A about the earliest year of three-year financial statements.
  • Eliminating the requirement that reporting persons furnish Section 16 reports to the registrant and discouraging references in reports when registrants have no delinquencies to report.
  • Allowing omission of schedules and similar attachments from all exhibits required to be filed.
  • Eliminating the requirement to submit confidential treatment requests to the SEC in connection with the redaction of competitively harmful but immaterial information from filed exhibits. This places the analysis of the propriety of redacted information in the hands of the registrant instead of SEC staff.
  • Permitting registrants with established reporting histories to consider the filing of material agreements entered into over the last year instead of over the last two years.
  • Simplifying the rules regarding incorporation by reference and hyperlinking of information in documents available on EDGAR.

Description of Property (Item 102)

Item 102 requires disclosure of the location and general character of the principal plants, mines, and other materially important physical properties of the registrant and its subsidiaries. The staff has observed, however, that the item may elicit disclosure that is not material. For example, some registrants—such as those in the services or information technology industry—may not have material physical properties, and accordingly, these registrants tend to disclose information about their corporate headquarters, office space, and other facilities in response to this item.

The SEC is proposing to revise Item 102 to emphasize materiality. The proposals clarify that the disclosure required under Item 102 should focus on physical properties that are material to the registrant and may be provided on a collective basis, if appropriate. The SEC is also proposing to harmonize the various non-industry-specific triggers for disclosure in Item 102.  For example, the SEC is proposing to replace the references to “major” encumbrances and “materially important” physical properties in Item 102 with references to a materiality threshold.  In light of the particular significance of this disclosure for registrants in the mining, real estate, and oil and gas industries, the SEC is not proposing to modify any of the instructions of Item 102 specific to those industries.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 303)

Item 303(a) requires registrants to discuss their financial condition, changes in financial condition, and results of operations in what is referred to as the MD&A. Instruction 1 to Item 303(a) states 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 formats that in the registrant’s judgment would enhance a reader’s understanding.  The instruction states that reference to the five-year selected financial data may be necessary where trend information is relevant.

The SEC is proposing to amend Item 303 to eliminate discussion in the MD&A of the earliest year in some situations. Under the proposed amendments, when financial statements included in a filing cover three years, discussion about the earliest year would not be required if (i) that discussion is not material to an understanding of the registrant’s financial condition, changes in financial condition, and results of operations, and (ii) the registrant has filed its prior year Form 10-K on EDGAR containing MD&A of the earliest of the three years included in the financial statements of the current filing. By allowing registrants to eliminate MD&A disclosure about the earliest year in these situations, the proposals are intended to discourage repetition of disclosure that is no longer material.

The proposals also eliminate the reference to five-year selected financial data in Instruction 1 to Item 303(a). The SEC noted disclosure requirements for liquidity, capital resources, and results of operations already require trend disclosure.  The proposal also simplifies Instruction 1 to Item 303(a) to emphasize that registrants may use any presentation that, in the registrant’s judgment, would enhance a reader’s understanding.

Directors, Executive Officers, Promoters, and Control Persons (Item 401)

Item 401 requires disclosure of identifying and background information about a registrant’s directors, executive officers, and significant employees. The information required by Item 401 must be included in several of the SEC’s disclosure forms, including Part III of an annual report on Form 10-K. General Instruction G of Form 10-K allows Part III disclosure to be incorporated into the Form 10-K by reference to the registrant’s definitive proxy or information statement.  As an alternative to incorporating all of the Part III disclosure by reference to a definitive proxy or information statement, Instruction 3 to Item 401(b) allows disclosure of information about executive officers required under Item 401 to be included in Part I of Form 10-K. If a registrant elects to follow this instruction, it is not required to repeat that information in its definitive proxy or information statement.

The SEC believes the instruction’s location may cause confusion because it is included under paragraph (b), despite the fact that other paragraphs of Item 401 also require disclosure about executive officers. To eliminate any confusion arising from the current location of the instruction, the SEC is proposing to clarify the instruction by moving it from Item 401(b) and making it a general instruction to Item 401. The amended instruction is intended to clarify its application to any disclosure about executive officers required by Item 401. The SEC is also proposing to revise the required caption for the disclosure if it is included in Part I of Form 10-K to reflect a “plain English” approach. The required caption would be “Information about our Executive Officers” instead of “Executive officers of the registrant.”

Compliance with Section 16(a) of the Exchange Act (Item 405)

Section 16(a) of the Exchange Act requires officers, directors, and specified types of security holders to report their beneficial ownership of a registrant’s equity securities using Forms 3, 4 and 5. Item 405 requires registrants to disclose each reporting person who failed to file on a timely basis Section 16 reports during the most recent fiscal year or prior fiscal years. The disclosure is required under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Rule 16a-3(e) requires reporting persons to furnish a duplicate of those Section 16 reports to the registrant. Item 405(a) states that registrants shall provide the required disclosure based solely on a review of such furnished reports and any written representation provided by such persons that no Form 5 is required.

The SEC is proposing to amend Item 405 to focus on a review of Section 16 reports available on EDGAR rather than reports furnished to the registrant. The SEC is also proposing to eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant. The SEC believes that a shift to reliance on electronically filed Section 16 reports, while retaining the written representation in Item 405(b)(1), would modernize and simplify compliance with Item 405 while still providing all material information.

The SEC is proposing to change the language of Item 405 to clarify that registrants may rely on Section 16 reports filed on EDGAR but are not required to limit their inquiry to those filings. Therefore, if a registrant was aware that information in a Section 16 report submitted on EDGAR was not complete or accurate, or that a reporting person failed to file a required report, it could provide appropriate disclosure pursuant to Item 405.

Currently SEC delinquencies are disclosed under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”   To reduce unnecessary disclosure and improve the ability to search a registrant’s filings for disclosure of Section 16(a) reporting delinquencies, the SEC is proposing to add an instruction to Item 405 that encourages registrants to exclude the heading if they have no delinquencies to report. The SEC is also proposing to change the heading to “Delinquent Section 16(a) Reports.”

The SEC is also proposing to eliminate the checkbox on the cover page of Form 10-K relating to Item 405 disclosures and the related instruction in Item 10 of Form 10-K. The SEC believes the proposed amendments would lessen the need for this checkbox by reducing the unnecessary use of the heading and thereby facilitating document searches.

Corporate Governance (Item 407)

Existing Item 407(d)(3)(i)(B) requires a registrant’s audit committee to 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 is outdated, because it was superseded by PCAOB Auditing Standard No. 16, Communications with Audit Committees (“AS 16”).  Furthermore, on March 31, 2015, the PCAOB formally reorganized its auditing standards resulting in the codification of AS 16 as Auditing Standard No. 1301, Communications with Audit Committees.

The SEC is proposing to update the reference to AU sec. 380 by referring more broadly to the applicable requirements of the PCAOB and the SEC. The SEC believes such an approach would accommodate future changes to audit committee communication requirements.

Item 407(e)(5) requires a registrant’s compensation committee to state whether it has reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) required by Item 402(b). The SEC is proposing to amend Item 407 to explicitly exclude emerging growth companies, or EGCs, from the Item 407(e)(5) requirement, because EGCs are not subject to a requirement to include a CD&A in their public disclosures.

Exhibits (Item 601)

Item 202(a)-(d) and (f) of Regulation S-K require registrants to include a brief description of their securities registered under Section 12 of the Exchange Act. This information is currently required to be provided in registration statements but has not previously been part of the required disclosure for Form 10-K or Form 10-Q. In an effort to “increase investors’ ease of access to information about the rights and obligations of each class of securities registered,” the SEC has proposed to amend Item 601(b)(4) of Regulation S-K to require that registrants include this information in the form of an exhibit to Form 10-K filings. Notwithstanding the new requirement, registrants would remain obligated to file a complete copy of amended articles of incorporation or bylaws under Item 601(b)(3)

The SEC’s release also proposes modifications to the information that may be omitted from exhibits required to be filed under Item 601 of Regulation S-K. The first proposed change in this area would expand Item 601(b)(2) to allow a registrant to omit schedules or similar attachments from all filed exhibits provided that such schedules or attachments do not contain information material to an investment decision and is not otherwise disclosed in the agreement or the disclosure document. This accommodation previously applied only to “plans of acquisition, reorganization, arrangement, liquidation, or succession.” In support of this change, the SEC cited commenters in the concept release who expressed concern that the current requirement to file complete exhibits “is unnecessarily cumbersome and expensive where the schedules do not contain material information” and “exacerbated where those schedules contain, as is frequently the case, confidential information” that would prompt the filing of a confidential treatment requests. Consistent with the prior formulation of the Item requirement, registrants would still be required to provide a list briefly describing the contents of any omitted materials. Likewise, the staff would continue to have the right to request a copy of any omitted schedules or attachments.

The proposed rules would also codify the staff’s long-held approach of allowing the omission of personally identifiable information (“PII”) like bank account numbers, social security numbers, home addresses and similar information from filed exhibits under Item 601. Registrants would not be required to submit a confidential treatment request or provide any analysis to avail itself of this accommodation to be provided under Item 601(a)(6) of Regulation S-K.

The proposed rules would also revise Item 601(b)(10)(i) to limit the “two-year look back” requirement for material exhibits to only those registrants falling under the definition of a “newly reporting registrant” under the proposed rules (generally, registrants not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act at the time of filing). By contrast, seasoned reporting companies under the proposed rules would only be responsible for filing material agreements entered into over the immediately preceding year. This accommodation for seasoned reporters was driven by wide availability of prior filings for such registrants.

The SEC is also proposing amendments to Item 601 to require registrants to include in its description of significant subsidiaries via exhibit, the legal entity identifier (“LEI”), if one has been obtained, of the registrant and each subsidiary listed. An LEI is a 20-character, alpha-numeric code that allows for unique identification of entities engaged in financial transactions. LEIs are intended to improve market transparency by providing clear identification of participants.

Confidential Treatment Requests

One of the most noteworthy modifications in the SEC’s proposed rulemaking may be the termination of the Division of Corporation Finance’s confidential treatment request (“CTR”) program. Currently, registrants are permitted to exclude information from exhibits filed under Item 601 only following the submission of a CTR to the SEC pursuant to Rule 406 of the Securities Act or Rule 24b-2 of the Exchange Act. These CTRs are, in turn, analyzed by the SEC staff to ensure that the information is both immaterial and competitively harmful if publicly disclosed. Under the proposed rules, registrants would no longer be required to submit CTRs to the SEC. Instead, registrants would be free to redact immaterial and competitively harmful information from filed exhibits provided that the first page of the filed exhibits includes a prominent statement that information has been omitted and the specific locations in which information has been omitted are marked with brackets. This process closely mirrors the existing process for redacting information from filed exhibits but places analysis of the propriety of redacted information in the hands of the registrant instead of the SEC staff. Notwithstanding this change, the staff would retain the ability to review material exhibits and assess whether redactions therein are limited to non-material and competitively harmful information. The staff would also be allowed to request unreacted copies of agreements to assist them in making this assessment.

Incorporation by Reference

Item 10(d) of Regulation S-K focuses on incorporation by reference and permits a document to be incorporated by reference to a specific document and to the prior filing or submission in which that document was physically filed or submitted. As currently formulated, Item 10(d) prohibits incorporation by reference where the documents have been on file with the Commission for more than five years. The proposed rules would eliminate this five-year limit in recognition that the document retention concerns that drove this limitation are no longer a concern in the era of electronic filings.

The proposed rules would require hyperlinks to information that is incorporated by reference if that information is available on EDGAR – expanding on the Commission’s recently adopted rules requiring hyperlinks to most exhibits filed under Item 601. To facilitate hyperlinking, all such documents would need to be filed in HTML format.

The SEC is also proposing a prohibition on incorporation by reference or cross-referencing in financial statements where it “can raise questions as to the scope of an auditor’s responsibilities.”

The proposed rules would likewise restrict the incorporation of financial information required to be given in comparative form for two or more fiscal years or periods unless the information incorporated by reference includes the entire period for which the comparative data is given.


The proposed rules also include amendments to require all of the information on the cover pages of Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F to be tagged in Inline XBRL in accordance with the EDGAR Filer Manual. Under the proposed amendments, the cover page data would appear in HTML format with embedded XBRL data, instead of the traditional XBRL format to match the SEC’s recent rules proposal in March 2017 (Release No. 33-10323) relating to XBRL-tagging of operating company financial statements.

Risk Factors (Item 503(c))

Item 503(c) requires disclosure of the most significant factors that make the offering speculative or risky. The item specifies that the discussion should be concise and organized logically. Although the requirement is principles-based, it includes specific examples as factors that may make an offering speculative or risky. Risk factor disclosure was initially called for only in the offering context. In 2005, risk factor disclosure requirements were extended to periodic reports and registration statements on Form 10.

The SEC is proposing to relocate Item 503(c) from Subpart 500 to Subpart 100 to reflect the application of risk factor disclosure requirements to registration statements on Form 10 and periodic reports. Subpart 100 covers a broad category of business information and is not limited to offering-related disclosure. Accordingly, the proposed amendments would move Item 503(c)’s requirement for risk factor disclosure to new Item 105. In addition the proposed amendments would eliminate the risk factor examples that are currently enumerated in Item 503(c).

Outside Front Cover Page of the Prospectus (Item 501(b))

Name (Item 501(b)(1))

Item 501(b)(1) requires disclosure of a registrant’s name, including an English translation of the name of foreign registrants. The instruction to Item 501(b)(1) states that if 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, the registrant must include information to eliminate any possible confusion with the other company. If disclosure is insufficient to eliminate the confusion, the registrant may be required to change its name. An exception, however, is available when the registrant is an “established company,” the character of the registrant’s business has changed, and the “investing public is generally aware of the change and the character of [the registrant’s] current business.”

The SEC staff’s experience administering the foregoing provision suggests that these situations can typically be addressed with clarifying disclosure. The Commission and the staff may be able to address situations in which the registrant’s name is either confusingly similar or misleading in connection with any public interest finding necessary to declare the filing effective. Accordingly, the SEC is proposing to streamline the instruction to Item 501(b)(1) by eliminating the portion that discusses when a name change may be required and the exception to that requirement.

Offering Price of the Securities (Item 501(b)(3))

Item 501(b)(3) requires disclosure of the price of the securities being offered, the underwriter’s discounts and commissions, and the net proceeds that the registrant and any selling security holders will receive. In many cases the disclosure required by Item 501(b)(3) is straightforward, but Instruction 2 states that “[i]f it is impracticable to state the price to the public, explain the method by which the price is to be determined.”

The SEC is proposing to amend Instruction 2 to explicitly allow registrants to include a clear statement that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus. Under the proposed instruction, registrants would be required to accompany that statement with a cross-reference to the offering price method or formula disclosure, including a page number that is highlighted by prominent type or in another manner.

Market for the Securities (Item 501(b)(4))

Item 501(b)(4) requires a registrant to name the national securities exchanges that list the securities being offered and to disclose the trading symbols for those securities. A “national securities exchange” is a securities exchange that has registered with the SEC under Section 6 of the Exchange Act. Under Item 501(b)(4), registrants are not required to name markets that are not a “national securities exchange.”

The SEC believes that information about markets that are not a “national securities exchange” could be important to investors and should be disclosed on the prospectus cover page. Accordingly, the SEC is proposing to amend Item 501(b)(4) to require disclosure of the principal United States market or markets for the securities being offered and the corresponding trading symbols.

In addition, the SEC is limiting disclosure of markets that are not national securities exchanges to those principal United States markets where the registrant, through the engagement of a registered broker-dealer, has actively sought and achieved quotation. The SEC believes that a registrant cannot always control whether its securities are quoted on an over-the-counter market and should not be burdened with making that determination.

Prospectus “Subject to Completion” Legend (Item 501(b)(10))

Item 501(b)(10) requires a registrant that is using a preliminary prospectus to include a legend advising readers that the information will be amended or completed. The legend also must include a statement 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 legend requirement has remained largely unchanged even after the National Securities Markets Improvement Act allowed for preemption of state blue sky laws in many offerings.  The SEC is proposing to amend Item 501(b)(10) to 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 law.

The SEC is also proposing to streamline Item 501(b) by combining paragraphs (b)(10) and (11) without substantive change. Thus, the proposed amendments to paragraph (b)(10) would also require the “subject to completion” legend to be included if a registrant relies on Rule 430A to omit pricing information and the prospectus is used after the effectiveness of the registration statement but before the public offering price is determined. Correspondingly, the SEC is proposing to delete paragraph (b)(11).

Plan of Distribution (Item 508)

Item 508 requires disclosure about the plan of distribution for securities in an offering, including information about underwriters. Paragraph (a) requires disclosure about the principal underwriters and underwriters that have a material relationship with the registrant, while paragraph (h) requires disclosure of the discounts and commissions to be allowed or paid to dealers. If a dealer is paid any additional discounts or commissions for acting as a “sub-underwriter,” paragraph (h) allows the registrant to include a general statement to that effect without giving the additional amounts to be sold.

“Sub-underwriter” is not a defined term, and its application may be unclear. “Principal underwriter,” however, is defined in Regulation C as “an underwriter in privity of contract with the issuer of the securities as to which he is an underwriter.” In light of the definition of “principal underwriter” and the disclosure required by Item 508(a), the SEC is proposing to amend Rule 405 to define the term “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.

Undertakings (Item 512)

Item 512 provides undertakings that a registrant must include in Part II of its registration statement, depending on the type of offering. The SEC is proposing to eliminate undertakings that are duplicative of other rules or that have become unnecessary due to developments since their adoption.