Simplified disclosure rules required by FAST Act may be finalized in 2018

The Securities and Exchange Commission (SEC) plans in 2018 to finish some rule changes to simplify the public company disclosure requirements for regulatory filings.

The anticipated rule changes are based upon the October 2017 proposals in Release No. 33-10425, FAST Act Modernization and Simplification of Regulation S-K, which was issued to modernize and simplify the requirements in Regulation S-K and lower public companies’ compliance costs. Reg S-K lays out the disclosure rules for registration statements and annual and quarterly reports. Comments were due by Jan. 2, 2018.

One of the most significant changes in Release No. 33-10425 deals with Item 303 of Reg S-K, which covers the management’s discussion and analysis (MD&A) of a company’s financial condition in a regulatory filing. The proposal would let companies omit the earlier of three years if it is not material to an investor’s understanding of a company’s financial condition.

MD&A “is typically one of the most labor-intensive pieces of disclosures, as you know,” said Elizabeth Murphy, an associate director in the SEC’s Corporation Finance Division, during a presentation at the Practising Law Institute’s SEC Speaks conference on Feb. 23, 2018 in Washington.

Another significant change deals with confidential treatment of certain disclosures in Item 601. The SEC proposed letting companies omit schedules or attachments to exhibits that do not contain information that the company decides is not material to an investing decision or shareholder vote. The proposed change would also let companies redact provisions or terms of their exhibits that include contracts if they are not material and could hurt a company’s competitive position if they are publicly disclosed. The proposal would also let companies redact personally identifiable information from exhibits, such as social security numbers, bank account numbers and home addresses.

Companies would have to promptly provide a complete paper copy of the exhibit if the SEC’s staff requests it.

Release No. 33-10425 proposes to make changes to Item 503(c), which requires disclosure of the most significant factors that make a stock offering speculative or risky. The requirement is principles-based, but it includes specific examples that may make an offering risky, such as a company’s lack of an operating history, the absence of profits in recent reporting periods, a weak financial position, doubts about the company’s business or proposed business or the lack of a market for a company’s shares or debt.

Paul Atkins, who served as an SEC commissioner from 2002 to 2008, said some of the disclosures that companies provide in response to the Item 503(c) examples “are worthless as far as analyzing the real risk that companies have to address.”

Corporation Finance Director William Hinman said the proposal in Release No. 33-10425 called for deleting the examples.

“We cited some behavioral economists’ studies that show when we provide more examples, people tend to gravitate to the examples in a less thoughtful way than we would like,” Hinman said. “You can get more rote disclosures and not the kind of disclosures you are suggesting would be helpful, which is something tailored and specific and tied to the company, and not so generic. So, we hear you on that. The proposal is actually trying to move things that way, and we encourage people to do that.”

The proposed changes would also clarify Item 102 of Reg S-K so that companies will only describe the physical properties that are material to their business. The staff found that companies often discuss properties that are not important to investors’ decisions in their regulatory filings.

The proposal would make it easier for investors to access and compare disclosures by requiring companies to include hyperlinks for older documents that were previously filed with the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.

In addition, the SEC wants companies to use a process called inline eXtensible Business Reporting Language (XBRL) and embed data tags directly onto the cover pages of periodic reports, including a new data point, the trading symbol for each class of securities.

Comment letters from businesses and investors largely supported the proposed changes in Release No. 33-10425, which are mandated by the Fixing America’s Surface Transportation (FAST) Act. The FAST Act directed the agency to modernize and simplify the requirements in Regulation S-K to lower public companies’ compliance costs.

The SEC wants to finalize some proposed rule changes to simplify the public company disclosure requirements for regulatory filings. The SEC proposed the changes to modernize and simplify its disclosure rules for registration statements and annual and quarterly reports.

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