SEC Updates and Streamlines Disclosure Requirements
The Situation: The U.S. Securities and Exchange Commission ("SEC") adopted amendments to Regulation S-K, Regulation S-X, and related rules and forms to update and streamline disclosure and ease unnecessary compliance burdens for issuers.
The Result: The amendments eliminate, integrate, or modify disclosure requirements related to segment financial information, information by geographic area, research and development activities, seasonality, stock price and dividend information, and other matters.
Looking Ahead: The amendments are modest, incremental changes but require issuers to consider the prominence and context of disclosure.
On August 17, 2018, the SEC adopted amendments to Regulation S-K, Regulation S-X, and certain related rules and forms which, among other things:
- Eliminate certain redundant or duplicative disclosure requirements that provide substantially the same disclosures as U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), International Financial Reporting Standards ("IFRS"), or other SEC requirements;
- Eliminate and/or integrate certain overlapping disclosure requirements, which require reasonably similar disclosures as U.S. GAAP or other SEC requirements;
- Amend certain outdated disclosure requirements, which are outdated due to the passage of time or changes in regulatory, business, or technological environments; and
- Amend certain superseded disclosure requirements that have been superseded by newer accounting, auditing, and disclosure requirements.
The amendments, adopted two years after the SEC's initial proposal in July 2016, are a part of the SEC's ongoing efforts under its Fixing America's Surface Transportation, or "FAST," Act mandate and Disclosure Effectiveness Initiative to improve disclosure effectiveness and simplify compliance while continuing to provide all material information to investors. The amendments will be effective 30 days after publication in the Federal Register, which is projected to be late September 2018.
SUMMARY OF THE AMENDMENTS
The following summary highlights some of the noteworthy amendments that will affect an issuer's typical SEC disclosures.
Description of Business (Item 101)
- Segments and Geographic Information. The amendments eliminate the requirement to provide segment financial information, financial information by geographic area, risks associated with an issuer's foreign operations, and any segment's dependence on foreign operations in light of existing U.S. GAAP and other Regulation S-K disclosure requirements. Segment disclosures will continue to be available in the notes to the financial statements and, where applicable, the Management Discussions and Analysis ("MD&A"). The SEC has concluded that risks related to foreign operations and segment dependence on foreign operations are more appropriately disclosed under "Risk Factors" and, where applicable, the MD&A. The SEC explicitly added a specific reference to "geographic areas" to the MD&A requirement to disclose trends and uncertainties by segment.
- R&D Activities. The amendments eliminate the requirement to disclose the amount spent on research and development ("R&D") activities for all years presented, since U.S. GAAP and IFRS require reasonably similar disclosure. However, companies should continue to provide the required trend information related to R&D activities, if material, and can still continue to provide voluntary disclosure of their R&D activities as part of their business description.
MD&A (Item 303)
The amendments retain the seasonality disclosure requirements in annual reports but eliminate the requirement in interim reports, since U.S. GAAP in combination with Item 303 of Regulation S-K requires reasonably similar information. As the Private Securities Litigation Reform Act of 1995 ("PSLRA") safe harbor is not available for information disclosed in the notes to the financial statements, it could be argued that investors may potentially receive less forward-looking information about seasonality due to this change. However, the SEC noted that, even with this amendment change, the MD&A requires disclosure of such information in interim reports to the extent that the effects of seasonality may become material.
Market for Registrant's Common Equity (Item 201(a))
The amendments eliminate the outdated requirement to disclose the high and low trading prices of an issuer's common equity for each full quarterly period within the two most recent fiscal years and interim periods, since investors can now easily access such information free of charge on numerous websites. The SEC replaced the outdated rule with required disclosure of the trading symbol(s) for each class of the issuer's common equity.
Dividends (Item 201(c)(1))
The amendments eliminate the requirement to state the frequency and amount of any cash dividends in an annual report, Form S-1 or other relevant filings, since Regulation S-X was amended to require similar disclosure. Additionally, the amendments consolidate disclosure requirements regarding restrictions that currently, or are likely to, materially limit the issuer's ability to pay dividends on its common equity into a single requirement in Regulation S-X to provide disclosure in the notes to the financial statements.
Ratio of Earnings to Fixed Charges (Item 503(d))
The amendments eliminate the requirement to disclose the historical and pro forma ratio of earnings to fixed charges (and ratio of combined fixed charges and preference dividends to earnings) in connection with the registration of debt securities and preference equity securities, as well as the related exhibit setting forth the computation of such ratio. The SEC noted that debt investors often negotiate covenants requiring issuers to provide more relevant financial information about their ability to meet financial obligations, and U.S. GAAP already requires the disclosure of many components commonly used to calculate the ratio (e.g., income, interest expense, lease expense).
Where You Can Find More Information (Item 101)
The amendments eliminate the outdated requirement to identify the SEC's Public Reference Room and disclose its physical location and phone number, while retaining the requirements to disclose the SEC's internet address and the issuer's internet address if it has one.
Exhibits (Item 601)
The amendments eliminate the following exhibit requirements (although the exhibit-numbering system has been preserved):
- Earnings Per Share. The final amendments eliminate Item 601(b)(11), which requires a statement showing the calculation of per-share earnings (unless the computation can be determined from information already in the report) in annual filings, since the SEC found the requirement duplicative of information required under U.S. GAAP, Regulation S-X, and IFRS.
- Ratio of Earnings to Fixed Charges. In connection with the elimination of the ratio of earnings to fixed charges noted above, the related Item 601(b)(12) computation of the ratio exhibit filing requirement has been eliminated.
- Reports to Shareholders. Various reports to security holders, required to be filed as exhibits under Items 601(b)(19) and (22), are also eliminated in light of, in the former case, other exhibit provisions or, in the latter case, the requirement to disclose shareholder voting results in a Form 8- K.
REFERRALS TO FASB
The SEC refrained from adopting amendments to other overlapping provisions and instead referred such items to the Financial Accounting Standards Board ("FASB") for potential incorporation into U.S. GAAP. These include disclosure requirements relating to major customers, products, and services; foreign currency; equity compensation plans; debt obligations; related party transactions; and interim financial statements. The SEC has requested that FASB complete its determination process within 18 months after the amendments are published.
Three Key Takeaways
- Although the changes are mainly incremental and clean-up in nature: (i) the relocation of certain disclosure from outside to inside the financial statements will subject such disclosure to annual audit and/or internal review, internal control over financial reporting, and XBRL tagging requirements; (ii) the PSLRA safe harbor for forward-looking information will no longer be available for disclosures relocated from outside to inside the financial statements and will have the opposite effect on disclosures relocated to outside the financial statements; and (iii) the relocation of some disclosure items could impact the prominence of, and context around, that disclosure.
- Issuers should prepare for incorporation of these changes in upcoming periodic filings and registration statements and begin discussions with internal accounting and legal departments and their independent registered public accounting firm.
- Issuers should expect additional changes in the future as part of the SEC's ongoing efforts to modernize and simplify disclosure requirements.
For further information, please contact your principal Firm representative or the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus/.
Bradley C. Brasser
Minneapolis / Chicago
+1.612.217.8886 / +1.312.269.4252
Rory T. Hood
Amisha S. Kotte
Joel T. May
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.