The U.S. Securities and Exchange Commission this month adopted amendments to certain disclosure requirements in an effort to streamline rules and regulations, and to remove requirements that are “redundant, duplicative, overlapping, outdated, or superseded.” These amendments were adopted as part of a mandate given to the SEC by Congress when it enacted the Fixing America’s Surface Transportation Act of 2015, and are largely technical in nature. Despite the number of changes made to various regulations and forms (which were so numerous the SEC provided a 205-page marked copy of the changes), the overall effect on disclosure requirements is minimal. With a few notable exceptions, the amendments conform to other SEC disclosure requirements or U.S. Generally Accepted Accounting Principles, rather than eliminating disclosure requirements.
The rules, adopted on August 17, are effective 30 days after publication in the Federal Register, which is expected to occur in the next couple of weeks, and it is anticipated that they will be effective by the end of September. The majority of the amendments are changes to accounting and financial statement requirements that are either duplicative of or superseded by U.S. GAAP. In some cases, the amendments move disclosure from outside to inside the financial statements. This has the effect of imposing XBRL tagging requirements, subjecting the displaced disclosures to internal control over financial reporting, and eliminating the Private Securities Litigation Reform Act of 1995 safe harbor as to such disclosures. In addition to the amendments, the SEC has also undertaken to refer certain proposed changes to the Financial Accounting Standards Board to consider integration into U.S. GAAP. Finally, there were a few instances in which the SEC declined to make amendments that were originally included in the proposing release based on feedback from commentators that such disclosures were not as duplicative as they originally appeared.
Impact on Technology and Life Sciences Companies
Although many of the amendments will go practically unnoticed by practitioners and companies, there are a few changes of which companies and their counsel should take note:
- Segment Reporting: Item 101(b) of Regulation S-K and Rule 3-03(e) of Regulation S-X are being eliminated, as they are deemed to be redundant with the requirements of U.S. GAAP. This will eliminate duplicate disclosure in the Business section of certain filings.
- Geographic Area: Item 101(d) of Regulation S-K, which requires reporting of financial information by geographic area, is being eliminated as redundant with existing financial statement and risk factor disclosure obligations. However, to help underscore that actual disclosure requirements are not changing, Item 303(a) of Regulation S-K has been amended to explicitly state that where a discussion of geographic area would be appropriate to understanding the business of the company, it should be included in the MD&A section of filings.
- Stock Price: Item 201 of Regulation S-K will be amended to require the disclosure of the company’s trading symbol, but the stock price or bid information will no longer be required if the stock trades on an established public trading market. This change is a welcome update in an era where a company’s entire stock history is available through numerous free websites.
- Dividends and Derivative Securities: In addition to removing the stock price disclosure, Item 201 was amended to remove the requirement that dividend payments or any restrictions on dividend payments be disclosed. This information is required by Rule 4-08(e) of Regulation S-X and the redundancy and duplicative disclosure was deemed unnecessary. Likewise, the number of outstanding options, warrants or derivative securities no longer needs to be disclosed under Item 201 as it is required by U.S. GAAP.
- Development Stage Companies: Another welcome change is the elimination of cumulative financial disclosures for development stage companies, which was previously required by Rule 8-03(b) and Rule 10-01(a) of Regulation S-X. These changes to the regulation bring it in line with the current U.S. GAAP.
- Ratio of Earnings to Fixed Charges: Item 503(d) and Item 601(b)(12) of Regulation S-K will be amended to eliminate the requirement that companies provide a ratio of their earnings to fixed charges. This change is one of the more major amendments, but these ratios have long been considered immaterial or not very helpful and many companies do not report them as frequently as they were technically required. Like the elimination of the stock price disclosure, it is a modernization of the regulations that acknowledges that there can be better sources of information than periodic SEC filings or registration statements.
- Where to Find Additional Information: In another nod to modern technology, the SEC is also removing the requirement that the physical address of the SEC public reference room be included in filings, but it requires a company to include its website address. This has become almost standard practice at this point, but companies and their counsel should take care to double check their filings after the rule changes are enacted.
The above list of highlighted changes is only a small fraction of the total changes that the amendments encompass. Despite the fact that these amendments are not expected to have a sweeping impact on disclosure obligations, there are many technicalities that will need to be observed. If you have questions about the amendments and the impact to your accounting or legal disclosures, please reach out to any member of the securities group at Fenwick & West.
For more information regarding the new rules, please see the SEC’s adopting release.