SEC Adopts Amendments that Simplify and Update Disclosure Requirements

by McDermott Will & Emery
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On August 17, 2018, the US Securities and Exchange Commission (SEC) adopted amendments that simplify and update certain disclosure requirements in light of (1) other SEC disclosure requirements, (2) US Generally Accepted Accounting Principles (US GAAP) or (3) changes in the information environment. Further, the SEC referred certain SEC disclosure requirements that overlap with US GAAP to the Financial Accounting Standards Board (FASB) for potential incorporation into US GAAP. The amendments are intended to facilitate the disclosure of information to investors, simplify compliance without significantly altering the total mix of information provided to investors, improve investors’ ability to make investment decisions more efficiently and reduce issuer compliance costs.

The amendments affect a variety of entities. These include domestic and foreign issuers, large accelerated filers, accelerated filers, non-accelerated filers, emerging growth companies and smaller reporting companies. The amendments also affect Regulation A issuers, funds regulated under the Investment Company Act, registered broker-dealers, investment advisers and nationally recognized statistical rating organizations.

The amendments eliminate rules that became redundant, duplicative or overlapping as the FASB updated US GAAP. Since a number of SEC disclosure requirements require information that is incremental to US GAAP, the SEC referred some requirements to the FASB for consideration of whether such disclosure requirements can be incorporated into US GAAP. The SEC requested that the FASB complete its review within 18 months.

As a result of the amendments: (1) some disclosures that provide a certain level of prominence and/or context to other disclosures will be relocated; (2) some disclosures will be relocated from outside to inside the financial statements, subjecting such information to annual audit and/or interim review and internal control over financial reporting, while other disclosure will be relocated from inside to outside the financial statements, with the opposite effect; and (3) one disclosure requirement with a bright line threshold relating to restrictions on dividends and related items will be amended.

Redundant or Duplicative Requirements

The amendments revise several portions of Regulation S-X, Regulation S-K and Form 20-F by eliminating disclosure requirements deemed to be redundant or duplicative of other disclosure requirements. Specifically, the amendments eliminate those disclosure requirements found to be redundant or duplicative of corresponding US GAAP, IFRS and/or other SEC disclosure requirements. However, the elimination of these redundant or duplicative requirements from Regulations S-X and S-K does not necessarily change any underlying disclosure obligations, as in each case the corresponding GAAP or other SEC disclosure requirement still applies.

Overlapping Requirements

The SEC has also identified various disclosure requirements that are redundant, duplicative and overlapping. These various disclosure requirements are related to, but not the same as, those set forth by US GAAP, International Financial Reporting Standards (IFRS) and other SEC disclosure requirements. The SEC proposed two possible courses of action when dealing with such disclosure requirements: (1) deletion of requirements that convey similar information as US GAAP, IFRS and SEC disclosure requirements, or are no longer useful to investors or (2) integration into other SEC disclosure requirements.

Some Key Disclosure Requirements for Deletion:

  • Research and Development Activities. Items 101(c)(1)(xi) and 101(h)(4)(x) of Regulation S-K relating to amounts spent on research and development were deleted from Regulation S-K. These disclosure requirements are reasonably similar to those required by US GAAP.
  • Warrants, Rights and Convertible Instruments. Item 201(a)(2)(i) of Regulation S-K relating to disclosures on Form S-1 or Form 10 of common equity subject to outstanding options, warrants or convertible securities when the common equity has no established trading market in the United States were deleted from Regulation S-K. These disclosure requirements are encompassed in broader disclosures required by US GAAP.
  • Ratio of Earnings to Fixed Charges. Items 503(d) and 601(b)(12) of Regulation S-K and Instruction 7 to “Instructions as to Exhibits” to Form 20-F were deleted since these disclosure requirements contain components commonly used in similar disclosures required by US GAAP and IFRS.
  • Foreign Currency Restrictions. The contents of Rule 3A-02(d) were moved to Rule 3-20(b) of Regulation S-X in combination with the deletion any reference to foreign private issuers in the title of Rule 3-20 to preserve the scope of Rule 3A-02(d)’s disclosure requirements (as 3-20(b) previously only applied to foreign private issuers). Additionally, issuers other than “foreign private issuers” are required to present financial statements in US dollars.
  • Geographic Areas. Item 303 of Regulation S-K was revised to include a reference to “geographic areas” and to delete Item 101(d)(4).

Outdated Requirements

The SEC has amended a number of disclosure requirements that have become obsolete due to changes in regulatory, technical and information environments where such information is otherwise readily available. Key updates to outdated disclosures include:

  • Exchange Rate Data. The amendments remove the requirement that foreign private issuers provide exchange rate data when their financial statements are prepared in a currency other than the US dollar due to exchange rate information being readily available for free on a number of websites.
  • Sale/Bid Prices. The detailed disclosure requirement of sale or bid prices for most issuers whose common equity is traded in an established public trading market has been eliminated and replaced with the disclosure of the trading symbol.
  • SEC Public Reference Room. The amendments delete the requirements in Regulation S-K and certain registration forms to identify the Public Reference Room and disclose its physical address and phone number.
  • Websites. The amendments require all issuers to disclose the SEC’s Internet address, include a statement that electronic SEC filings are available there and to disclose their own Internet addresses, if one exists.

Superseded Requirements

The SEC has also updated certain disclosure requirements that had been superseded by newer accounting, auditing and disclosure requirements in recent years. In practice, issuers were complying with the most recently adopted disclosure requirement, whether set forth by US GAAP or the SEC. The adoption by the SEC of the following amendments was meant to simplify the process for issuers and eliminate the confusion created by the discrepancies between related requirements.

  • Updated Regulation S-X Disclosure Requirements based on US GAAP

There were a number of provisions in Regulation S-X that the SEC deleted because they were superseded by requirements more recently promulgated under US GAAP. The SEC also adopted a number of amendments to Regulation S-X regarding the presentation of consolidated and combined financial statements. These included (1) deleting the requirement in Rule 3A-04 of Regulation S-X) that required an issuer to explain why it did not eliminate any intercompany transactions from its financial statement; and (2) deleting the requirement in Rule 4-08(k)(2) of Regulation S-X to disclose, in separate financial statements of a subset of a consolidated group, the intercompany transactions which are eliminated or not eliminated. 

Furthermore, the SEC adopted amendments to (1) eliminate the US GAAP disclosure requirement for development stage companies, (2) simplify compliance for issuers by removing the elements of the rules that conflicted with US GAAP, (3) eliminate all references to extraordinary items throughout Regulation S-X and (4) amend Regulation S-X to include a definition of extraordinary expenses within certain N-Forms.

The SEC updated a number of other disclosure requirements to better reflect the requirements under US GAAP including (1) amending Rule 3-02 of Regulation S-X to replace references to “changes in financial position” to “cash flows” and (2) deleting the reference to net of amortization in Rule 9-03.10(1) and goodwill amortization in Rule 9-04.14(c) of Regulation S-X.

  • PCAOB Disclosure Updates

Back in 2004, the SEC had published guidance noting that references to Generally Accepted Auditing Standards (GAAS) throughout staff guidance and SEC rules should be read to instead mean the standards of PCAOB rather than the standards of GAAS. The SEC has adopted amendments to reflect the contents of that particular guidance.

  • Non-Existent or Incorrect References and Typographical Errors

In addition to the number of updates to the disclosure requirements, the SEC did a general update of any incorrect references, outdated references and typographical errors that were still part of the various SEC disclosure requirements. These updates did not have any material impact on the meaning and substance of such affected disclosure requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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