The SEC’s Disclosure Modernization Proposals

Recent proposed rules to modernize and simplify SEC disclosure requirements have gotten a lot of attention. You may recall that the Fixing America’s Surface Transportation (FAST) Act of 2015  directed the SEC to issue a report recommending amendments to Regulation S-K to accomplish those goals. The SEC issued its report in November 2016. The proposals are the next step in the process.

The proposed changes, while helpful, are perhaps only marginally so. The most significant proposal would modify MD&A by allowing companies to forgo discussion of the oldest period being presented if (1) it has been previously reported and (2) the disclosure is no longer material. Although this is not an earth shattering development, eliminating the redundancy of the year-two to year-three comparison would be nice. The materiality qualifier may, however, limit the proposal’s practical effect if companies take a conservative approach to determining materiality.

Also helpful would be the proposal to streamline the process for obtaining confidential treatment for commercially sensitive information. The proposed change would permit companies to omit from exhibits confidential information that is not material and would cause competitive harm without having to first request confidential treatment from the SEC staff. Companies also would be permitted to omit “personally identifiable information” in all cases without submitting a request. Exhibits would remain subject to review by the staff, which could issue comments if it determines that redactions were not appropriate.

Several other proposed changes are even more minor, mostly just simplifying the forms themselves, tweaking certain disclosure provisions, or clarifying regulation instructions. They include updates and clarifications to:

  • the scope of the property description,
  • the placement of director and executive officer disclosures,
  • Section 16 reporting compliance disclosures,
  • risk factor disclosures,
  • prospectus plan of distribution disclosures,
  • registration statement undertaking requirements,
  • material contracts,
  • incorporation by reference,
  • data tagging and hyperlinking, and
  • the cover pages of certain forms.

In addition, there is a proposal to require certain companies to provide in Exhibit 21 “legal entity identifiers,” which are designed to allow investors to more quickly and precisely identify companies and their subsidiaries.

Most of these proposed changes are uncontroversial, though the proposals to modify MD&A and confidential treatment may generate additional dialogue and revisions. And while it’s tempting to be disappointed with the modest scope of the proposed changes, it is probably wise of the SEC not to risk getting bogged down by tackling too much too soon. We’ll see what happens next.

All the best,

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