Though not intended to be exhaustive, this blog post highlights SEC reporting and disclosure developments across several key topics, along with related practical implications for registrants and the attorneys, accountants and corporate finance professionals who work with them.
Four developments you should know about SEC reporting and disclosures
The first half of 2019 brought a good deal of activity in the SEC reporting and disclosure realm, ranging from disclosure simplification to hedging. What follows is a discussion of four SEC focus areas that registrants should keep top of mind as they work towards providing meaningful disclosures that reflect actual business practices.
1) FAST Act mandate to simplify reporting and disclosures
In March 2019, the SEC adopted changes to its rules and forms in an effort to modernize and simplify certain disclosure requirements in Regulation S-K (available on Thomson Reuters Checkpoint) for public companies, foreign private issuers, investment advisers and investment companies. These changes are a part of its Disclosure Effectiveness initiative aimed at eliminating outdated, unnecessary disclosure, improving the readability of disclosure documents and lowering costs and burdens on registrants, while continuing to provide all material information to investors.
Registrants, let’s look at some areas impacted by the new rules that are likely to have the most significant impact on your disclosures and financial reporting:
- Management’s Discussion and Analysis (MD&A). If you provide three years of financial statements in a filing, you may now omit discussion of the earliest year in the MD&A, provided discussion of that year is included in a prior filing. If you choose to go this route, you must disclose the location of that discussion in the prior filing.
- Exhibits. You may now file redacted material contracts without having to apply for confidential treatment of the redacted information, so long as the information isn’t material and would likely cause competitive harm if publicly disclosed.
You may also omit certain schedules and attachments to exhibits if they don’t contain material information and the information isn’t otherwise disclosed. Under these circumstances, you must file with each exhibit a list of any omitted schedules and attachments and furnish it upon request.
- Property and Risk Factor Disclosures. The new rules point out that physical property disclosures under Regulation S-K Item 102 are only required if the physical properties are considered material, and the disclosures can be made on a collective basis, if appropriate. Take note, registrants, that the new rules don’t change the industry-specific disclosure requirements for companies in the oil and gas, real estate and mining industries because information about physical properties in those industries is generally considered significant.
Also note that the new rules eliminate the risk-factor examples included in Regulation S-K Item 503(c) to encourage you to focus on your own risk-identification process and to provide relevant disclosures that are tailored to your business.
- Extensible Business Reporting Language (XBRL) Tagging and Hyperlinks. You must now tag all information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F and 40-F (available on Thomson Reuters Checkpoint) using Inline XBRL (iXBRL). You’ll also need to include on the cover pages, where applicable, the national exchange for your securities, the trading symbol and the title of each class of securities. And let’s not forget that you must now include hyperlinks to any documents incorporated by reference instead of including those documents as exhibits.
- Incorporation by Reference and Cross-Referencing in Financial Statements. Under the new reporting and disclosure rules, you’re prohibited from having your financial statements cross-reference to disclosures in other parts of a filing that are outside of the financial statements. You’re also prohibited from incorporating by reference information from other filings into your financial statements, unless specifically allowed by SEC rules, United States generally accepted accounting principles (US GAAP) or International Financial Reporting Standards (IFRS).
When it comes to compliance, most of the amendments took effect last month on May 2. One exception relates to the rules covering the redaction of confidential information, which took effect on April 2. Another exception relates to the rules covering XBRL tagging of cover pages, which are generally subject to a three-year phase-in, as follows: (1) fiscal periods ending on or after June 15, 2019 for large accelerated filers using US GAAP, (2) fiscal periods ending on or after June 15, 2020 for accelerated filers using US GAAP and fiscal periods ending on or after June 15, 2021 for all other filers.
Now let’s consider some important reporting and disclosure takeaways. First, registrants, you should make sure that you fully understand all the rule and form changes and that you are compliant. Second, in the MD&A context, there may be circumstances where you feel the need to still include a discussion of the earliest year because you consider it material. That’s something that you’ll need to evaluate. Third, even though you may now file redacted material contracts without having to apply for confidential treatment under certain circumstances, you’re still responsible for making sure that all material information is disclosed. Remember, SEC Staff will continue to selectively review registrants’ filings and determine whether exhibit redactions align with registrants’ reporting and disclosure obligations. Fourth, if you previously obtained a confidential treatment order for a material contract, you must continue to file extension applications if you want to protect the confidential information. Simply redacting the exhibit in the manner set forth in the redacted exhibit rules and refiling it will not provide confidential treatment for the previously filed confidential-treatment-request information.
2) Inline XBRL
Effective September 2018, the SEC adopted amendments requiring the use of iXBRL for the submission of operating company financial statement information and fund risk/return summary information, all in an effort to modernize reporting and disclosure requirements.
These new rules eliminate (1) the 15-business day XBRL filing period for fund risk/return summaries so that the data will be publicly available in a timelier fashion and (2) the requirement for filers to post Interactive Data Files on their websites.
Note, registrants, that you are also required to tag certain cover page data using iXBRL (see “FAST Act” discussion above for further details).
Note also that the new rules are subject to the three-year phase-in shown below:
- Operating companies: (1) fiscal periods ending on or after June 15, 2019 for large accelerated filers using US GAAP, (2) fiscal periods ending on or after June 15, 2020 for accelerated filers using US GAAP, and (3) fiscal periods ending on or after June 15, 2021 for all other filers, beginning with the first Form 10-Q filed after the relevant compliance date.
- Funds: (1) September 17, 2020 for fund groups with net assets of $1 billion or more as of the end of their most recent fiscal year; and (2) September 17, 2021 for all other funds.
For registrants who are large accelerated filers, compliance time is near. For the rest of you, you should consider, if you haven’t already, how the adoption of iXBRL will affect the nature and timing of your filing preparation and review processes, including potential changes to workflows and software.
3) Modernized mining company property disclosures
In late October 2018, the SEC adopted amendments that modernize the property disclosure requirements for mining registrants currently set forth in Regulation S-K Item 102 and Industry Guide 7. Under the new rules, the SEC is rescinding Industry Guide 7 and relocating its mining property disclosure requirements to new Regulation S-K Subpart 1300.
Mining registrants, you’ll have to provide a summary about mineral reserves for properties that are individually material and about mineral resources and material exploration results for groups of properties that are material in the aggregate. These disclosures will have to include support from a mining technical expert and describe your internal controls over the reliability of your property disclosures and estimates. And the technical report summary will have to be filed as new Exhibit (96) to Regulation S-K Item 601.
Regardless of whether you’re a domestic or a foreign registrant, so long as you have mining operations that are material to your business or financial condition, you must begin providing the new disclosures in fiscal years beginning on or after January 1, 2021 (other than certain Canadian issuers). And Industry Guide 7 will remain in effect until all registrants are required to comply with the final rules.
For those of you interested in early compliance, it is allowed. However, since the EDGAR reprogramming required by the new rules isn’t yet finalized, the SEC said in a May 7, 2019 announcement that those choosing to immediately comply should file technical report summaries under Regulation S-K Item 601(b)(99) or Exhibit No. 15 of Form 20-F, so long as all of Subpart 1300’s provisions and existing EDGAR requirements are satisfied. And then once EDGAR reprogramming is completed, early adopters are to file the report under Regulation S-K Item 601(b)(96), in accordance with the new rules.
4) Employee and director hedging disclosures
In late December 2018, the SEC implemented Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring companies to disclose any practices or policies regarding the ability of employees (including officers) or directors to engage in transactions that hedge or offset any decrease in the market value of the company’s equity securities. While current disclosure obligations relating to hedging policies are provided by Regulation S-K Item 402(b), which sets forth the disclosure required in the company’s Compensation Discussion and Analysis (CD&A) and relates only to named executive officers, new paragraph (i) of Regulation S-K Item 407 now requires companies to disclose in any proxy or information statement relating to the election of directors whether they permit employees, officers and directors to hedge.
Registrants, the rule applies to all equity securities held by employees, officers and directors, directly or indirectly, not just to equity securities granted as compensation. And, if you don’t have hedging policies or practices, then you must disclose that fact or state that hedging transactions are generally allowed.
Note that if you’re a smaller reporting company (SRC) or an emerging growth company (EGC), you must provide the disclosures during fiscal years beginning on or after July 1, 2020. Otherwise, compliance is around the corner: for fiscal years beginning on or after July 1, 2019, except that listed closed-end funds and foreign private issuers are not subject to the rule.
Finally, keep in mind, registrants, that you should update your D&O Questionnaires to reflect this new rule and review your existing hedging policies and practices, keeping an eye on related changes adopted by companies in your peer group. Stay tuned for more reporting and disclosure developments as they arise.