Snell & Wilmer
Corporate Communicator
 

Editor
Jeffrey E. Beck
602.382.6316
jbeck@swlaw.com
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Author 
Kevin Zen
714.427.7411
kzen@swlaw.com
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Snell & Wilmer
Past Issues

Fall 2018

Dear clients and friends,

For this edition of the Corporate Communicator, we summarize recently adopted amendments by the SEC as part of its disclosure simplification project to reduce or eliminate disclosures that have become redundant, duplicative, overlapping, outdated, or superseded. Although in our view the amendments do not result in a fundamental change in the overall information package required to be presented in periodic reports and registration statements, it is nevertheless refreshing to report on new rules that generally reduce, versus increase, disclosure requirements. We hope this is the start of a trend.

Very truly yours,

Corporate & Securities Group


SEC Adopts Amendments to Simplify and Update Disclosure Requirements

by Kevin Zen

On August 17, 2018, the SEC adopted amendments to certain disclosure requirements that it deems to have become “redundant, duplicative, overlapping, outdated, or superseded” given existing SEC disclosure requirements, U.S. Generally Accepted Accounting Principles (U.S. GAAP), or changes in the information environment. The SEC states that the purpose of the amendments is to simplify and update the disclosure of information to investors and reduce compliance burdens for companies without significantly altering the total mix of information available to investors. The amendments reflect the SEC’s efforts to implement one of the mandates of the Fixing America’s Surface Transportation (FAST) Act.

The amendments become effective 30 days after publication in the Federal Register (expected timing and transition considerations discussed below).

Although the amendments apply primarily to public reporting companies (including foreign private issuers), some of the amendments also apply to other entities, such as Regulation A issuers, investment advisers, investment companies, broker-dealers, and nationally recognized statistical rating organizations.

Below is a summary highlighting some of the key changes relevant to most U.S. public companies.

Key Changes to Regulation S-K Disclosure

Item 101: Description of Business

  • Eliminated the requirement to disclose financial information about segments (covered by U.S. GAAP)
  • Eliminated the requirement to disclose financial information by geographic area and any risks associated with a company’s foreign operations and any segment’s dependence on foreign operations (covered by U.S. GAAP or other parts of Regulation S-K, such as Item 503(c))
  • Eliminated the requirement to include, when interim financial statements are presented, a discussion of the facts that indicate the three-year financial data for geographic performance may not be indicative of current or future operations (covered by Item 303 of Regulation S-K)
  • Eliminated the requirement to disclose, if material, the amount spent on research and development activities for all years presented (covered by U.S. GAAP)
  • Eliminated the requirement to identify the SEC’s Public Reference Room and disclose its physical address and phone number
  • Added a requirement for all companies to disclose their internet address (or, in the case of asset-backed issuers, the address of the specified transaction party), if they have one

Item 201: Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

  • Eliminated the requirement to disclose on Form S-1 or Form 10 the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established public trading market (covered by U.S. GAAP)
  • Eliminated the requirement to disclose the frequency and amount of cash dividends declared (covered by revised Rule 3-04 of Regulation S-X)
  • Eliminated the requirement to disclose restrictions that currently or are likely to materially limit a company’s ability to pay dividends on its common equity (covered by revised Rule 4-08(e)(3) of Regulation S-X)
  • For companies with a class of common equity traded in an established public trading market, eliminated the requirement to disclose the high and low sale prices for such common equity for each quarter within the two most recent fiscal years and subsequent interim period; instead, such companies must disclose the principal U.S. market(s) where each class is traded and the trading symbol(s) used by the market(s) for each class of common equity

Item 303: Management’s Discussion and Analysis of Financial Condition and Results of Operations

  • Added an explicit reference to “geographic areas” as an example of a subdivision of a business that is required to be discussed when management believes such discussion would be appropriate to an understanding of the company’s business
  • Eliminated Instruction 5 of Item 303(b), which required companies to discuss in interim reports any seasonal aspects of a company’s business which have had a material effect upon its financial condition or results of operations (covered by U.S. GAAP and the remainder of Item 303 of Regulation S-K)

Item 503: Prospectus Summary and Risk Factors

  • Eliminated the requirement to disclose (i) the ratio of earnings to fixed charges or (ii) the ratio of combined fixed charges and preference dividends to earnings (both historical and pro forma), where a company has registered debt securities or preference equity securities, respectively (covered by U.S. GAAP)

Item 601: Exhibits

  • Eliminated the requirement in Item 601(b)(11) to file an exhibit containing the computation of per share earnings (covered by U.S. GAAP)
  • Eliminated the requirement in Item 601(b)(12) to file an exhibit containing the computation of any ratio of earnings to fixed charges or any ratio of earnings to combined fixed charges and preferred stock dividends (covered by U.S. GAAP)

Key Changes to Regulation S-X Disclosure

Many of the changes to Regulation S-X relate to reducing redundant or overlapping requirements that are covered under U.S. GAAP or other requirements. For example, Rule 8-03(b)(4) and Rule 10-01(b)(4) of Regulation S-X and U.S. GAAP both require supplemental pro forma information about business combinations in the notes to interim financial statements. Accordingly, the recent amendments eliminated such requirement in the Regulation S-X rules. Additional changes to Regulation S-X can be found in the SEC’s adopting release.

One additional change to Regulation S-X to note, however, is the new requirement in Rule 3-04 of Regulation S-X, which will now result in the interim period disclosure of changes in stockholders’ equity and the amount of dividends per share for each class of shares (rather than only for common stock). This quarterly disclosure can be provided in a note to the financial statements or in a separate financial statement. As mentioned above, given that the new amendments have not been published in the Federal Register yet, many have questioned whether or not the new requirement to disclose changes in stockholders’ equity will be necessary for the upcoming 10-Qs. On September 25, 2018, the SEC issued a new Compliance and Disclosure Interpretation (Question 105.09 of the Exchange Act Forms) clarifying this issue. The SEC noted that it will not object if a company’s first presentation of the changes in stockholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. In other words, companies with a 12/31 fiscal year-end may omit the new disclosure about changes in stockholders’ equity from the third quarter 2018 10-Q and instead begin including the disclosure with the first quarter 2019 10-Q.

FASB Referral

The SEC also noted that certain disclosure requirements that overlap with, but require information incremental to, U.S. GAAP are being referred to the Financial Accounting Standards Board (FASB) for consideration for potential incorporation into U.S. GAAP. The SEC has requested that FASB complete its review within 18 months after the new amendments are published in the Federal Register.

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