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Parsing the SEC's Recent Disclosure Amendments

    Client Alerts
  • August 28, 2018

On August 17, the SEC announced a sprawling array of rule amendments designed to simplify and update its disclosure requirements. You may recall that the Fixing America’s Surface Transportation (FAST) Act of 2015 directed the SEC to identify amendments to accomplish those goals. This is a step toward implementing that directive. The new rules will be effective 30 days after publication in the Federal Register.

Although the final release is extensive (more than 300 pages) and the rule changes are numerous, the overall impact is more cosmetic than substantive. In fact, the SEC states that the changes will not “significantly alter […] the total mix of information provided to investors,” while facilitating and simplifying disclosure. That is a fair assessment of these mostly technical and modest amendments.

The release helpfully categorizes the changes under four headings, which provide a sense of the overall approach:

  • Redundant or duplicative requirements—those substantially similar to existing U.S. GAAP, IFRS or other SEC disclosure requirements
  • Overlapping requirements—those related to, but not the same as U.S. GAAP, IFRS or other SEC requirements
  • Outdated requirements—those that have become obsolete due to the passage of time or changes in the regulatory, business, or technological environment
  • Superseded requirements—those that are inconsistent with recent legislation, SEC rules, and U.S. GAAP rules

The SEC defers throughout the release to the role of the Financial Accounting Standards Board, noting that it long ago designated the FASB as the private-sector accounting standard setter for U.S. financial reporting. Therefore, many of the amendments are intended to prioritize U.S. GAAP standards of disclosure where there are minor inconsistencies or overlap with similar SEC rules. In some cases, the SEC referred proposed amendments to the FASB for further study based on public comments it received during the rule-making process.

An attempt to summarize the multitude of amendments is well beyond the scope of this blog. I do, however, have a few personal favorites:

  • The venerable “ratio of earnings to fixed charges,” both historical and pro forma, is no more. Everyone agreed that nobody really used it and that investors now have all of the information they need at their fingertips to calculate whatever ratios they deem important.
  • The Regulation S-K Item 101(b) segment financial information disclosure requirements have been eliminated from the “Business” section of Form 10-K. The SEC notes that essentially the same information appears elsewhere in order to satisfy U.S. GAAP and Regulation S-X Item 303(b) requirements.
  • The Regulation S-K Item 201(a) disclosures regarding stock price and market have been substantially reduced. Apparently, it came to the SEC’s attention that market prices of publicly traded securities are readily available in real time for free on numerous websites, which also provide an endless variety of easy-to-generate historical trading data and tables. Therefore, companies with equity securities traded on an exchange will need only disclose the market where it is traded and the trading symbol. (Other issuers have more extensive disclosure requirements.) Gone is the old two-year table providing high and low sales prices on a quarterly basis.

The takeaway from all of this is that companies will need to be careful over the next few reporting cycles when rule-checking their Forms 10-K and 10-Q and Securities Act filings. Simply updating the most recent periodic report won’t be sufficient. Otherwise, it’s more or less business as usual.