Regulation S-K- The topic of disclosure requirements under the Securities Exchange Act of 1934 (“Exchange Act”) and in particular the requirements under Regulation S-K has come to the forefront over the past two years and has been a regular topic of industry discussion, recommendations and review.
On April 15 2016 the SEC issued a 341 page concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements in Regulation S-K. Prior to that in September 2015 the SEC Advisory Committee on Small and Emerging Companies met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies. In March 2015 the American Bar Association submitted its second comment letter to the SEC making recommendations for changes to Regulation S-K.
In early December 2014, the House passed the Disclosure Modernization and Simplification Act of 2014, following which it was bundled into the FAST Act and passed into law on December 4 2015. The Disclosure Modernization and Simplification Act of 2014 became Sections 72001-72003 of the FAST Act.
The Disclosure Modernization and Simplification Act of 2014 requires the SEC to adopt or amend rules to: (i) allow issuers to include a summary page to Form 10-K; and (ii) scale or eliminate duplicative, antiquated or unnecessary requirements for Emerging growth companies, accelerated filers, smaller reporting companies and other smaller issuers in Regulation S-K. In addition, the SEC is required to conduct a study within one year on all Regulation S-K disclosure requirements to determine how best to amend and modernize the rules to reduce costs and burdens while still providing all material information.
The FAST Act gave the SEC a 180 day deadline to issue rules and regulations implementing the changes.
The FAST Act requests that the SEC emphasize a “company by company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements while preserving completeness and comparability of information across registrants” and “evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information.”
This approach is thought of as a principled approach with a concentration on materiality as opposed to just filling in line item information whether relevant or not to a particular company. It is believed, and I completely agree, that simply providing required line item disclosures, that are not relevant to a particular company, dilutes the material important information regarding that particular company and has the unintended consequence of weakening necessary disclosure to potential investors and the public trading markets.
Even before the FAST Act, in May 2015, General Electric filed its annual 10-K with a complete make-over from prior years. GE’s 10-K, the first like it, is full of colorful charts and graphics and has scaled down narrative from what was once a virtually incomprehensible document. GE worked with the SEC on the new 10-K utilizing the materiality approach.