This Week's Alert
SEC Proposes Reg. S-K Disclosure Simplification Amendments
At its open meeting today, the SEC proposed for public comment these amendments to Reg. S-K based on staff's recommendations encompassed in the FAST-Act mandated Report on Modernization and Simplification of Regulation S-K - which was released in November 2016, and a broader review of the agency's disclosure scheme.
According to the SEC's Fact Sheet, among other things, the proposed amendments:
- Revise rules or forms to update, streamline or otherwise improve the Commission’s disclosure framework by eliminating the risk factor examples listed in the disclosure requirement and revising the description of property requirement to emphasize the materiality threshold;
- Update rules to account for developments since their adoption or last amendment by eliminating certain requirements for undertakings in registration statements;
- Simplify disclosure or the disclosure process, including proposed changes to exhibit filing requirements and the related process for confidential treatment requests and changes to Management's Discussion and Analysis that would allow for flexibility in discussing historical periods; and
- Incorporate technology to improve access to information by requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR.
This memo from Weil summarizes key technical and substantive recommendations encompassed in the FAST-Act mandated report, including:
- Clarifying that a description of property is required only to the extent that physical properties are material to a company’s business (Reg. S-K Item 102)
- Clarifying that a registrant need only provide a period-to-period comparison for the two most recent fiscal years presented in the financial statements and may hyperlink to the prior year’s annual report for the additional period-to-period comparison (MD&A Item 303)
- Allowing companies to rely solely on a review of Section 16 reports submitted on Edgar for any disclosable reporting delinquencies, and eliminating the requirement that reporting persons furnish Section 16 reports to the company (Item 405)
- Expressly (as an addition to Item 405) requiring companies to include a Section 16(a) Beneficial Ownership Reporting Compliance section only if they have delinquencies to report
- Allowing companies to omit attachments and schedules to filed exhibits unless the attachments/schedules contain information that has not been otherwise disclosed and is material to an investment decision (Item 601)
The comment period on the SEC's release will be open for 60 days. Comments may be submitted here.
See also these Statements from Chair Clayton and Commissioners Piwowar and Stein, and our prior report on the FAST Act-mandated report, and stay tuned for further analysis and commentary.
Treasury Recommends Sweeping Capital Markets Regulatory Reforms
Further to our Riches post on Monday and our previous Society Alert report, the US Treasury Department released its second in a series of Executive Order-triggered regulatory reform-focused reports, which includes numerous recommended capital markets reforms consistent with the EO's economic growth and capital formation objectives.
This post from Stinson Leonard Street Partner and Society member Steve Quinlivan summarizes a number of key recommendations, including these:
- Repealing "non-material disclosure requirements," including Dodd-Frank §1502 (conflict minerals), §1503 (mine safety), §1504 (resource extraction), and §953(b) (pay ratio) and withdrawing any rules issued pursuant to such provisions, as proposed by the Financial CHOICE Act (most recently reported on here). Absent legislative action, Treasury recommends that the SEC consider exempting Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs) from these requirements. (Report pg. 29)
- Substantially revising the 30-year-old $2,000 holding requirement for shareholder proposals. The report also suggests the SEC "explore options that better align shareholder interests (such as considering the shareholder’s dollar holding in company stock as a percentage of his or her net liquid assets) when evaluating eligibility, rather than basing eligibility solely on a fixed dollar holding in stock or percentage of the company’s outstanding stock." (Report pgs. 31-32)
- Substantially revising the shareholder proposal resubmission thresholds for repeat proposals - from the current thresholds of 3%, 6%, and 10% - to promote accountability, better manage costs, and reduce unnecessary burdens. (Report pgs. 31-32)
- Modifying rules that would broaden eligibility for status as an SRC and as a non-accelerated filer to include entities with up to $250 million in public float from the current $75 million, as reflected in the SEC's proposed amendments. (Report pg. 36)
- Extending the length of time a company may be considered an EGC to up to 10 years subject to a revenue and/or public float threshold - consistent with H.R. 1645, the Fostering Innovation Act of 2017. (Report pgs. 36-37)
- Expanding Reg. A eligibility to include Exchange Act reporting companies and increase the Tier 2 offering limit to $75 million. (Report pgs. 39-40)
Appendix B of the report (see pg. 205+) conveniently lists all of its recommendations by major topic (e.g., Access to Capital) and subtopic (e.g., Public Companies & IPOs) - including the recommended action, method of implementation (Congressional and/or regulatory action), and corresponding EO Core Principles. Remarkably few of the recommendations call for legislative action - signaling a call for the SEC and CFTC , both of whose chairs Jay Clayton and Christopher Giancarlo, respectively, reportedly "provided extensive input to the 'thoughtful' report and supported its recommendations" - to act at the agency level.
The prior Administration viewed financial markets as creators of risk that had to be controlled; this Administration appears to view financial markets as creators of growth that would benefit from decreased controls. This is simply a tremendous difference in perspective and tone.
There will and should be a fair amount of discussion over these many and specific recommendations. One broad recommendation, however, stands out: restoring to both the SEC and the CFTC complete exemptive authority as to the requirements of the statutes that they enforce [see pgs. 179-180 of the Report]. Depriving the regulators of this authority in the wake of the Congressional enthusiasm for Dodd-Frank had limited the regulators ability to fix Congressional mistakes and over-reaches in drafting. The prior Administration had simply become so locked into defending Dodd-Frank against any criticism that it had become impossible for the regulators to consider, or even discuss, what aspects of it might be working or not. The new Administration does not bear the burden of justification.
Treasury: Retain Anti-Corporate Inversion Regs (For Now), But Ease Documentation
Treasury's Executive Order-triggered report aimed at reducing tax regulatory burdens - released last week - notably revealed its determination to develop proposed alternative, streamlined documentation requirements associated with the IRC §385 Obama administration-issued anti-corporate inversion-related regulations, but retain the balance of these regulations aimed at preventing earnings stripping pending fundamental tax reform, which Treasury's release indicates should eliminate the need for the regulations entirely. As previously reported, in July, Treasury issued this Notice seeking public comment on the potential rescission or modification of this, along with seven other, enumerated tax regulations issued since January 1, 2016.
DOJ on Corporate Wrongdoing: Yates & Other Policy Memos Under Review
Last week, in his NYU Program on Corporate Compliance & Enforcement Keynote Address on the DOJ's corporate prosecution policies, Deputy AG Rod Rosenstein affirmed (see "DOJ Signals Forthcoming Changes to Corporate Fraud Policy") that the individual accountability-focused Yates memo is among the DOJ's policy memos under review. While he didn't announce new policy, and he in fact committed to stem the agency's tendency to "manage by memo" (i.e., articulate policies and guidance by Deputy AG-issued memos in lieu of properly updating the DOJ (aka US Attorneys') Manual), he did share this much:
I am not certain that the existing memos, talking points, and “F.A.Q.” documents got it exactly right. But any adjustments or changes we make will reflect several common themes. First, any changes will reflect our resolve to hold individuals accountable for corporate wrongdoing. Second, they will affirm that the government should not use criminal authority unfairly to extract civil payments. Third, any changes will make the policy more clear and more concise. And they will reflect input from stakeholders inside and outside the Department of Justice.
Rosenstein also indicated that the agency is reviewing and enhancing its training of prosecutors and agents on corporate investigations and fraud, and "working to incentive, reward, and even partner with companies that demonstrate a commitment to combating corporate fraud."
New PCAOB Revenue Recognition Resource Also Instructive for Companies
Last Thursday, the PCAOB issued this Staff Audit Practice Alert No. 15: Matters Related to Auditing Revenue from Contracts with Customers to assist auditors in applying PCAOB standards when auditing companies' implementation of the new revenue recognition standard. The Practice Alert reportedly highlights PCAOB requirements and other considerations for auditing the company's implementation of the new standard, including:
- Transition disclosures and transition adjustments
- Internal control over financial reporting
- Fraud risks
- Revenue recognition
As was the case with the PCAOB's recently-issued Staff Inspection Brief (reported on here), although billed as a resource for its registered audit firms, the Practice Alert also serves as indirect guidance to audit committees and issuers in preparing for the company's 2017 YE audit, particularly since the Brief identified the new revenue recognition standard as a key audit inspection focus area.