SEC Final Rules Intelligently Reduce Disclosure Requirements

On March 20, 2019, the U.S. Securities and Exchange Commission (SEC) adopted final rules (the Final Rules) to modernize and simplify certain disclosure requirements in Regulation S-K, as mandated by the 2015 Fixing America’s Surface Transportation Act (the FAST Act). The Final Rules are effective today. The most significant changes to the disclosure requirements under Item 601(b)(10) of Regulation S-K (Material Contracts), Item 503(c) of Regulation S-K (Risk Factors), and Item 303 of Regulation S-K (Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are summarized below.

Material Contracts

This is my favorite change under the Final Rules. Currently, Item 601(b)(10) of Regulation S-K requires registrants to file material contracts as exhibits to applicable disclosure documents. The information contained in these material contracts is often highly sensitive for competitive reasons. Prior to today, in order to redact highly sensitive information, registrants would submit a confidential treatment request including a copy of the unredacted material contract, a copy of the proposed redactions and a memo explaining why, based on the facts and circumstances of the particular case. Disclosure of the highly sensitive information is unnecessary for the protection of investors.

Processing time for a confidential treatment request was often lengthy, and until the SEC made a decision on a confidential treatment request, the registrant would usually file the redacted version of the material contract. The Final Rules allow registrants to avoid the lengthy process and redact highly sensitive information from exhibits using their own good judgment – provided that the redacted information is clearly marked and a prominent statement on the first page of the redacted exhibit states that information has been excluded because it is both (1) not material, and (2) would be competitively harmful if publicly disclosed. However, the SEC retains the right to selectively review filings and request supplemental information to ensure compliance with the Final Rules.

Risk Factors

Currently, Item 503(c) of Regulation S-K requires registrants to discuss risk factors. It also provides a list of example risk factors. The SEC was concerned that the inclusion of these examples could lead the registrant’s risk analysis in the direction of the examples, or result in risk factors that are not tailored to the unique circumstances of the registrant. Therefore, the Final Rules eliminate the list of example risk factors in an attempt to encourage registrants to focus on their own risk identification processes.

MD&A

Currently, Item 303(a) of Regulation S-K requires registrants to discuss their financial condition covering a three-year period. The SEC was concerned that this disclosure would be repetitive of disclosure that was no longer material. Therefore, the Final Rules remove the requirement to discuss the earliest year if it was already discussed in a prior filing.

The changes described above to the disclosure requirements under the Final Rules are not comprehensive and may not be deemed legal advice.