October 11, 2017

SEC Open Meeting – 10.11.17

Key Topics & Takeaways                    

  • Amendments to Regulation S-K: The Commission voted 3-0 to propose amendments to Regulation S-K based on the recommendations in the SEC staff Report on Modernization and Simplification of Regulation S-K.


Securities and Exchange Commission (SEC) Chairman Jay Clayton opened the meeting by noting that this meeting is his first open meeting as Chairman. Clayton said that the Commission would vote on staff recommendations for amendments to Regulation S-K, and noted that a review of Regulation S-K was required by the Fixing America’s Surface Transportation (FAST) Act of 2015. Clayton said the proposed amendments would discourage the unnecessary duplication of information, make disclosure documents more legible, and update the disclosure requirements of registrants generally. Clayton also praised the proposed amendments as able to create “significant” savings for registrants without harming investors, and for optimizing the use of technology in disclosures.

Bill Hinman, the Director of the SEC’s Division of Corporate Finance, introduced the staff’s recommendations for proposed amendments to Regulation S-K. Hinman said that the proposed amendments stemmed from the SEC’s November 2016 staff report to Congress on possible updates to Regulation S-K that was required by the FAST Act.

The first major set of recommendations called for revising the Management Discussion and Analysis (MD&A) section of disclosures to clarify that a registrant need only provide analysis for the two most recent fiscal years of financial results, instead of three. Staff defended the proposal, saying it would improve the readability of disclosures, while lowering the cost to registrants of producing the MD&A section. Staff also pointed out that three years of MD&A disclosure will still be required if the third year’s discussion is still material to earnings.

The second major set of recommendations called for changes to the confidential treatment of exhibits and disclosures. Specifically, the proposed amendments would allow registrants to omit confidential material, including material that could cause competitive harm if publicized, without needing to request confidential treatment in advance from the SEC. The proposed amendments would also allow registrants to omit personally identifiable information (PII) from public disclosures without SEC approval. Staff defended the proposals as a change in process, not policy.

Other proposed amendments would revise the disclosure regime generally, including by including Legal Entity Identifier (LEI) tags in disclosures, requiring forms to tag trading symbols using inline XBRL, and requiring registrants to provide hyperlinks to prior filings when referenced in new filings. Another proposed amendment would limit the two-year lookback for the filing of material contracts by well-established issuers, as investors can view older disclosure forms and older contracts through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Another amendment would improve the Commission’s disclosure framework by eliminating the risk factor examples listed in the disclosure requirement and by revising the description of properties requirements. The proposed amendments also would require certain investment company filings to be submitted in HTML and provide hyperlinks to exhibits discussed in those filings.

Jeffrey Harris, Director of the Division of Economic and Risk Analysis (DERA), provided a brief assessment of the economic impact of the proposed amendments. Harris said that streamlined disclosure is better for registrants and investors than “convoluted” disclosure and said the proposals under consideration would facilitate compliance and eliminate confusion for registrants. Harris did concede that some registrants may see an incremental increase in compliance costs from the new rules, but said DERA expects these new costs to be “minimal.” Harris also argued that the proposals would enhance capital formation and improve the allocative efficiency of capital markets.

Commissioner Kara Stein argued that the Commission should consider how best to modernize disclosure and discuss how best to incorporate LEI into the disclosure regime, saying the proposed amendments under consideration did not “go far enough” on LEI. Stein also commented that by eliminating the three-year MD&A reporting requirement, the Commission would potentially reduce the amount of information received by investors. Stein also encouraged the public to comment on the proposed changes to the disclosure of confidential information to the commission. Stein closed by saying she was supportive of the proposals “overall” but said she believed the proposal “could go further” to modernize disclosure.

Commissioner Michael Piwowar expressed strong support for the amendments, and praised the Commission’s decision to review Regulation S-K, saying that a review of disclosure regulations is both important and with historical precedent. Piwowar said he looked forward to working with the commission on changes to disclosures.

The meeting closed with the Commission voting 3-0 to approve the amendments.

For more information on this meeting, click here.