Perspectives

SEC issues final rule that updates and simplifies its disclosure requirements

This Heads Up discusses SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends various SEC disclosure requirements that the Commission has determined to be redundant, duplicative, overlapping, outdated, or superseded. Issued as part of the SEC’s ongoing disclosure effectiveness initiative, the final rule is effective 30 days after its publication in the Federal Register.

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On August 17, 2018, the SEC issued a final rule that amends certain of its disclosure requirements “that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, [U.S. GAAP], or changes in the information environment.” As further stated in the final rule, the amendments it contains are “intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors.” The final rule was issued as part of the SEC Division of Corporation Finance’s overall effort to improve the effectiveness of the SEC’s financial reporting requirements and to implement certain elements of the Fixing America’s Surface Transportation Act. The final rule is effective 30 days after its publication in the Federal Register.

This Heads Up summarizes the final rule and related financial reporting implications.

Volume 25, Issue 12 | August 28, 2018

Entities Affected

The final rule’s amendments may affect U.S. issuers, foreign private issuers (FPIs), investment advisers, Regulation A issuers, investment companies, broker-dealers, and nationally recognized statistical rating organizations. The effect on each type of issuer can vary depending on the amendment.

Noteworthy Changes

The final rule amends numerous SEC rules, items, and forms covering a diverse group of topics. (In fact, given the number of changes, the SEC has included a demonstration version of the final rule, which is an unofficial, “black-line” illustration of changes made by the final rule.) While the financial reporting implications of the changes made by the final rule can vary by company, the changes are generally expected to reduce or eliminate some of an SEC registrant’s disclosures, thereby reducing its burden of complying with these requirements. However, in a limited number of circumstances, the amendments may expand a registrant’s disclosure requirements (e.g., see the discussion below regarding an analysis of changes in stockholders’ equity for interim periods).

Noteworthy changes in the final rule, which eliminate certain disclosure requirements but add or modify a few others, include amendments related to the following:

  • Ratio of earnings to fixed charges — The final rule removes the requirement to disclose the historical and pro forma ratio of earnings to fixed charges and the related exhibit by deleting SEC Regulation S-K, Items 503(d) and 601(b)(12), respectively. The SEC eliminated this requirement because it reasoned that since many of the components are already reasonably available in a registrant’s financial statements, eliminating the ratio would not significantly affect the information available to investors and other users of financial information.
  • Changes in stockholders’ equity for interim periods — The final rule extends to interim periods the annual disclosure requirement in SEC Regulation S-X, Rule 3-04, of presenting (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares. An analysis of changes in stockholders’ equity will now be required for the current and comparative year-to-date interim periods.
  • Dividend disclosures — The final rule deletes the provisions in SEC Regulation S-X, Rules 8-03(a)(2) and 10-01(b)(2), that require the presentation of dividends per share on the face of the income statement for interim periods and moves the required disclosure to the analysis of changes in stockholders’ equity (see discussion above). This amendment aims to conform SEC reporting to guidance in U.S. GAAP, which prohibits such disclosure on the face of the financial statements (although it permits such disclosure in the notes to the financial statements).

    The final rule also removes the bright-line threshold in SEC Regulation S-X, Rule 4-08(e), which currently requires certain disclosures about dividend restrictions when the restricted net asset threshold of 25 percent of total net assets has been met. As amended by the final rule, the disclosure requirement in Rule 4-08(e) will apply when the information is material and will not be based on a specified numerical threshold. This change should simplify the disclosure requirement and will potentially eliminate the disclosure for some registrants.
  • Segments — The final rule eliminates the requirements in SEC Regulation S-K, Item 101(b), which currently requires the Description of Business section of a filing to include (1) disclosures of segment financial information, (2) a restatement of prior periods when reportable segments change, and (3) a discussion of interim segment performance that may not be indicative of current or future operations. The SEC made this change because the guidance in U.S. GAAP and SEC Regulation S-K, Item 303(b), on MD&A of interim periods require similar disclosures.
  • Geographic area — The final rule eliminates the requirements in SEC Regulation S-K, Item 101(d), which currently mandate disclosure of financial information by geographic area in the Description of Business section of a filing. This change was made to eliminate disclosures that are duplicative of those required under U.S. GAAP. However, the final rule amends the disclosure requirements in SEC Regulation S-K, Item 303(a), on trends and uncertainties discussed in MD&A to add an explicit reference to “geographic areas.” The disclosure in MD&A, in combination with the disclosures about risk factors required under SEC Regulation S-K, Item 503(c), will provide information necessary for investors and other users of financial information to understand the risks associated with geographic areas.
  • Market price information — SEC Regulation S-K, Item 201(a)(1), currently requires disclosure of the high and low trading prices of an entity’s common stock for specified quarterly periods, among other market information. Under Item 201(a)(1) as amended by the final rule, a registrant will instead need to disclose the ticker symbol of its common equity or include other disclosures if that information is not available.
  • References to the SEC’s Public Reference Room and company Web sites — Because of the widespread availability of the Internet, the final rule deletes the requirement to refer investors and other users of financial information to the SEC’s Public Reference Room for information about a company. However, registrants will be required to provide their Web site addresses. Companies are currently only “encouraged” to provide this information.

See the appendix in the PDF for a tabular summary of some of the changes discussed above and other amendments in the final rule.

View the rest of the Heads Up.

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