Source: https://seciblog.pli.edu/?cat=242
Timestamp: 2019-05-19 10:21:06
Document Index: 568595259

Matched Legal Cases: ['§229', '§230', '§ 229', 'art 500', '§230', '§ 230', '§ 230', '§229', '§ 229']

05/06/2019 ReportingGeorge Wilson
In the last week there have been two very interesting developments in the SEC’s disclosure effectiveness process.
On May 3, 2019, the SEC formally proposed a rule to “improve the information that investors receive regarding the acquisition and disposition of businesses.” The SEC indicated that “[t]he proposed amendments are also intended to facilitate more timely access to capital and to reduce complexity and compliance costs of these financial disclosures.”
The proposed rules would change Regulation S-X Rules 3-05 and 3-14, Article 11, and other related rules and forms. Among the many changes in the proposed rule are:
Updates to the investment test and the income test in the significant subsidiary test
Expanding the use of pro forma financial information in measuring significance
Requiring the financial statements of the acquired business to cover up to the two most recent fiscal years rather than up to the three most recent fiscal years
Permitting disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity.
There are a raft of details in the proposed rule and you can find an extensive Fact Sheet with a link to the proposed rule here.
On May 9, 2019, in an open meeting, the SEC will consider proposing changes to the definitions of accelerated and large accelerated filers. According to the meeting agenda:
04/30/2019 ReportingGeorge Wilson
This is a revised version of an earlier post, and demonstrates the risks in trying to get out with information as early as possible! Drafting this post late yesterday and early this morning the SEC had not yet released updated versions of the cover pages for the forms and I created a version for this post. And, shortly after I posted our suggested version the SEC updated the forms. So, you can find the official revised cover pages for Forms 10-K, 10-Q and 8-K here.
04/26/2019 ReportingGeorge Wilson
Risk factor disclosure frequently presents a conundrum in public reporting. The SEC’s risk factor disclosure requirements focus on what makes an investment in a company’s securities “risky or speculative”. Buy many companies present so many risk factors that questions arise about their relevance to investors. This is one among a number of reasons the SEC included this disclosure in their March 20, 2019 Disclosure Modernization and Simplification rule.
As you likely have heard, most of the changes in this rule, including risk factor changes, are effective for filings after May 2, 2019.
To begin reviewing the changes in risk factor disclosures, Item 1A in Form 10-K previously read:
Set forth, under the caption “Risk Factors,” where appropriate, the risk factors described in Item 503(c) of Regulation S-K (§229.503(c) of this chapter) applicable to the registrant. Provide any discussion of risk factors in plain English in accordance with Rule 421(d) of the Securities Act of 1933 (§230.421(d) of this chapter). Smaller reporting companies are not required to provide the information required by this item.
Item 1A has been changed to now read:
Set forth, under the caption “Risk Factors,” where appropriate, the risk factors described in Item 105 of Regulation S-K (§ 229.105 of this chapter) applicable to the registrant.
The specific disclosure requirements surrounding risk factors have been moved to S-K Item 105 and out of Item 503. Since most of the disclosures in Part 500 of S-K deal with prospectus disclosures and risk factors are, since 2005, a regular ‘34 Act report disclosure requirement, this change makes sense.
In addition, as you will see below, the removal of the plain English language that was in the Item 1A instructions is not really a change as the requirement is now incorporated in new S-K Item 105.
The old text of Item 503(c), which has been removed, read:
(c) Risk factors. Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make the offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply to any issuer or any offering. Explain how the risk affects the issuer or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. The risk factor discussion must immediately follow the summary section. If you do not include a summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately follows the cover page. Pricing information means price and price-related information that you may omit from the prospectus in an effective registration statement based on §230.430A(a) of this chapter. The risk factors may include, among other things, the following:
The new requirement in S-K Item 105 now reads:
Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make an investment in the registrant or offeringspeculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply generically to any registrant or any offering. Explain how the risk affects the registrant or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. If the risk factor discussion is included in a registration statement, it must immediately follow the summary section. If you do not include a summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately follows the cover page. Pricing information means price and price-related information that you may omit from the prospectus in an effective registration statement based on Rule 430A (§ 230.430A(a) of this chapter). The registrant must furnish this information in plain English. See § 230.421(d) of Regulation C of this chapter.
New S-K Item 105 has some subtle wording changes which are highlighted above. The addition of the phrase “an investment in the registrant” makes the application of this disclosure clearer for ‘34 Act periodic reports. And, the addition of the phrase “apply generically” helps clarify that the requirement should not be interpreted too broadly.
Also, the removal of the examples makes it clear that this is intended to be a registrant specific, principles-based requirement. In the Final Rule Release the SEC included these comments:
The Commission also proposed amendments that would eliminate the specific risk factor examples that are currently enumerated in Item 503(c). Although Item 503(c) is principles based, and the Commission has eschewed “boiler plate” risk factors that are not tailored to the unique circumstances of each registrant, the …. examples of factors that may make an offering speculative or risky have remained unchanged since the Commission first published guidance on risk factor disclosure in 1964.
As discussed in the Proposing Release, the Commission’s principles-based approach to risk factor disclosure is not consonant with the item’s list of examples of material risks. These examples may not apply to all registrants and may not correspond to the material risks of any particular registrant. In addition, the inclusion of these examples could suggest that a registrant must address each one in its risk factor disclosures, regardless of the significance to its business. Finally, the Commission was concerned that the inclusion of any examples in Item 503(c), whether to illustrate the specific kinds of risks that should be disclosed or generic risks that should be avoided, could anchor or skew the registrant’s risk analysis in the direction of the examples.
It will be interesting to watch and see how or if companies take advantage of this new requirement.
04/23/2019 ReportingGeorge Wilson
After our recent posts about the disclosure issues surrounding emerging and changing issues including Brexit and Libor, we are returning to our series delving into the details of implementing the SEC’s March 20, 2019 Disclosure Modernization and Simplification rule, and specifically the changes in properties disclosures.
As you likely have heard, most of the changes in this rule, including property disclosures, are effective for filings after May 2, 2019.
To being reviewing the changes in property disclosures Item 2 in Form 10-K requires the disclosures in Regulation S-K Item 102.
The old text Item 102 is:
State briefly the location and general character of the principal plants, mines and other materially important physical properties of the registrant and its subsidiaries. In addition, identify the segment(s), as reported in the financial statements, that use the properties described. If any such property is not held in fee or is held subject to any major encumbrance, so state and describe briefly how held.
Instructions to Item 102: 1. What is required is such information as reasonably will inform investors as to the suitability, adequacy, productive capacity and extent of utilization of the facilities by the registrant. Detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and shall not be given.
2. In determining whether properties should be described, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§229.101).
The new text effective May 2, 2019 is:
To the extent material, disclose the location and general character of the registrant’s principal physical properties. In addition, identify the segment(s), as reported in the financial statements, that use the properties described. If any such property is not held in fee or is held subject to an encumbrance that is material to the registrant, so state and describe briefly how held.
Instruction 1 to Item 102: This item requires information that will reasonably inform investors as to the suitability, adequacy, productive capacity, and extent of utilization of the principal physical properties of the registrant and its subsidiaries, to the extent the described properties are material. A registrant should engage in a comprehensive consideration of the materiality of its properties. If appropriate, descriptions may be provided on a collective basis;detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and shall not be given.
Instruction 2 to Item 102: In determining materiality under this Item, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§ 229.101).
The changes to this item focus on one of the more complex judgments we make in SEC reporting,materiality. (This was one of the key judgments that CorpFin Director Hinman discussed in the speech explored in our last two posts.)
The old item started:
“State briefly the location and general character of the principal plants, mines and other materially important physical properties…”
“To the extent material, disclose the location and general character of the registrant’s principal physical properties.”
The change in wording from“materially important physical properties” to “To the extent material, disclose…” tells us that we don’t need to include information that, in the words of CorpFin Director Hinman, does not provide investors:
“material information they need about companies and their securities offerings to make informed investment and voting decisions”
While the information about segments and suitability, adequacy, productive capacity and extent of utilization reads very similarly from the old to the new requirement, the words “to the extent the described properties are material” makes clear we can make materiality calls and not be concerned with the other potential considerations in the old language. We can hopefully no longer by rote disclose information about our properties that will not matter to investors.
Additionally, the new instruction “A registrant should engage in a comprehensive consideration of the materiality of its properties” more or less makes this a requirement.
In the final rule release, the SEC made this observation:
Despite existing language in Item 102 that limits the required information to properties that are “materially important” to the registrant and its subsidiaries, the disclosure elicited in response to this item may not have been consistently material.For many companies, the only physical properties held may be their headquarters, office space, or ancillary facilities, a description of which is likely to be unimportant to an investor’s evaluation of an investment in the company.
As an example, if a service company uses only simple office space and is in an area where an adequate supply of suitable space is available and the company has no excess space problems, it could be appropriate to make no disclosures about properties. This would reduce the clutter of immaterial information in Form 10-K.
The last part of instruction 1 makes a suggestion to avoid immaterial details:
“If appropriate, descriptions may be provided on a collective basis”
The last instruction, which is the same on both the old and new versions of S-K Item 102, makes it clear that the definition of materiality is not just the magnitude of an item.
Instruction 1 to Item 101 does not actually refer to SAB 99. It does include an example that perhaps is similar to considerations in SAB 99
Instructions to Item 101: 1. In determining what information about the segments is material to an understanding of the registrant’s business taken as a whole and therefore required to be disclosed, pursuant to paragraph (c) of this Item, the registrant should take into account both quantitative and qualitative factorssuch as the significance of the matter to the registrant (e.g., whether a matter with a relatively minor impact on the registrant’s business is represented by management to be important to its future profitability), the pervasiveness of the matter (e.g., whether it affects or may affect numerous items in the segment information), and the impact of the matter (e.g., whether it distorts the trends reflected in the segment information). Situations may arise when information should be disclosed about a segment, although the information in quantitative terms may not appear significant to the registrant’s business taken as a whole.
While this change does present some new materiality judgments for properties, it does hopefully modernize and simplify these disclosures. And, to provide a starting point, here are two examples from 3M Corporation and General Motors, which are wonderfully brief even though prepared under the old disclosure requirements:
3M Corporation – Item 2. Properties.
In the U.S., 3M’s general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 80 manufacturing facilities in 29 states. Internationally, the Company operates 125 manufacturing and converting facilities in 37 countries.
General Motors – Item 2. Properties
One final note – the specific requirements in industries such as mining and oil and gas are not changed by this new rule.
Moving Forward After Year-End
04/15/2019 ReportingGeorge Wilson
For all of us with a December 31 fiscal year we are finally past the year-end finish line. It is always nice to look up after year-end and feel good that we made it through another busy season. Right after that celebration, however, the next thing we see is the challenge of first quarter-end!
This is an opportune moment to take stock of our just filed Form 10-K and think about ways we may want to update, refine or improve our reporting. It is also a good idea to identify areas where we may need to adjust our on-going quarterly reporting for changes going on in the world around us.
At PLI’s 18thAnnual Securities Regulation in Europe program on March 15, 2019, CorpFin Division Director William Hinman provided us with discussion of two areasthat we can use as stepping off points for this process, Brexit and sustainability disclosures.
Beyond reminders about these two important areas, Mr. Hinman also included important discussion about how the SEC’s disclosure system works:
The SEC’s disclosure system is fundamentally principles-based, and
Two of the most important principles-based sections of the disclosure requirements are risk factors and MD&A.
While Mr. Hinman’s speech is fairly brief, it provides substantial food for thought. We will explore this speech in two posts:
A review of the principles behind the SEC’s disclosure system (this post), and
A discussion of how these principles guide our disclosures in the two areas he addressed, Brexit and sustainability matters (next week).
These are two areas we may want to place on our disclosure committee or disclosure process agendas.
The SEC’s Principles-Based Disclosure System
One of the things that make Mr. Hinman’s speechwell worth reading is his discussion of the challenges in applying the principles-based disclosure guidance of the securities law to complex, uncertain and evolving risks.
One trap we sometimes fall into is the belief that if we disclose everything the SEC’s rules address, if we check all the boxes in Regulations S-K and S-X, the SAB’s and the SLB’s, and all the other sources from the SEC, we will be ok. In our Workshops we emphasize that this is not the case! And losing this “check-the-box” mentality is crucial to get disclosure right in complex, uncertain and evolving areas.
While it may seem a bit contradictory, the SEC actually has a rule saying that we need to think beyond the rules!
To emphasize this part of the SEC’s disclosure regimen Mr. Hinman articulates the foundation of the disclosure system:
In other words, while the SEC’s rules and regulations provide a starting point, we need to consider the whole context of a situation and include all information material to investors. He also provides this reminder about two of the most principles-based parts of periodic reports:
“Management’s Discussion and Analysis (MD&A) and Risk Factors are examples of such disclosure requirements and are well-suited to elicit disclosure about complex and evolving areas”
This is borne out in the very first sentence of Regulation S-K Item 303, the core guidance for MD&A:
229.303 (Item 303) Management’s discussion and analysis of financial condition and results of operations.
(a) Full fiscal years. Discuss registrant’s financial condition, changes in financial condition and results of operations.
It is hard to imagine a broader, more principles-based requirement than this simple sentence!
In our next post we will delve more into how this principles-based framework provides direction for the two specific areas Mr. Hinman addressed, Brexit and sustainability disclosures.