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From Securities Regulation Daily, November 28, 2016

SEC’s FAST Act report outlines recommendations for simplifying disclosure

By Amanda Maine, J.D.

The SEC has issued a report containing recommendations on how to modernize and simplify the disclosure requirements for public companies under Regulation S-K. The report is mandated by the Fixing America’s Surface Transportation Act (the FAST Act). In addition to the report, the FAST Act requires the SEC to reduce disclosure requirements on smaller companies and to eliminate duplicative and outdated provisions.

SEC proposals. The report notes that the SEC has already taken steps toward implementing the FAST Act’s mandates. The SEC proposed in June 2016 that property disclosures for mining registrants be modernized to align them with current industry and global regulatory practices and standards. It would also rescind Industry Guide 7 and include the disclosure requirements in a new Regulation S-K subpart.

Regarding the definition of smaller reporting companies, the report notes that in June 2016, the Commission proposed to raise the public float threshold for qualifying as a smaller reporting company from less than $75 million, or with zero public float and revenues below $50 million, to less than $250 million, or with zero public float and revenues below $100 million.

The SEC’s July 2016 Disclosure Update Release proposed amendments to certain disclosure requirements that have become redundant, overlapping, outdated, or superseded. In August 2016, the Commission proposed rules that would require registrants to provide hyperlinks to their exhibits to their registration statements and periodic and current reports, the report advised.

Incorporation by reference. The report recommends that restrictions on the incorporation by reference of documents older than five years be loosened by allowing instant access to those documents through the use of hyperlinks. It also recommends that it consolidate the Commission’s rules on incorporation by reference, which currently differ by type of filing. The report recommends revising the rules to allow for more consistent incorporation by reference.

Description of property. The report aims to modernize Item 102’s Description of Property requirement so that it would require such a description only to the extent that physical properties are material to the registrant’s business. This revision seeks to distinguish disclosures between property-dependent industries such as manufacturing companies, hotels, and resource extraction companies, and industries such as service or technology companies, which may occupy properties that are easily replaced.

Financial information. The report notes that many registrants provide line-by-line analysis of immaterial changes reflected in the financial statements. To rectify this, the report recommends that the Commission clarify that a registrant need only provide a period-to-period comparison for the two most recent fiscal years and may hyperlink to the prior year’s annual report for this comparison. It also recommends eliminating the requirement to disclose a table of contractual obligations in favor of a hyperlink to the relevant financial notes.

Beneficial ownership. Regarding beneficial ownership reporting, the report recommends that registrants should include a Beneficial Ownership Reporting Compliance section in their filings only if they have delinquencies to report. This will reduce unnecessary disclosure, according to the report.

Registration statement and prospectus. The report contains a number of recommendations on revising the information required on the forepart of registration statements and the front page of prospectuses. The name change requirement would be eliminated in certain circumstances, and the method for determining pricing could be cross-referenced within the prospectus, including through use of a hyperlink. It also makes recommendations about disclosures regarding other national exchanges where an issuer’s securities are quoted and reducing the "subject to completion" prospectus legend.

Risk factors and sub-underwriters. To update the requirement regarding the disclosure of risk factors, the report recommends moving the requirement from Item 503(c) to its own new Item 105 in Subpart 100. The report also recommends that the Commission clarify that the application of the term "sub-underwriters" applies to dealers acting as underwriters that are not disclosed pursuant to Item 508(a).

Undertakings. The report advises that the Commission eliminate certain provisions regarding Undertakings (Item 512) because they are duplicative or obsolete. These include requirements that relate to the Public Utility Holding Company Act (PUHCA), which was repealed in 2006, and Form S-2, which was eliminated in 2005.

Exhibits. The report makes several recommendations regarding exhibits to filings under Item 601. The report advises that the Commission should consider expanding 601 to require registrants to provide a description of the rights and obligations of each class of their registered securities as an exhibit to Form 10-K. Currently, registrants are required to provide a brief description under Item 202. The report also recommends that the omission of attachments and schedules filed with exhibits be permitted unless they contain material information not disclosed elsewhere. This should reduce the amount of immaterial information disclosed, according to the report.

Another recommended change to Item 601 is to limit the two-year look back requirement to newly reporting registrants. The report notes that the requirement was intended to help investors seeking information about registrants with no reporting history. Investors who wish to access this information about registrants who have been subject to reporting requirements can find this information on EDGAR, the report explains.

In addition, the report recommends the disclosure of legal entity identifiers (LEIs) for the registrant and each subsidiary included on its list of significant subsidiaries. The report notes that efforts to expand the use of a universal LEI system have progressed significantly.

Manner of delivery. Finally, the report makes two recommendations to improve the manner of delivery for periodic and current reports. The first recommendation is to require machine-readable tagging of all the information presented on the reports’ cover page. The second recommendation is to require the use of hyperlinks wherever the rules call for the inclusion of a website address, although the report warns that the hyperlinks should only be used if the technology will not jeopardize the security of the EDGAR system.

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