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November 5, 2018

Stroock Special Bulletin

By: Eric Requenez

On August 17, 2018, the Securities and Exchange Commission (the “SEC”) issued a release (the “Adopting Release”) describing the adoption of amendments to Regulation S-K, and its related rules and forms (each an “Amendment,” and collectively, the “Amendments”).[1]  The Amendments are effective today, November 5, 2018 and impact SEC filings on a go forward basis. 

The Amendments are intended to streamline disclosure to investors and improve the disclosure process for both issuers and investors. The Amendments are part of the Fixing America’s Surface Transportation (FAST) Act (the “FAST Act”) and eliminate provisions of Regulation S-K which are outdated, redundant to, overlapping with, or superseded by U.S. Generally Accepted Accounting Provisions (“US GAAP”), International Financial Reporting Standards (“IFRS”), changes in the information environment or other SEC disclosure requirements.[2]

The Timeline

The FAST Act was signed into law on December 4, 2015.  Among other things, the FAST Act required that the SEC staff consider ways to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated or unnecessary.[3]  The SEC staff released proposed amendments on July 13, 2016 (the “Proposed Amendments”) with a 60 day comment period that was eventually extended for 30 additional days.  Now that the Amendments have been published they are effective today, November 5, 2018.[4]

Select Proposed Amendments

Set forth below is a summary of some noteworthy Amendments and their impact on Regulation S-K:

Redundant or Duplicative Disclosure Requirements

The Amendments remove disclosure requirements under Regulation S-K that are redundant or duplicative to U.S. GAAP, IFRS or other SEC disclosure requirements.  The Amendments remove disclosures regarding the consolidation of financial statements and contingencies (which, depending on the structure of a registered investment adviser, could result in significant changes to their financial disclosures), income tax reconciliation, earnings per share, insurance companies and bank holding companies; as these topics are addressed by US GAAP, IFRS or other SEC Requirements.  Other disclosure requirements removed from Regulation S-K due to redundancy include the references to Article 3A in both Rule 4-08(a) and 3A-01 of Regulation S-X regarding consolidation and the requirements to disclose significant changes in issued amounts of debt subsequent to the latest balance sheet date in Rule 4-08(f) of Regulation S-X.

In contrast, while the SEC considered the removal of disclosures regarding currency requirements, the SEC ultimately determined based on comments received to the Proposed Amendments, to refer the issue to the Financial Accounting Standards Board (“FASB”) for potential clarification in US GAAP.   

Overlapping Requirements

The Amendments also reduce Regulation S-K requirements where they overlap with either US GAAP, IFRS or other SEC requirements.  For example, some Regulation S-X requirements are removed due to overlap with REIT disclosures (both status as  REIT and the status of undistributed gains and losses), distributable earnings, interim financial statements and dividend disclosure. One noteworthy item removed based on overlap with U.S. GAAP are the majority of the requirements regarding derivative disclosure under Rule 4-08(n) of Regulation S-X.

The Amendments also provide insight that the SEC’s approach in weighing whether to retain a given overlapping or redundant disclosure in multiple locations took into account how significant the disclosure was to maintaining effective disclosure in each location.  Some of the Proposed Amendments could have caused information to be featured at a higher level of prominence in a narrative disclosure, while others would have resulted in a disclosure only appearing at a more buried level solely within financial statements.  The SEC cites this as a consideration in its decision to adopt certain Proposed Amendments and  not adopt other Proposed Amendments, while referring other Proposed Amendments to the FASB.  One example of a disclosure which the SEC determined only required disclosure in the financial statements is the requirement in Item 101(b) of Regulation S-K to disclose restatements of prior periods when reportable segments change.  This is now no longer a requirement in Regulation S-K, and instead is only required to be disclosed under U.S. GAAP and therefore, only in the notes to financial statements.

Outdated or Superseded Requirements

The Amendments also  address outdated and superseded information.  Examples of outdated items that are removed include stale transition dates which have passed, requirements to provide exchange rate data where non US Dollar currencies are used and other logistical items that no longer require disclosure. 

Requirements from Regulation S-K have been superseded by various auditing standards (which are intended to improve former difficulties in complying with Regulation S-K), bank holding company regulation, insurance regulation and income tax regulation.  The Amendments seek to minimize the conflicts that exist with each regime.  One superseded requirement that will no longer by required by Regulation S-K is the need to disclose gains or loss on sale of properties by REITs, which had been addressed in Rule 3-15(a)(1) of Regulation S-X, but will now be addressed by U.S. GAAP requirements that restrict presentation to gains and losses on disposals that meet the definition of discontinued operations.

Conclusion

Now that the Amendments to Regulation S-K are effective it behooves all filers of Regulation S-K forms to review all of their future Regulation S-K filings against the most recent form prior to filing.  Additionally all issuers should be aware that there may be potential future changes based on items under review by the FASB.  If you have any questions, please feel free to reach out to one of the attorneys listed below who can assist in navigating changes to Regulation S-K in preparation of disclosure.

This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such. 


[1]              Disclosure Update and Simplification  83 FR 50148
[3]              FAST Act § 72003.

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