Wednesday, December 20, 2017

Commenters weigh in on proposed SEC disclosure requirements

By Amanda Maine, J.D.

A number of organizations have submitted comment letters to the SEC on the Commission’s proposed modernization of disclosure requirements under Regulation S-K. The proposed amendments, which the Commission approved for comment on October 11, 2017, are mandated by the FAST Act and include amendments to Management’s Discussion & Analysis (MD&A) and the use of cross-references and incorporation by reference of a company’s periodic reports.

Nasdaq. Nasdaq’s comment letter indicated that it supports the proposed rule amendments that reinforce the concept of materiality, which it believes is the “linchpin of public company disclosure.” In this vein, Nasdaq supports proposed amendments that would clarify that a description of property is required only to the extent that physical properties are material to a company’s business and that would reduce the period-to-period MD&A comparison requirement from three to the two most recent fiscal years, as long as the earlier period discussion is not material and is included in the company's previous Form 10-K.

Nasdaq also supports the modernization of financial reporting through the use of technology, in particular the proposed rule amendments allowing incorporation by reference and the use of cross-references. Regarding the proposal to require all information on certain filed forms’ cover pages to be tagged in Inline XBRL in accordance with the EDGAR Filer Manual, Nasdaq believes that this requirement will only impose a minimal incremental burden and does not object to it. However, it warned that it may not be able to rely on XBRL due to the subjective nature of XBRL tags as well as the ability of companies to use custom tags.

Nasdaq supports the proposed requirement to disclose trading symbols, but opposes the proposed required disclosure of a principal U.S. market that is not a national securities exchange. According to Nasdaq, requiring companies to disclose trading markets other than national securities exchanges may confuse investors by giving those other markets the “same imprimatur of a National Securities Exchange” without requiring that they satisfy the requirements of a regulated market.

FEI. In its comment letter, Financial Executives International reiterated its support for a principles-based approach to improving and simplifying disclosure. FEI echoed Nasdaq’s support to allow registrants discretion in determining whether to include MD&A related to the comparison of the two earliest years presented in the financial statements as well as the proposed amendment to the description of property.

FEI also praised the proposed amendments on exhibits as reflecting a principles-based approach that is focused on materiality. However, it does not support the proposed amendment requiring a new 10-K Exhibit detailing the rights and obligations of each class of registered securities because it is unnecessary given the disclosure obligations under Form 8-K and Schedule 14A. FEI also does not support requiring the disclosure of a legal entity identifier (LEI) of the registrant and each subsidiary.

Regarding cover page XBRL tagging, FEI does not believe that there is significant incremental value from tagging this information. FEI points out that registrants are currently required to tag most of these data points according to Regulation S-T and the EDGAR Filer Manual.

CAQ. The Center for Audit Quality (CAQ), while agreeing that materiality should be the primary consideration for disclosures, wrote it its comment letter that it is unnecessary to embed any explicit materiality reference within the respective disclosure requirements. As such, it recommended that the proposed amendment regarding criteria for omitting information about the third year in Item 303(a) be eliminated.

Regarding MD&A, CAQ recommended that as long as the SEC requires a three-year MD&A discussion, a registrant should only be permitted to omit from its current Form 10-K the discussion of the earliest of the three years if it was also previously filed in Securities Act filings on EDGAR or Exchange Act filings. CAQ supports the SEC’s proposal to revise instruction 1 to Item 303(a) to eliminate the reference to year-to-year comparisons and five-year selected financial data to encourage companies to take a fresh look at their MD&A.

CAQ supports streamlining information through the use of cross-referencing, but it does not believe that any benefits would result from amending the Commission’s rules to clarify or expand when financial statement disclosure may be used to satisfy other disclosure requirements. CAQ recommends that the SEC consider requiring disclosure to identify any information which has been cross-referenced in the financial statements, particularly in regards to the use of International Financial Reporting Standards (IFRS) used by foreign private issuers. It does not believe that it is necessary to change the information that may be incorporated by reference into a prospectus under any of the Commission’s forms. CAQ did emphasize that it is important that the SEC consider professional standards when an auditor is associated with “other information” contained in a document that includes the independent auditor’s report, drawing attention to the PCAOB’s auditing standard regarding other information in documents containing audited financial statements.