Business and Financial Disclosure Required by Regulation S-K

Federal RegisterApr 22, 2016

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 232, 239, 240 and 249

[Release No. 33-10064; 34-77599; File No. S7-06-16]

RIN 3235-AL78

Business and Financial Disclosure Required by Regulation S-K

AGENCY:

Securities and Exchange Commission.

ACTION:

Concept release.

SUMMARY:

The Commission is publishing this concept release to seek public comment on modernizing certain business and financial disclosure requirements in Regulation S-K. These disclosure requirements serve as the foundation for the business and financial disclosure in registrants' periodic reports. This concept release is part of an initiative by the Division of Corporation Finance to review the disclosure requirements applicable to registrants to consider ways to improve the requirements for the benefit of investors and registrants.

DATES:

Comments should be received on or before July 21, 2016.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/concept.shtml

);

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-06-16 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-16. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's Web site (

http://www.sec.gov/rules/concept.shtml

). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

Angie Kim, Special Counsel in the Office of Rulemaking, at (202) 551-3430, in the Division of Corporation Finance; 100 F Street NE., Washington, DC 20549.

Table of Contents

I. Introduction

II. Relevant History and Background

A. History of Regulation S-K

B. Broad Economic Considerations

C. Prior Regulation S-K Modernization Initiatives and Studies

III. Disclosure Framework

A. Basis for Our Disclosure Requirements

1. Statutory Mandates

2. Commission Responses to Market Developments

B. Nature of Our Disclosure Requirements

1. Principles-Based and Prescriptive Disclosure Requirements

2. Audience for Disclosure

3. Compliance and Competitive Costs

IV. Information for Investment and Voting Decisions

A. Core Company Business Information

1. General Development of Business (Item 101(a)(1))

2. Narrative Description of Business (Item 101(c))

3. Technology and Intellectual Property Rights (Item 101(c)(1)(iv))

4. Government Contracts and Regulation, Including Environmental Laws (Items 101(c)(1)(ix) and (c)(1)(xii))

5. Number of Employees (Item 101(c)(1)(xiii))

6. Description of Property (Item 102)

B. Company Performance, Financial Information and Future Prospects

1. Selected Financial Data (Item 301)

2. Supplementary Financial Information (Item 302)

3. Content and Focus of MD&A (Item 303—Generally)

4. Results of Operations (Item 303(a)(3))

5. Liquidity and Capital Resources (Item 303(a)(1) and (a)(2))

6. Off-Balance Sheet Arrangements (Item 303(a)(4))

7. Contractual Obligations (Item 303(a)(5))

8. Critical Accounting Estimates

C. Risk and Risk Management

1. Risk Factors (Item 503(c))

2. Quantitative and Qualitative Disclosures About Market Risk (Item 305)

3. Disclosure of Approach to Risk Management and Risk Management Process

4. Consolidating Risk-Related Disclosure

D. Securities of the Registrant

1. Related Stockholder Matters—Number of Equity Holders (Item 201(b))

2. Description of Capital Stock (Item 202)

3. Recent Sales of Unregistered Securities (Items 701(a)-(e))

4. Use of Proceeds From Registered Securities (Item 701(f))

5. Purchases of Equity Securities by the Issuer and Affiliated Purchasers (Item 703)

E. Industry Guides

1. Comments Received

2. Discussion

3. Request for Comment

F. Disclosure of Information Relating to Public Policy and Sustainability Matters

1. Comments Received

2. Discussion

3. Request for Comment

G. Exhibits

1. Request for Comment

2. Schedules and Attachments to Exhibits

3. Amendments to Exhibits

4. Changes to Exhibits (Instruction 1 to Item 601)

5. Material Contracts (Item 601(b)(10))

6. Preferability Letter (Item 601(b)(18))

7. Subsidiaries and Legal Entity Identifiers

H. Scaled Requirements

1. Categories of Registrants Eligible for Scaled Disclosure

2. Scaled Disclosure Requirements for Eligible Registrants

3. Frequency of Interim Reporting

V. Presentation and Delivery of Important Information

A. Cross-Referencing

1. Comments Received

2. Discussion

B. Incorporation by Reference

1. Comments Received

2. Discussion

3. Request for Comment

C. Hyperlinks

1. Comments Received

2. Discussion

3. Request for Comment

D. Company Web Sites

1. Comments Received

2. Discussion

3. Request for Comment

E. Specific Formatting Requirements

1. Comments Received

2. Discussion

3. Request for Comment

F. Layered Disclosure

1. Comments Received

2. Discussion

3. Request for Comment

G. Structured Disclosures

1. Comments Received

2. Discussion

3. Request for Comment

VI. Conclusion

I. Introduction

Regulation S-K was adopted to foster uniform and integrated disclosure for registration statements under the Securities Act of 1933 (“Securities Act”), registration statements under the Securities Exchange Act of 1934 (“Exchange Act”), and other Exchange Act filings, including periodic and current reports.

Over thirty years ago, the Commission expanded and reorganized Regulation S-K to be the

central repository for its non-financial statement disclosure requirements.

When adopting the integrated disclosure system, the Commission's goals were to reduce the costs to registrants and eliminate duplicative disclosures while continuing to provide material information.

In this concept release, we revisit the business and financial disclosure requirements in Regulation S-K. We seek to assess whether they continue to provide the information that investors need to make informed investment and voting decisions and whether any of our rules have become outdated or unnecessary.

See

Item 10(a) of Regulation S-K [17 CFR 229.10].

See

Adoption of Integrated Disclosure System, Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (“1982 Integrated Disclosure Adopting Release”).

See id.

We focus this release on business and financial disclosures that registrants provide in their periodic reports, which are a subset of the disclosure requirements in Regulation S-K.

We focus on these requirements because many of them have changed little since they were first adopted. We are not at this time revisiting other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants. Although the specific scope of this concept release is as indicated, we welcome and encourage comments on any other disclosure topics not specifically addressed in this concept release.

The scope of this release does not include certain disclosure requirements for information other than business and financial disclosures, such as Subpart 400, which requires disclosure about management and certain security holders as well as corporate governance matters. We also have not included offering-specific disclosure requirements under Subpart 500, which generally apply to registration statements and prospectuses but not periodic reports.

This release begins with a discussion of the regulatory history of the integrated disclosure system and Regulation S-K as well as an overview of prior initiatives to review and modernize our disclosure requirements. We then present the framework for our current disclosure regime and explore potential alternative approaches. We proceed to review the business and financial disclosure requirements that apply to periodic reports. We first consider what financial and business information should be required and whether any of these requirements are appropriate to scale for smaller registrants. We then explore how registrants can most effectively present this information to improve its usefulness to investors. In this release, we consider input we have received from letters submitted in response to disclosure modernization efforts

as well as the staff's experience with particular disclosure requirements, regulatory history and changes in the regulatory and business landscape since the rule's adoption.

See infra

notes 9 to 10 and accompanying text.

Through this release, we are reviewing and seeking public comment on whether our business and financial disclosure requirements continue to elicit important information for investors and how registrants can most effectively present this information. We are specifically seeking comment on:

• Whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;

• whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;

Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] requires that, whenever the Commission is engaged in rulemaking under the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation. Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] sets forth this same requirement.

See also

Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)].

• whether, and if so how, we could revise our requirements to enhance the protection of investors;

• whether our current requirements appropriately balance the costs of disclosure with the benefits;

• whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;

• whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and

• any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.

While we set forth a number of general and specific questions, we welcome comments from investors, registrants and other market participants on any other concerns related to our disclosure requirements. In addition to comments received on this release, we will consider any input from investor focus group studies or surveys, the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies.

This concept release is part of a comprehensive evaluation of the Commission's disclosure requirements recommended in the staff's Report on Review of Disclosure Requirements in Regulation S-K (“S-K Study”), which was mandated by Section 108 of the Jumpstart Our Business Startups Act (“JOBS Act”).

Based on the S-K Study's recommendation and at the request of Commission Chair Mary Jo White,

Commission staff initiated a comprehensive evaluation of the type of information our rules require registrants to disclose, how this information is presented, where and how this information is disclosed and how we can leverage technology as part of these efforts (collectively, “Disclosure Effectiveness Initiative”). The overall objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for both investors and registrants.

Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). Section 108 of the JOBS Act required the Commission to conduct a review of Regulation S-K to determine how such requirements can be updated to modernize and simplify the registration process for emerging growth companies (“EGCs”). For a further discussion of the S-K Study,

see

Section II.C.

See SEC Issues Staff Report on Public Company Disclosure

(Dec. 20, 2013),

available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540530982

In connection with the S-K Study

and the subsequent launch of the Disclosure Effectiveness Initiative,

we received public comments on various topics discussed in this release. Below and elsewhere throughout this release, we discuss these comments as further context for the topics under consideration. Comments received in connection with the Disclosure Effectiveness Initiative that are outside the scope of this release are not discussed here. These comment letters are being considered as part of the staff's continued evaluation of Regulation S-K

from which the staff expects to make further recommendations to the Commission for consideration.

In connection with the S-K Study, we received public comments on regulatory initiatives to be undertaken in response to the JOBS Act.

See

Comments on SEC Regulatory Initiatives Under the JOBS Act: Title I—Review of Regulation S-K,

available at http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml

Some of the comments received in connection with the S-K Study were specific to EGCs.

To facilitate public input on the Disclosure Effectiveness Initiative, members of the public were invited to submit comments. Public comments we have received to date on the topic of Disclosure Effectiveness are available on our Web site.

See

Comments on Disclosure Effectiveness,

available at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml

The staff is also working on recommendations for our consideration to propose specific revisions to update or simplify certain of our business and financial disclosure requirements, as required by the recently enacted Fixing America's Surface Transportation Act of 2015 (“FAST Act”).

Those recommendations relate to specific proposals to help address “duplicative, overlapping, outdated or unnecessary” disclosure and are not specifically addressed in this concept release, which seeks to explore both general considerations and specific questions that we believe would benefit from further evaluation and input before proposing any changes to the related rules.

Public Law 114-94, Sec. 72002, 129 Stat. 1312 (2015).

Id.

II. Relevant History and Background

A. History of Regulation S-K

Regulation S-K

Enactment of the Securities Act and the Exchange Act resulted in the creation of two separate disclosure regimes. These disclosure regimes remained distinct for approximately thirty years and often resulted in overlapping and duplicative disclosure requirements. Regulation S-K reflects the Commission's efforts to harmonize disclosure required under both the Securities Act and the Exchange Act by creating a single repository for disclosure regulation that applies to filings by registrants under both statutes.

The current integrated disclosure system resulted from a series of efforts triggered by a 1964 amendment to the Exchange Act,

which added Section 12(g) to the Exchange Act and extended the Exchange Act's reporting requirements to companies meeting specified thresholds, including those that were not exchange listed.

In light of the Exchange Act's broadened reporting requirements, Professor Milton Cohen suggested in a seminal 1966 law review article greater coordination between the Securities Act and Exchange Act.

He recommended that the continuous reporting obligations under the Exchange Act serve as the foundation for corporate disclosure while relaxing or eliminating overlapping Securities Act disclosure requirements.

See, e.g.,

Disclosure to Investors—A Reappraisal of Federal Administrative Policies under the '33 and '34 Acts, Policy Study,

Mar. 27, 1969,

available at http://www.sechistorical.org/museum/galleries/tbi/gogo_d.php

(“Wheat Report”) (stating that one of the reasons for a broad re-examination of disclosure policy was the 1964 amendment to the Exchange Act).

See also

Phase Two Recommendations of Task Force on Disclosure Simplification, Release No. 33-7431 (July 18, 1997) [62 FR 43581 (Aug. 14, 1997)] (“Phase Two Recommendations of Task Force on Disclosure Simplification Release”) (rescinding two forms and one rule and amending a number of rules and forms). The Commission further implemented certain of the recommendations in the Task Force Report relating to accounting disclosure rules that were identified as being largely duplicative of U.S. GAAP or other Commission rules.

The Task Force also made the following recommendations on Regulation S-K:

• Streamline Item 101's description of business disclosure by eliminating duplication of quantitative information about business segments and foreign operations provided in the financial statements;

• revise Item 102's description of property disclosure to elicit “more meaningful and material disclosure;” and

• eliminate Item 103's instruction to replace the $100,000 standard with a general materiality standard for certain environmental legal proceedings to ensure registrants will not be required to disclose non-material information.

The Task Force also generally recommended adjusting certain dollar thresholds in Regulation S-K and Regulation S-X for inflation since the time of their adoption. The Task Force cited, among other items, the $50,000 threshold in Item 509 of Regulation S-K (relating to disclosure of payments to experts and counsel) [17 CFR 229.509] and the $100,000 threshold in Rule 3-11 of Regulation S-X (relating to the definition of an inactive registrant) [17 CFR 210.3-11].

See

Task Force Report.

While the Commission made a number of changes in response to the Task Force recommendations, the three items identified above were not adopted by the Commission. We revisit some of these issues in the questions presented below.

Report of the Advisory Committee on the Capital Formation and Regulatory Process

Also in 1995, the Commission established the Advisory Committee on the Capital Formation and Regulatory Processes (“1995 Advisory Committee”) to advise on, among other things, the regulatory process and disclosure requirements for public offerings. The 1995 Advisory Committee's primary recommendation was implementing a system of “company registration.”

Under a “company registration” system, a company would, on a one-time basis, file a registration statement (deemed effective immediately) that includes information similar to that currently provided in an initial short-form shelf registration statement. This registration statement could then be used for all types of securities and all types of offerings. All current and future Exchange Act reports would be incorporated by reference into that registration statement, and around the time of an offering, transactional and updating disclosures would be filed with the Commission and incorporated into the registration statement. As part of this “company registration” system, companies would be required to adopt certain disclosure enhancements (and encouraged to adopt others) that seek to improve the quality and timeliness of disclosure provided to investors and the markets.

See

Securities Act Concepts and Their Effects on Capital Formation, Release No. 33-7314 (July 25, 1996) [61 FR 40044 (July 31, 1996)] (“Securities Act Concept Release”).

Noting the Task Force Report, the 1995 Advisory Committee did not focus on specific line-item disclosure requirements but suggested disclosure enhancements as part of its recommendations for a system of “company registration.” These enhancements included a management certification to the Commission for all periodic and current reports, a management's report to the audit committee to be filed as an exhibit to the Form 10-K, expansion of current reporting obligations on Form 8-K and a risk factor disclosure requirement in Form 10-K.

See Report of The Advisory Committee on the Capital Formation and Regulatory Processes

(July 24, 1996),

available at http://www.sec.gov/news/studies/capform.htm

After receiving reports from both the Task Force and the 1995 Advisory Committee, the Commission issued a concept release on regulation of the securities offering process and also sought input on the 1995 Advisory Committee's proposed disclosure enhancements.

See

the Securities Act Concept Release. Many of the issues raised in the concept release were revisited in the Commission's 1998 proposal to modernize the securities offering process (known as the “Aircraft Carrier” release), and in the Commission's 2005 Securities Offering Reform rulemaking. Some of the proposals from the Aircraft Carrier release were later adopted. For example, the Aircraft Carrier release recommended inclusion of risk factor disclosure in Exchange Act registration statements and annual reports. This recommendation was adopted as part of Securities Offering Reform.

See

The Regulation of Securities Offerings, Release No. 33-7606A (Nov. 17, 1998) [63 FR 67174 (Dec. 4, 1998)] (“Aircraft Carrier Release”) and Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform Release”).

Plain English

In 1998, the Commission adopted rules intended to improve the readability of prospectuses by promoting clear, concise and understandable disclosure (“Plain English Rules”).

These rules required registrants to write the cover page, summary and risk factors section of prospectuses in plain English

and were extended to Exchange Act reports in 2005.

See

Plain English Disclosure, Release No. 33-7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)] (“Plain English Disclosure Adopting Release”).

Id.

See

Securities Offering Reform Release. As part of the Securities Offering Reform Release, Form 10-K was amended to require risk factor disclosure to be written in accordance with the same Plain English Rules that apply to risk factor disclosure in Securities Act registration statements.

See also

Part I, Item 1A of Form 10-K.

Advisory Committee on Improvements to Financial Reporting

In 2007, the Commission chartered the Advisory Committee on Improvements to Financial Reporting (“CIFiR Advisory Committee”) to examine the U.S. financial reporting system.

While the CIFiR Advisory Committee did not recommend specific changes to Regulation S-K, several of its suggestions sought to improve the usefulness of information in periodic reports.

The Commission adopted some of these suggestions, which included updating the Commission's interpretive guidance on use of electronic media for disseminating information on a registrant's financial performance

and adopting rules to require filing of interactive data-tagged financial statements.

The dual goals of the CIFiR Advisory Committee were “to examine the U.S. financial reporting system in order to make recommendations intended to increase the usefulness of financial information to investors, while reducing the complexity of the financial reporting system to investors, preparers, and auditors.”

See Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission

(Aug. 1, 2008), (“CIFiR Advisory Committee Report”),

available

http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf

See

CIFiR Advisory Committee Report (stating that “[i]ncreasing the usefulness of information in SEC reports” was one of five themes underlying the CIFiR Advisory Committee's recommendations).

In 2008, the Commission published interpretive guidance on the use of company Web sites as a means for companies to communicate and provide information to investors in compliance with the federal securities laws and, in particular, the Exchange Act.

See

Commission Guidance on the Use of Company Web sites, Release No. 34-58288 (Aug. 1, 2008) [73 FR 45862 (Aug. 7, 2008)] (“2008 Web site Guidance”). When it published the 2008 Web site Guidance, the Commission noted that the guidance was prompted, in part, by the CIFiR Advisory Committee's efforts.

In 2008, the Commission announced the 21st Century Disclosure Initiative, with the goal of preparing a plan for future action to modernize the Commission's disclosure system. The Initiative's report, issued in 2009, recommended a new disclosure system in which interactive data would replace plain-text disclosure documents while retaining the substantive content and filing schedule of the current system.

See 21st Century Disclosure Initiative: Staff Report, Toward Greater Transparency: Modernizing the Securities and Exchange Commission's Disclosure System

(Jan. 2009),

available

http://www.sec.gov/spotlight/disclosureinitiative/report.pdf

The Commission adopted rules in 2009 requiring companies to provide financial statement information in interactive data format using the eXtensible Business Reporting Language (“XBRL”) format.

See

Interactive Data to Improve Financial Reporting, Release No. 33-9002 (Jan. 20, 2009) [74 FR 6776 (Feb. 10, 2009)] (“Interactive Data Release”). This adopting release notes the CIFiR Advisory Committee's recommendation to require filing of interactive data-tagged financial statements.

JOBS Act Report on Review of Disclosure Requirements in Regulation S-K

The JOBS Act required the Commission to review Regulation S-K to determine how its disclosure requirements can be updated to modernize and simplify the registration process for EGCs.

In response to this mandate, Commission staff published the S-K Study in December 2013. Although the Congressional mandate

focused on EGCs, the report was intended to facilitate the improvement of disclosure requirements applicable to companies at all stages of development.

Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). For a discussion of EGCs, including the definition of “emerging growth company,” see Section IV.H.1.

See

S-K Study at 4.

The S-K Study recommended a comprehensive review of disclosure requirements in the Commission's rules and forms, including Regulations S-K and S-X, and identified specific areas for further review.

It also recommended the Commission consider the following principles when reviewing and evaluating changes to disclosure requirements:

See id

at 92-104. The S-K Study identified four issues for further study: (1) Generally, any recommended revisions should emphasize a principles-based approach as an overarching component of the disclosure framework while preserving the benefits of a rules-based system; (2) any review of the disclosure requirements should evaluate the appropriateness of current scaled disclosure requirements and consider whether further scaling is appropriate for EGCs or other categories of companies; (3) any review of the disclosure requirements should evaluate methods of information delivery and presentation, both through EDGAR and other means; and (4) any review of disclosure requirements should consider ways to present information to improve the readability and navigability of disclosure and explore methods for discouraging repetition and disclosure of immaterial information. As to this fourth issue, the S-K Study suggested reevaluating quantitative thresholds and other materiality standards in Regulation S-K as well as reassessing requirements for information that is readily accessible, such as historical stock price information.

Id.

at 97-98.

• Improving and maintaining the informativeness of disclosure;

• historical objectives of the rule and their continued or recurring relevance;

• whether the required information is available on a non-discriminatory basis from reliable sources and, if so, any costs or benefits from obtaining the information other than from the registrant;

• administrative and compliance costs of the requirements;

• any competitive or economic costs of disclosing proprietary information;

• maintenance of the Commission's ability to conduct an effective enforcement program and deter fraud; and

• importance of maintaining investor confidence in the reliability of registrant information, in order to, among other things, encourage capital formation.

See id.

at 94-95.

FAST Act Disclosure Modernization and Simplification

Under the FAST Act,

the Commission is required to carry out a study to determine how best to modernize and simplify the disclosure requirements in Regulation S-K and to propose revisions to those requirements.

The FAST Act requires that the study of Regulation S-K:

Public Law 114-94, 129 Stat. 1312 (2015).

Public Law 114-94, Sec. 72003, 129 Stat. 1312 (2015).

• Emphasize a company-by-company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements while preserving completeness and comparability of information across registrants; and

• evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information.

In conducting this study, the Commission is required to consult with the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies and to issue a report of findings and recommendations to Congress.

The FAST Act also requires the Commission to revise Regulation S-K to further scale or eliminate requirements to reduce the burden on EGCs, accelerated filers, smaller reporting companies (“SRCs”), and other smaller issuers, while still providing all material information to investors, and to eliminate duplicative, overlapping, outdated or superseded provisions.

Id.

Public Law 114-94, Sec. 72002, 129 Stat. 1312 (2015). The required revisions would not apply to provisions for which the Commission determines that further study is necessary to determine their efficacy.

Consistent with the S-K Study's recommendations and the FAST Act mandates, and in furtherance of the Commission's prior modernization studies and initiatives, we seek to evaluate components of our disclosure framework and revisit certain of our business and financial disclosure requirements to assess whether they continue to provide investors with information that is important to making informed investment and voting decisions. We also seek to evaluate whether current disclosure requirements should be revised to include different formats to facilitate the readability and navigability of disclosure, which we discuss in Section V of the release.

III. Disclosure Framework

A. Basis for Our Disclosure Requirements

The Securities Act and the Exchange Act authorize the Commission to promulgate rules for registrant disclosure as necessary or appropriate in the public interest or for the protection of investors.

The Commission has used this authority to require disclosure of information it believes is important to investors in both registration statements for public offerings and in ongoing reports.

See generally,

Sections 7, 10, and 19(a) of the Securities Act [15 U.S.C. 77g(a)(10), 77j; and 77s(a)]; and Sections 3(b), 12, 13, 14, 15(d), and 23(a) of the Exchange Act [15 U.S.C. 78c(b), 78

78m(a), 78n(a), 78o(d), and 78w(a)].

1. Statutory Mandates

The Securities Act and Exchange Act

A central goal of the federal securities laws is full and fair disclosure.

In enacting these laws, Congress recognized that investors must have access to accurate information important to making investment and voting decisions in order for the financial markets to function effectively. Thus, our disclosure rules are intended not only to protect investors but also to facilitate capital formation and maintain fair, orderly and efficient capital markets.

See

Preamble of the Securities Act (stating it is an Act to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.). In enacting the mandatory disclosure system under the Exchange Act, Congress sought to promote complete and accurate information in the secondary trading markets.

See

S. Rep. No. 73-1455, 73rd Cong., 2nd Sess., 1934 at 68 (stating “[o]ne of the prime concerns of the exchanges should be to make available to the public, honest, complete, and correct information regarding the securities listed”) and H.R. Rep. No. 73-1383, 73rd Cong., 2nd Sess., 1934 at 11 (stating “[t]here cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.”).

Schedule A of the Securities Act sets forth certain items of disclosure to be included in registration statements filed in public offerings and provides the basis for many of the disclosure requirements currently in Regulation S-K. Items in Schedule A are largely financial in nature and were intended to help investors assess a security's value. According to the House Report that preceded the Securities Act:

The items required to be disclosed . . . are items indispensable to any accurate judgment upon the value of a security . . . The type of information required to be disclosed is of a character comparable to that demanded by competent bankers from their borrowers, and has been worked out in light of these and other requirements. They are . . . adequate to bring into full glare of publicity those elements of real and unreal values which may lie behind a security.

H.R Rep. No. 73-85, 73rd Cong., 1st Sess., 1933.

The Exchange Act requires similar business and financial information to be

disclosed in Exchange Act registration statements and periodic reports.

See

Section 12(b)(1)(A) of the Exchange Act [15 U.S.C. 78l].

In addition to mandating certain disclosure requirements, the Securities Act and the Exchange Act grant the Commission authority to modify and supplement these requirements as necessary or appropriate to implement the purpose of the statutes.

Moreover, whenever it is engaged in rulemaking and is required to consider whether the action is necessary or appropriate in the public interest, the Commission must consider whether the action will promote efficiency, competition, and capital formation.

See, e.g.,

Sections 19(a) and 28 of the Securities Act and Sections 3(b), 23(a)(1) and 36(a)(1) of the Exchange Act. [15 U.S.C. 77s(a), 15 U.S.C. 77z-3] and [15 U.S.C. 78c(b), 15 U.S.C. 78w(a)(1), 15 U.S.C. 78mm(a)(1)]. Section 19(a) of the Securities Act and Section 23(a)(1) of the Exchange Act grant the Commission authority to make such rules and regulations as may be necessary to carry out the provisions of each title; Section 3(b) of the Exchange Act provides that the Commission shall have power to define technical, trade, accounting, and other terms used in the Exchange Act, consistently with the provisions and purposes of the Exchange Act; Section 28 of the Securities Act and Section 36(a)(1) of the Exchange Act provide that the Commission may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of each title or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.

See, e.g.,

Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)].

See also

Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)].

Business and Financial Legislation

From time to time, Congress has introduced additional disclosure requirements through other statutory mandates. Recent mandates have focused on corporate responsibility, corporate governance and providing enhanced business and financial information to investors. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”)

mandated numerous changes to strengthen the accountability of public companies for their financial disclosure and required substantial Commission rulemaking to implement its provisions, many of which resulted in additions to Regulation S-K.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)

required the Commission to adopt an array of disclosure provisions on corporate governance, executive compensation and specialized disclosure.

Public Law 107-204, 116 Stat. 745 (2002).

See

S-K Study at 21-23, footnotes 57-62 and corresponding text for a discussion of additions made to Regulation S-K as a result of the Sarbanes-Oxley Act.

Public Law 111-203, 124 Stat. 1376 (2010).

See

S-K Study at 28-29, footnotes 73-77 and corresponding text for a discussion of provisions in the Dodd-Frank Act that impact requirements in Regulation S-K.

Other Legislation

In some instances, Congress has mandated disclosure that is not necessarily financial in nature. These mandates have ranged from broad policy considerations to prescriptive directives. For example, under the National Environmental Policy Act of 1969 (“NEPA”),

Congress required all federal agencies to include consideration of the environment in regulatory action. In response to this mandate, the Commission adopted environmental compliance and litigation disclosure requirements.

Similarly, Section 1503 of the Dodd-Frank Act required registrants to include information about mine safety and health in their periodic reports. Although the disclosure requirements in Section 1503 were self-executing,

the Act authorized the Commission to issue such rules or regulations as necessary for the protection of investors and to carry out the purposes of Section 1503.

To facilitate consistent compliance, the Commission adopted rules to codify the statutory disclosure requirements.

More recently, the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”) requires registrants to disclose certain business activities relating to Iran in their periodic reports.

42 U.S.C. 4321-4347.

As a result of NEPA, the Commission issued an interpretive release in 1971 alerting companies to potential disclosure obligations that could arise from material environmental litigation and the material effects of compliance with environmental laws. The Commission later adopted more specific disclosure requirements relating to these matters and, in 1976, the Commission amended its forms to require disclosure of any material estimated capital expenditures for environmental control facilities.

See

Disclosures Pertaining to Matters Involving the Environment and Civil Rights, Release No. 33-5170 (July 19, 1971) [36 FR 13989 (July 29, 1971)], Disclosure with Respect to Compliance with Environmental Requirements and Other Matters, Release No. 33-5386 (April 20, 1973) [38 FR 12100 (May 9, 1973)], Disclosure of Environmental and Other Socially Significant Matters, Release No. 33-5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 18, 1975)] (“Notice of Public Proceedings on Environmental Disclosure Release”), Conclusions and Final Action on Rulemaking Proposals Relating to Environmental Disclosure, Release No. 33-5704 (May 6, 1976) [41 FR 21632 (May 27, 1976)] (“1976 Environmental Release”),

Natural Resources Defense Council et al.,

SEC,

389 F. Supp. 689 (D.D.C. 1974) (“Natural Resources Defense Council”).

See

Section 1503(f) of the Dodd-Frank Act. The disclosure requirements took effect 30 days after enactment of the Act.

Id.

at Section 1503(d)(2).

See

Mine Safety Disclosure, Release No. 33-9286 (Dec. 21, 2011) [76 FR 81762 (Dec. 28, 2011)] (“Mine Safety Disclosure Release”).

Public Law 112-158, 126 Stat. 1214 (2012). Section 219 of ITRSHRA amended Section 13 of the Exchange Act to add subsection (r). This subsection requires a company that files annual and quarterly reports under Section 13(a) of the Exchange Act to provide disclosure if, during the reporting period, it or any of its affiliates knowingly engaged in certain specified activities involving contacts with or support for Iran or other identified persons involved in terrorism or the creation of weapons of mass destruction. ITRSHRA was self-executing and required no substantive rulemaking by the Commission.

2. Commission Responses to Market Developments

Our disclosure regime includes requirements that we have adopted in response to market developments or advancements in technology. In response to the disorderly markets and damage to investors caused by the hot issue securities markets between 1967 and 1971, the Commission initiated hearings to determine the adequacy of existing disclosure requirements

and adopted new disclosure requirements to elicit more meaningful information concerning all registrants and to communicate more effectively the economic realities of new registrants.

Similarly, in 1994 in response to significant and sometimes unexpected losses in market risk sensitive instruments due to, among other things, changes in interest rates, foreign currency exchange rates and commodity prices, the Commission adopted Item 305 (quantitative and qualitative disclosures about market risk).

Hot issues result when the price of a new issuance of securities rises to a substantial premium over the initial offering price immediately or soon after the securities are first distributed to the public. In 1967-1971, the new issues markets experienced a resurgence.

See Report of the Securities and Exchange Commission Concerning the Hot Issues Markets,

August 1984,

available at http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1980/1984_0801_SECHotIssuesT.pdf

. Between 1968 and 1970, the value of stocks traded on national securities exchanges fell a total of $78.8 billion, from $759.5 billion to $680.7 billion.

See

Securities and Exchange Commission, Thirty-Seventh Annual Report, appendix Table 5 at 221 (1971)

available at https://www.sec.gov/about/annual_report/1971.pdf

See

New Ventures, Meaningful Disclosure, Release No. 33-5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)] (“Hot Issues Adopting Release”).

See

Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments, Release No. 33-7386 (Jan. 31, 1997) [62 FR 6044 (Feb. 10, 1997)] (“Disclosure of Market Risk Sensitive Instruments Release”).

Significant advancements in technology have also prompted some of our disclosure requirements. The

Commission's efforts in Securities Offering Reform recognized the impact of technology on market demand for more timely corporate disclosure and the ability of issuers to capture, process, and disseminate this information.

Similarly, modernization of our oil and gas rules was intended to update oil and gas disclosure requirements to align them with current practices and changes in technology.

See

Aircraft Carrier Release; Securities Offering Reform Release.

See

Modernization of Oil and Gas Reporting, Release No. 33-8995 (Dec. 31, 2008) [74 FR 2157 (Jan. 14, 2009)] (“Oil and Gas Release”).

We are considering changes to our disclosure requirements and seeking public input on how our disclosure requirements could be improved for the benefit of investors and registrants and whether the requirements could be revised to adapt to future changes in market conditions and advancements in technology. We also are seeking input on the utility of mechanisms such as sunset provisions or temporary rules.

a. Comments Received

S-K Study.

One commenter stated that a sunset provision would require the Commission to consider changes in the economic, business and regulatory landscape in assessing whether new disclosure requirements should be made permanent.

For significant new disclosure requirements, this commenter suggested a sunset provision of five or ten years and that formal Commission action should be required to indefinitely extend or modify any significant new disclosure requirement.

See

letter from Ernst & Young (Sept. 11, 2012) (“Ernst & Young 1”).

Disclosure Effectiveness Initiative.

We received a few comment letters that discussed potential regulatory mechanisms to review and update our disclosure requirements.

To determine the continuing need for disclosures in light of the then current economic, business and regulatory landscape, one commenter suggested a formal, post-adoption review process for significant new disclosure requirements.

This review process, or “sunset review,” would require formal Commission action to make a new disclosure requirement permanent. Another commenter recommended that the Commission develop a mechanism to timely update disclosure requirements to address new topical issues and to delete existing disclosure when the informational value for investors is diminished.

One commenter generally recommended sunset rules and finding a means to evaluate user demand and disclosure effectiveness for potentially outdated requirements.

See, e.g.,

letters from the Society of Corporate Secretaries and Governance Professionals (Sept.10, 2014) (“SCSGP”), Securities Industry and Financial Markets Association (Oct. 13, 2014) (“SIFMA”), and letter and articles referenced therein from Arthur J. Radin (May 29, 2015) (“A. Radin”).

See

SCSGP. This commenter also suggested that the staff issue “closing guidance” when topics on which the staff had previously focused are no longer areas of primary concern. The commenter cited 2003 MD&A guidance on disclosure of critical accounting policies estimates as an example of guidance that could be considered closed.

See

Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operation, Release No. 33-8350 (Dec. 19, 2003) (“2003 MD&A Interpretive Release”) [68 FR 75056 (Dec. 29, 2003)]. This commenter stated “it is not clear that investors are unaware of the uncertainties associated with the methods, assumptions and estimates underlying a company's critical accounting measurements.”

See

SIFMA. This commenter did not propose a particular mechanism that the Commission should use.

See

A. Radin.

b. Discussion

When adopting disclosure requirements that have departed from traditional disclosure concepts, the Commission has historically taken an incremental approach to change by first adopting modest revisions and then expanding their application after observing and evaluating the rules' effectiveness. For example, the initial adoption of simplified registration and reporting requirements for smaller businesses on Form S-18 were “in the nature of an experiment”

and a departure from traditional disclosure concepts.

After observing relative, widespread acceptance of Form S-18 and the absence of significant disclosure or enforcement problems, the Commission expanded the form's availability,

and it eventually served as a model for our current system of scaled disclosure for SRCs.

See

Simplified Registration and Reporting Requirements for Small Issuers, Release No. 33-6049 (Apr. 3, 1979) [44 FR 21562 (Apr. 10, 1979)] (“Form S-18 Release”) at 21564.

Id.

at 21562 (“The Commission will monitor closely the use of Form S-18 for an appropriate period . . .”).

See

Availability of Simplified Registration Form to Certain Mining Companies, Release No. 33-6299 (Mar. 27, 1981) [46 FR 18947 (Mar. 27, 1981)].

See also

Revisions to the Optional Form for the Registration of Securities to Be Sold to the Public by the Issuer for an Aggregate Cash Price Not To Exceed $5,000,000, Release No. 33-6406 (June 4, 1982) [47 FR 25126 (June 10, 1982)] (expanding Form S-18's availability to non-corporate registrants and registrants engaged, or to be engaged, in oil and gas related operations).

See

Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 4, 2008)] (“SRC Adopting Release”). In adopting the current scaled disclosure regime, the Commission stated “[t]he amendments that we are adopting address the need to revisit and adjust the Commission's small company policies to reflect changes in our securities markets as well as changes to the regulatory landscape since 1992, when the Commission first adopted an integrated scaled disclosure system for small business in Regulation S-B. The Commission adopted Regulation S-B and its associated Forms SB-1 and SB-2 based upon the success of Form S-18 . . .”

The Commission has, on occasion, adopted temporary rules or rules with automatic sunset provisions to better assess the effect of or necessity for a particular rule before adopting the rule on a permanent basis. For example, Securities Act Rule 415, which permits delayed and continuous offerings under certain circumstances, was initially adopted on a temporary basis for a period of nine months during which the Commission monitored the operation and impact of the new rule.

Following public hearings and comment on Rule 415, the Commission determined additional experience with the rule was necessary to study its operation and impact

and extended the temporary nature of this rule.

The Commission permanently adopted Rule 415 following 18 months of monitoring the operation and impact of the rule.

See

1982 Integrated Disclosure Adopting Release.

See

Delayed or Continuous Offering and Sale of Securities, Release No. 33-6423 (Sept. 2, 1982) [47 FR 39799 (Sept. 10, 1982)].

Id.

In June 1983, the Commission published the shelf registration rule for comment again in order to provide all interested parties another opportunity to share their views and experience under the Rule before the Commission made its final determination.

See

Delayed or Continuous Offering and Sale of Securities, Release No. 33-6470, (June 9. 1983) [48 FR 27768 (June 17, 1983)].

See

Shelf Registration, Release No. 33-6499 (Nov. 17, 1983) [48 FR 52889 (Nov. 23, 1983)].

While the Commission acted to permanently adopt Rule 415, it has allowed other temporary rules to expire. The Commission adopted on a temporary basis Securities Act Rules 702 and 703. Rule 702 required the filing of a Form 701 after sales under Rule 701 exceeded a particular threshold. Rule 703 disqualified registrants from relying on the Rule 701 exemption from registration where the registrant failed to make the filing required by Rule 702.

In adopting Rules 702 and 703, the Commission noted the importance of monitoring new exemptive provisions and stated that it would use Form 701 to “assess the utility of the exemption and, oversee

any abuses.”

The Commission did not extend Rules 702 and 703 based on its belief that the sunset of these rules had not compromised investor interests and that their reinstitution of the rules would serve little purpose.

See

Compensatory Benefit Plans and Contracts, Release No. 33-6768 (Apr. 14, 1988) [53 FR 12918 (Apr. 20, 1988)] (adopting Rule 701, an exemption from registration for certain offers and sales made pursuant to the terms of compensatory benefit plans or written compensation agreements for issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and adopting rules 702 and 703 on a temporary basis of five years).

See

Regulation D Revisions; Exemption for Certain Employee Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan. 30, 1987)] at 3021.

See

Phase One Recommendations of Task Force on Disclosure Simplification Release.

Even in the absence of a temporary rule or sunset provision, the Commission has undertaken efforts to study the effects of new rules or amendments. The Commission uses these studies to guide future amendments or rulemaking. For example, our staff has examined the effects on capital formation through private placements after adoption of amendments to Regulation D in accordance with the JOBS Act.

In adopting amendments to Rule 506 of Regulation D

to eliminate the prohibition against general solicitation for a subset of Rule 506 offerings, the Commission stated that the staff will monitor developments in the market for these offerings.

In addition, in connection with recently adopted amendments to Regulation A, an exemption from registration for smaller issues of securities, and the adoption of Regulation Crowdfunding, a new exemption for smaller securities offerings using the Internet through crowdfunding, the Commission stated, in each case, that the staff will study and submit a report to the Commission on the impact of the regulation on capital formation and investor protection.

Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov,

Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014,

Oct. 2015,

available at

https://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf

17 CFR 230.506.

See

Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (July 20. 2013) [78 FR 44771 (July 24, 2013)].

See

Amendments to Regulation A, Release No. 33-9741 (Mar. 25, 2015) [80 FR 21805 (Apr. 20, 2015)] (“2015 Regulation A Release”);

See

Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] (“Crowdfunding Adopting Release”). When proposing the crowdfunding rules, the Commission directed the staff to develop a work plan to review and monitor use of the crowdfunding rules, focusing on the types of issuers using the exemption, level of compliance by issuers and intermediaries, and whether the exemption is promoting new capital formation while providing key protections for investors.

See

Crowdfunding, Release No. 33-9470 (Oct. 23, 2013) [78 FR 66427 (Nov. 5, 2013)].

Requiring affirmative Commission action to extend or make permanent certain requirements, the utility of which may change over time, could require us to more frequently consider the effectiveness of our requirements. Alternatively, the Commission could commit to studying the impact of certain rule changes on a specified schedule, without making the rules temporary or applying automatic sunset provisions. Any such review would be in addition to the periodic review currently required by the Regulatory Flexibility Act (“RFA”),

under which the Commission reviews its rules that have a significant economic impact on a substantial number of small entities within ten years of their publication as final rules.

These approaches would, however, require significant Commission resources and could compete with other Commission priorities.

[5 U.S.C. 610(a)].

Each year, since 1981, the Commission provides the public with notice that these rules are scheduled for review and invites public comment on whether the rules should be continued without change, or should be amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities. As a matter of policy, the Commission reviews all final rules that are published for notice and comment to assess not only their continued compliance with the RFA, but also to assess generally their continued utility.

See, e.g.,

List of Rules to be Reviewed Pursuant to the Regulatory Flexibility Act, Release No. 33-9965 (Oct. 22, 2015) [80 FR 65973 (Oct. 28, 2015)]. In the past, the Commission has received little or no comment on the rules that it publishes for review.

c. Request for Comment

1. Should the Commission consider including automatic sunset provisions in new disclosure requirements? If so, what types of disclosure requirements should include these provisions? What factors should we consider in identifying them? What would be an appropriate length of time for any sunset provisions? Would this length of time vary with the nature of the rule in question?

2. What are the advantages and disadvantages of automatic sunset provisions? Would automatic sunset provisions result in unnecessary regulatory uncertainty for investors or registrants?

3. How would the use of automatic sunset provisions affect registrants, investors and other users of disclosure? Would registrants, investors or other users incur increased costs associated with the use of automatic sunset provisions?

4. Should we consider requiring the staff to study and report to the Commission on the impact of new disclosure requirements when adopting them, in addition to the review the Commission performs under the RFA? For what type of disclosure requirements would such an approach be appropriate? What are the advantages and disadvantages of such a study and report on a new rule?

5. Are there other ways our disclosure requirements could be revised to adapt more easily to future market changes and technological advancements?

B. Nature of Our Disclosure Requirements

The concept of materiality has been described as “the cornerstone” of the disclosure system established by the federal securities laws.

Schedule A to the Securities Act identifies certain categories of information that are generally viewed as material to investors.

Those categories are incorporated and expanded upon in the categories of information that registrants are required to disclose under Regulation S-K.

See

Sommer Report at 320.

See id.

at 324.

In creating and implementing our system of integrated disclosure, identification of material information was one of two principal objectives. In the 1982 Integrated Disclosure Adopting Release, the Commission stated:

The Commission's program to integrate the disclosure systems has focused on two principal objectives: First, a comprehensive evaluation of the disclosure policies and procedures under both Acts to identify the information which is material to security holders and investors in both the distribution process and the trading markets . . . and, second, a determination of the circumstances under which information should be disseminated to security holders, investors and the marketplace.

See

1982 Integrated Disclosure Adopting Release at 11382.

See also

Proposed Comprehensive Revision to System for Registration of Securities of Securities Offerings, Rel. No. 33-6235 (Sept. 2, 1980) [45 FR 63693 (Sept. 25, 1980)] (“1980 Proposed Revisions”) at 63694. This proposing release states “[t]he shape of the [Commission's integrated disclosure] program will be influenced by the answer to two fundamental questions: (1) What information is material to investment decisions in the context of public offerings of securities; and (2) Under what circumstances and in what form should such material information be disseminated and made available by companies making public offerings of securities to the various participants in the capital market system? The task of identifying what information is material to investment and voting decisions is a continuing one in the field of securities regulation.”

The Commission adopted line-item requirements in Regulation S-K and its predecessors to provide investors with specific disclosure within broad categories of material information.

Through its disclosure requirements, the Commission has adopted different approaches to guide registrants in

evaluating materiality for purposes of disclosure, including in some cases using quantitative thresholds to address uncertainty in the application of materiality.

See

Sommer Report at 324.

1. Principles-Based and Prescriptive Disclosure Requirements

Principles-based disclosure requirements.

Many of our rules require disclosure when information is material to investors.

These rules rely on a registrant's management to evaluate the significance of information in the context of the registrant's overall business and financial circumstances and determine whether disclosure is necessary.

The requirements are often referred to as “principles-based” because they articulate a disclosure objective and look to management to exercise judgment in satisfying that objective.

On several occasions, the Commission has reiterated that its requirements seek disclosure of material information.

See, e.g.,

Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 8, 2010) [75 FR 6290 (Feb. 8, 2010)] (“Climate Change Release”) at 6292-6293 (stating “During the 1970s and 1980s, materiality standards for disclosure under the federal securities laws also were more fully articulated. Those standards provide that information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or, put another way, if the information would alter the total mix of available information.”); Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies, Investment Advisers, Investment Companies, and Municipal Securities Issuers, Release No. 33-7558 (Jul. 29, 1998) [63 FR 41394 (Aug. 4, 1998)] (“Year 2000 Release”) at 41395 (stating “Our disclosure framework requires companies to disclose material information that enables investors to make informed investment decisions.”); Timely Disclosure of Material Corporate Events, Release No. 33-5092 (Oct. 15, 1970) [35 FR 16733 (Oct. 29, 1970)] at 16733-16734 (“Notwithstanding the fact that a company complies with such [annual, semi-annual and current] reporting requirements, it still has an obligation to make full and prompt announcements of material facts regarding the company's financial condition . . . Corporate managements are urged to review their policies with respect to corporate disclosure and endeavor to set up procedures which will insure that prompt disclosure be made of material corporate developments . . .”).

See also

A.A. Sommer Jr,.

The U.S. SEC Disclosure Study,

1 U. Pa. J. Int'l L. 145, 148 (1978) (“[T]he Committee did not believe that the Commission should design a variety of formats and degrees of summarization to serve the diverse needs of various investors. It is evident that the sophistication and knowledge of investors varies broadly, from the small, occasional [investor] through the sophisticated portfolio managers. The Committee believed that by having the Commission concentrate on the needs of sophisticated investors, the needs of other types of investors would be adequately served through the many private services which collect, synthesize, summarize and comment upon data concerning issuers.”).

146

Sommer Report at D-9. The Advisory Committee on Corporate Disclosure identified as information disseminators the “organizations commonly thought of as the financial press,”

id.

at 163, that “condense, summarize and disseminate available information and thereby assist analysts and investors in obtaining investment decision making information in forms suitable to their respective needs and abilities to use it.”

Id.

at D-5.

When adopting format and content changes to Form 10-K and the annual report to security holders as part of integrated disclosure, the Commission characterized users of Form 10-K as different from users of the annual report to security holders.

147

Specifically, the Commission viewed annual reports to shareholders as readable documents designed to be delivered to shareholders

148

and stated that the disclosure requirements in these reports “evolved in the context of shareholders making voting decisions.”

149

Meanwhile, the Commission noted that Form 10-K was a more technical document,

150

and the Form 10-K disclosure was developed for “investors and other users making economic decisions about the company.”

151

The Commission further noted that the most frequent users of Form 10-K disclosure were institutional investors, professional security analysts and sophisticated individual investors.

147

See

Amendments to Annual Report Form, Related Forms, Rules, Regulations and Guides; Integration of Securities Act Disclosure Systems, Release No. 33-6231, (Sept. 2, 1980) [45 FR 63630 (Sept. 25, 1980)] (“1980 Form 10-K Adopting Release”).

148

See

Proposed Amendments to Annual Report Form; Integration of Securities Acts Disclosure Systems, Release No. 33-6176 (Jan. 15, 1980) [45 FR 5972 (Jan. 24, 1980)] (“1980 Form 10-K Proposing Release”).

See also

1980 Form 10-K Adopting Release, citing Annual Reports—Information Required in Proxy Statement, Release No. 34-10591 (Jan. 10, 1974) [39 FR 3820 (Jan. 30, 1974)] for the statement that “[t]he annual report to security holders has long been recognized as the most effective means of communication between management and security holders. Such reports are readable because they generally avoid legalistic and technical terminology and present information in an understandable, and often innovative, form . . . The Commission believes it is in the public interest that all security holders be provided with meaningful information regarding the business, management, operations and financial position of the issuer and that the annual report to security holders is the most suitable vehicle presently available for providing this information.”

See also

Annual Reports, Release No. 34-11079 (Oct. 31, 1974) [39 FR 40766 (Nov. 20, 1974)] at 40766.

149

1980 Form 10-K Adopting Release at 63630.

150

See

1980 Form 10-K Proposing Release.

151

1980 Form 10-K Adopting Release at 63630.

In the adopting release for these changes, the Commission stated its belief that focusing primarily on these frequent users is appropriate in formulating Form 10-K disclosure requirements, but “such a focus would not be appropriate in formulating requirements for annual reports to security holders.”

152

While the Commission acknowledged the benefit of uniformity of certain minimum disclosures in the annual report to security holders and the Form 10-K, it stated that not all disclosure requirements would be identical between the Form 10-K and the annual report to security holders, which potentially served different purposes and user constituencies.

152

Id.

a. Comments Received

S-K Study.

Two commenters noted that, in some contexts, customers, vendors and competitors of registrants typically understand certain disclosures, but that the same information is likely to be less meaningful to investors who typically would lack the necessary industry-specific knowledge and interest.

153

See

Silicon Valley and M. Liles.

Disclosure Effectiveness Initiative.

Two commenters discussed the profile of the investor contemplated by our disclosure requirements and the intended audience for public company disclosures.

154

Both commenters recommended that we should assume that investors using registrants' disclosures have some level of sophistication. One of these commenters suggested that a contributing factor to increased disclosure is the current assumption that the typical investor is a novice.

155

The other commenter

recommended an empirical study of the audience for financial statements and a review of who makes investment decisions and how such decisions are made.

156

This commenter stated that sophisticated investors are likely the most appropriate audience for Commission filings, as they are generally the investors performing detailed analysis and acting as price-makers. This commenter also stated that most of these investors do not express concern about the volume of disclosure.

154

See, e.g.,

CFA Institute; Shearman.

155

See

Shearman (stating “it seems that disclosure if often premised on the assumption that the reasonable investor has little or no knowledge of a company's business, its industry or the merits or risks associated with its business. We believe

that the profile of the reasonable investor has devolved to the `neophyte investor' . . .”).

156

See

CFA Institute.

One commenter suggested that current disclosure is too complicated for the everyday person to read and that it should be less duplicative and more straightforward.

157

Another commenter noted the diversity of the investor community and that the Commission's mandate is to protect all investors.

158

This commenter acknowledged that some disclosures may not be useful to retail investors but may be useful to institutional investors or vice versa and that in such circumstances, disclosure should still be required. This commenter also stated that each segment of the investor community is “entitled to have access to all necessary and relevant information.” Additionally, this commenter noted that broad based disclosure improves transparency and builds public trust, confidence and understanding of capital markets.

157

See

letter from Carrie Devorah (Sept. 25, 2015).

158

See

letter from the American Federation of Labor and Congress of Industrial Organizations (Nov. 20, 2015) (“AFL-CIO”).

b. Discussion

We recognize the diverse composition and varied informational needs, sophistication and financial resources of investors and that some investors may obtain their analysis or advice from or through third parties who use registrant disclosures. Investors using registrant disclosure directly may include both individual investors and institutional investors, such as banks, insurance companies, mutual funds, exchange traded funds, pension funds, hedge funds and managed accounts. These investor types may also use registrant disclosure indirectly through professional data aggregators, financial advisors, proxy advisors, professional analysts, journalists, and other third parties who process and synthesize disclosures for end user investors.

Different investor types and third parties may focus on different filings or items of disclosure.

159

Accordingly, the audience for disclosure is an important consideration in determining the means for disclosure, and specifically, in which filings or locations certain information should be directly provided and where cross-references, hyperlinks or incorporating by reference to information elsewhere is appropriate.

160

159

See, e.g.,

1980 Form 10-K Adopting Release.

See also

S-K Study at 32, footnote 88.

185

See

1977 Regulation S-K Adopting Release.

186

Id.

at 65553. (“The disclosure requirement relating to descriptions of products or services has also been amended to delete the requirement that changes in the kinds of products produced or services rendered or in the markets or methods of distribution during the past three fiscal years be discussed. Any material changes would be required to be described pursuant to paragraph (a) of the item.”).

Business developments and other disclosure called for by Item 101(a)(1) are often reflected elsewhere in the filing, such as in the financial statements or MD&A. Additionally, in 2004, the Commission expanded the number of reportable events on Form 8-K to include items that may result in disclosure that overlaps with the requirements of Item 101(a)(1), such as disclosure of entry into a material definitive agreement, including business combination agreements.

187

See

Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69 FR 15594 (Mar. 25, 2004)] (“2004 Form 8-K Adopting Release”).

c. Request for Comment

24. Does the current requirement in Item 101(a)(1) to describe the general development of a registrant's business during the past five years provide useful disclosure that is not available either elsewhere in the current filing (

e.g.,

MD&A or the notes to the financial

statements) or in any prior filing, including current reports on Form 8-K? Should we require additional or more specific information under Item 101(a)(1) and, if so, what type of information and why?

25. How could we improve Item 101(a)(1)? For example, is the five-year time frame for this disclosure appropriate? Would a shorter or longer time frame be more appropriate? If so, what time frame would be appropriate and why?

26. Does this disclosure continue to be useful for registrants with a reporting history? Once a registrant has disclosed this information in a registration statement should we allow registrants to omit this disclosure from subsequent periodic reports unless material changes occur? Alternatively, should we require registrants to describe its business as currently conducted as well as any material changes that have occurred in the last five years?

27. Should we revise Item 101(a)(1) to require disclosure of a registrant's business strategy? Would investors find such a disclosure important or useful? If so, should this requirement be included in a registrant's MD&A? Should we define “business strategy”? If so, how?

28. Should we permit a summary disclosure of the general development of a registrant's business in all filings except the initial filing? For example, should we require a more detailed discussion of a registrant's business in the initial filing, and in subsequent filings only require a summary of the registrant's business along with a discussion of material changes in the business as previously disclosed in the registrant's Form 10-K? Alternatively, should we require a more detailed discussion of a registrant's business on a periodic basis, such as every three years, and a summary disclosure in other years? Should any such requirement be conditioned on timely reporting or some other consideration?

29. What types of investors or audiences are most likely to value the information required by Item 101(a)(1)?

30. What is the cost of providing the disclosure required by Item 101(a), including the administrative and compliance costs of preparing and disseminating this disclosure? How would these costs change if we made any of the changes contemplated here? Please provide quantified estimates where possible and include only those costs associated with providing disclosure under Item 101(a).

2. Narrative Description of Business (Item 101(c))

While Item 101(a) requires disclosure of the general development of the business, Item 101(c) requires a narrative description of a registrant's business and identifies thirteen specific items that must be disclosed:

188

17 CFR 229.101(c). Item 101(c)(1) specifies that, to the extent material to an understanding of the registrant's business taken as a whole, the description of each segment must include the information specified in subsections (i) through (x). Information in subsections (xi) to (xiii) is required to be discussed for the registrant's business in general; where material, the segments to which these matters are significant also must be identified.

(i) principal products produced and services rendered;

(ii) new products or segments;

(iii) sources and availability of raw materials;

(iv) intellectual property;

(v) seasonality of the business;

(vi) working capital practices;

(vii) dependence on certain customers;

(viii) dollar amount of backlog orders believed to be firm;

(ix) business subject to renegotiation or termination of government contracts;

(x) competitive conditions;

(xi) company-sponsored research and development activities;

(xii) compliance with environmental laws; and

(xiii) number of employees.

a. Comments Received

S-K Study.

Two commenters recommended eliminating the requirement in Item 101(c) to disclose the amount of backlog orders believed to be firm for EGCs, stating the concept of backlog is not a “meaningful metric” for most of these companies.

189

These commenters stated that eliminating this requirement for EGCs would not “compromise the delivery of meaningful disclosure to investors.” These commenters also raised the question of whether the concept of backlog (or for businesses other than industrials, some other measure of committed revenue that is not yet reflected in the financial statements) would be addressed more appropriately in MD&A. Another commenter recommended eliminating disclosure requirements that no longer apply due to market or other changes and noted backlog as an example.

190

This commenter recommended eliminating this requirement for all registrants, not only EGCs, or moving this requirement to MD&A.

189

See

Silicon Valley and M. Liles. Item 101(c)(1)(viii) requires disclosure of the dollar amount of backlog orders believed to be firm, as of a recent date and as of a comparable date in the preceding fiscal year, together with an indication of the portion thereof not reasonably expected to be filled within the current fiscal year, and seasonal or other material aspects of the backlog.

190

See

Ernst & Young 1.

Disclosure Effectiveness Initiative.

One commenter stated that many of the subsections of Item 101(c) would be more appropriately addressed elsewhere in the filing, stating that when such information is material to a registrant, investors would be better served by having the registrant address that information in its MD&A or risk factors.

191

See

SCSGP (stating that the following subsections of Item 101 would be more useful if included in MD&A: backlog ((c)(1)(viii)), working capital practices ((c)(1)(vi)), sources and availability of raw materials ((c)(1)(iii)), dependence on certain customers ((c)(1)(vii)), competitive conditions ((c)(1)(x)), compliance with environmental laws ((c)(1)(xii)) and risks attendant to foreign operations ((d)(3))).

b. Discussion

Consistent with Schedule A of the Securities Act, the earliest forms of registration statements and annual reports required a brief outline of the general character of the business done and intended to be done by a registrant.

192

Many of the disclosure requirements that currently appear in Item 101(c) were adopted in 1973 following investigation of the hot issues markets.

193

The adopting release notes that, in making investment decisions, venture capitalists and underwriters typically obtain specific information from companies about their competitive position and the methods of competition in their respective industries, and accordingly, the new requirements were expected to provide similar information to the investing public.

194

At the same time, the Commission also added requirements for the disclosure of the amount of backlog orders, the sources and availability of raw materials essential to the business, the number of employees and working capital practices.

195

192

See, e.g.,

Item 5 of Form A-2 adopted in 1935, which required registrants to outline briefly “the general character of the business done and intended to be done by the registrant and its subsidiaries.”

See

Release No. 33-276 (Jan. 14, 1935) [

not published in the

Federal Register

]. Additionally, Items 3 through 5 of Form A-1, adopted in 1933, required registrants to briefly describe the “character of business done or intended to be done,” disclose a list of states where the issuer owned property and was qualified to do business, and the length of time the registrant had been engaged in its business.

See

Release No. 33-5 (July 6, 1933) [

not published in the

Federal Register

See also

S-K Study at 32, footnote 88.

193

See

Hot Issues Adopting Release.

See also

Hot Issues; Meaningful Disclosure, Release No. 33-5274 (July 26, 1972) [37 FR 16005 (Aug. 9, 1972)].

194

See

Hot Issues Adopting Release.

195

See id.

In the S-K Study, the staff recommended reviewing the description of business for continuing relevance in

light of changes that have occurred in the way businesses operate, which may make other disclosures relevant that are not expressly addressed under current requirements.

196

As an example, the S-K Study noted that requirements could be more specific as to additional disclosure that would be necessary where a business relies heavily on intellectual property owned by a third party or relies on a service agreement with third parties to perform necessary business functions.

197

196

See

S-K Study at 99-100.

197

Below, and in other parts of this release, we discuss other areas where our requirements could be revised to reflect changes in the way businesses operate.

c. Request for Comment

31. Do the disclosure requirements in Item 101(c) continue to provide useful information to investors? How could we improve Item 101(c)'s requirements?

32. How could we update Item 101(c) to better reflect changes in the way businesses operate? Are there particular categories or types of registrants for which these disclosure requirements are more or less relevant?

33. Are there additional line-item disclosure requirements about a registrant's business that would improve the quality and consistency of disclosure? Are there any categories of information that certain registrants voluntarily provide, and are not required to disclose under Item 101(c), that we should include in Item 101(c)?

198

What would be the benefits and challenges of requiring disclosure of additional categories of information?

198

For example, the staff has observed that many registrants provide disclosure about the regulatory environment in which their business operates although no specific line-item disclosure requirement for this exists.

34. Currently, some registrants include in their business section a general description of their industry. Should industry disclosure be a separate requirement? If so, would this requirement be more useful to investors in the business section or in MD&A?

35. Should we require additional specific disclosure relevant to particular industries, such as manufacturing or technology companies? If so, which industries and why? What are the benefits and challenges of requiring industry-specific disclosure?

199

For a discussion of industry-specific disclosures,

see

Section IV.E.

36. What is the impact on disclosure of listing the thirteen item requirements in Item 101(c)? In practice, do registrants view Item 101(c) as a checklist? Do the prescriptive items result in disclosure of information that is not important by some registrants?

37. Should we require Item 101(c) disclosure only in the initial filing with follow-up disclosure of any material changes for subsequent years? Should any such requirement be conditioned on timely reporting or some other consideration? Should the requirements differ for registration statements and periodic reports?

38. Is there any information currently disclosed in the description of business that should be presented in a different context such as MD&A or risk factors? Why?

39. In some circumstances, disclosure is required under Item 101(c)(1) if material. The item specifies that, to the extent material to an understanding of the registrant's business taken as a whole, the description of each segment shall include the information in (c)(1)(i) through (x) and that matters in (c)(1)(xi) through (xiii) shall be discussed for the registrant's business in general; where material, the segments to which these matters are significant shall be identified. Additionally, some sub-items of Item 101(c)(1) require disclosure if material, such as (c)(1)(ii) and (c)(1)(ix),

200

while others do not.

201

Should we require disclosure of all line items in Item 101(c) in all circumstances, regardless of materiality? Why or why not? Alternatively, would a principles-based approach to disclosure about a registrant's business and operations allow flexibility to disclose information that is important to investors? If so, how should such a disclosure requirement be structured? What factors should we consider in developing such a requirement?

200

For example, Item 101(c)(1)(ii) requires a description of the status of a product or segment (

e.g.,

whether in the planning stage, whether prototypes exist, the degree to which product design has progressed or whether further engineering is necessary), if there has been a public announcement of, or if the registrant otherwise has made public information about, a new product or segment that would require the investment of a material amount of the assets of the registrant or that otherwise is material. In addition, Item 101(c)(1)(ix) requires a description of any material portion of the business that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.

201

For example, Item 101(c)(1)(xiii) requires disclosure of the number of persons employed by the registrant.

40. What types of investors or audiences are most likely to value the information required by Item 101(c)? Would an alternative format or presentation of the information improve the value of such disclosure to a particular type of investor or audience? If so, what type of format or presentation?

41. What is the cost of providing the disclosure required by Item 101(c), including the administrative and compliance costs of preparing and disseminating this disclosure? How would these costs change if we made any of the changes contemplated here? Please provide quantified estimates where possible and include only those costs associated with providing disclosure under Item 101(c).

3. Technology and Intellectual Property Rights (Item 101(c)(1)(iv))

Item 101(c)(1)(iv) requires disclosure of the importance to the segment and the duration and effect of all patents, trademarks, licenses, franchises and concessions held.

202

17 CFR 229.101(c)(1)(iv).

a. Comments Received

S-K Study.

None

Disclosure Effectiveness Initiative.

None.

b. Discussion

A broad range of industries benefit from intellectual property, both directly and indirectly,

203

and intellectual property has become increasingly important to business performance.

204

Certain industries produce or use significant amounts of intellectual property or rely more heavily on these rights.

205

Accordingly, certain registrants provide detailed disclosure in response to Item 101(c)(1)(iv), and disclosure varies among registrants and across industries.

203

See

Economics and Statistics Administration and United States Patent and Trademark Office,

Intellectual Property and the U.S. Economy: Industries in Focus

(March 2012) at iv,

available at

http://www.uspto.gov/sites/default/files/news/publications/IP_Report_March_2012.pdf

(“Intellectual Property and the U.S. Economy”).

204

See, e.g.,

Kelvin W. Willoughby,

What impact does intellectual property have on the business performance of technology firms?,

Int. J. Intellectual Property Management, Vol. 6, No. 4 (2013).

205

See

Intellectual Property and the U.S. Economy. This report identifies seventy-five industries as “IP-intensive.” In this report, patents, trademarks and copyrights were the categories of intellectual property assessed. The methodology for designating each of these subcategories as “IP-intensive” is outlined further in this report. For patent intensive industries, the report utilized the North American Industry Classification System (NAICS) codes and identified, as the four most patent-intensive industries, those industries classified in computer and electronic product manufacturing (NAICS 334). This three-digit NAICS industry includes computer and peripheral equipment; communications equipment; other computer and electronic products; semiconductor and other electronic components; and navigational, measuring, electro-medical, and control instruments.

In the biotechnology and pharmaceutical industries, registrants that provide detailed patent disclosure often disclose the jurisdiction in which the patent was filed, year of expiration, type of patent (

e.g.,

composition of

matter, method of use, method of delivery or method of manufacturing), products or technologies to which the patent relates and how the patent was acquired (

e.g.,

licensed from another entity or owned and filed by the registrant). Some registrants in these industries aggregate patent disclosure by groups of patents, potentially making disclosure about individual material patents difficult to discern. As registrants in the biotechnology and pharmaceutical industries regularly sell one or a few patented products that generate substantial revenue, disclosure of “patent cliffs,”

206

which often result in material adverse financial effects, may be required in the risk factors section or MD&A.

206

The term “patent cliff” as used in the biotechnology and pharmaceutical industry refers to a future loss of patent protection and consequential loss of revenue. These potential future losses are known to registrants far in advance of their onset. When they occur, they often precipitate material adverse financial effects.

See, e.g.,

Andrew Jack,

Pharma tries to avoid falling off `patent cliff,'

Financial Times, May 6, 2012 and

Cliffhanger,

Economist, Dec. 3, 2011.

See also

Ed Silverman,

Big Pharma Faces Some Big Patent Losses, but Pipelines are Improving,

Wall St. J.: L. Blog,

available

http://blogs.wsj.com/pharmalot/2015/02/09/big-pharma-faces-some-big-patent-losses-but-pipelines-are-improving/

In the information technologies and services industry, registrants protect their intellectual property through the use of patents, trademarks, copyrights, trade secrets, licenses and confidentiality agreements.

207

Registrants with large portfolios of intellectual property often disclose that their products, services and technologies are not dependent on any specific patent, trademark, copyright, trade secret or license. As a result, these registrants often provide only high-level discussions of their intellectual property portfolios, which include general statements of a registrant's development, use and protection of its intellectual property. Registrants with smaller intellectual property portfolios tend to provide slightly more detailed discussions, including, for example, disclosure of their total number of issued patents, a range of years during which those patents expire and their total number of pending patent applications.

207

See

Bruce Abramson,

Promoting Innovation in the Software Industry: A First Principles Approach to Intellectual Property Reform,

8 B.U. J. Sci. & Tech. L. 75 (2002) (discussing the software industry's use of intellectual property law).

In general, registrants in the information technologies and services industry use copyrights to protect against the unauthorized copying of software programs

208

and trade secrets to protect proprietary and confidential information that derives its value from continued secrecy.

209

Since Item 101(c)(1)(iv) does not require disclosure about copyrights or trade secrets, registrants currently make disclosure about such matters voluntarily.

208

See

Dennis S. Karjala,

9 Cornell J.L. & Pub. Pol'y 161, 172 (1999) (discussing the dependence of software technology companies on copyright).

209

See

Raymond T. Nimmer & Patricia Ann Krauthaus,

Software Copyright: Sliding Scales and Abstracted Expression,

32 Hous. L. Rev. 317, 325 (1995) (distinguishing between the software industry's use of trade secret law, patent law and copyright law).

c. Request for Comment

42. Should we retain the current scope of Item 101(c)(1)(iv), which requires disclosure of a registrant's patents, trademarks, licenses, franchises and concessions? Should we expand the rule to include other types of intellectual property, such as copyrights? Should we remove the individual categories and instead require disclosure of “intellectual property”? If so, should we define that term and what should it encompass?

43. What, if any, additional information about a registrant's reliance on or use of technology and related intellectual property rights should we require and why? Should we revise Item 101(c)(1)(iv) to require more detailed intellectual property disclosure, similar to the disclosure currently provided by some biotechnology and pharmaceutical registrants? If so, should we require such detailed disclosures for all or only some of a registrant's intellectual property, such as those that are material to the business?

44. For registrants with large intellectual property portfolios, does aggregate disclosure of the total number of patents, trademarks and copyrights and a range of expiration dates provide investors with sufficient information? If not, what additional information do investors need about a company's portfolio of intellectual property? Would tabular disclosure or an alternate format or presentation of a registrant's intellectual property portfolio make the information more useful to investors? What would be the benefits and challenges of requiring disclosure of this information in this format?

45. Should we limit these disclosure requirements to registrants in particular industries? If so, which industries should we specify and why? Is disclosure about a registrant's intellectual property most useful in the context of the description of business, disclosure about trends and developments affecting results of operations, or in a discussion of risk and risk management?

46. What are the competitive costs of disclosure under Item 101(c)(1)(iv)?

4. Government Contracts and Regulation, Including Environmental Laws (Items 101(c)(1)(ix) and (c)(1)(xii))

Item 101(c)(1)(ix) requires disclosure of any material portion of a business that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.

210

Item 101(c)(1)(xii) requires disclosure of the material effects of compliance with environmental laws on the capital expenditures, earnings and competitive position of the registrant and its subsidiaries, as well as any material estimated capital expenditures for the remainder of the fiscal year, the succeeding fiscal year, and such future periods that the registrant deems material.

211

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