# FAST Act Modernization and Simplification of Regulation S-K > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-05695 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** April 2, 2019 - **Citation:** 84 FR 12674 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 230, 232, 239, 240, 249, 270, 274, and 275 [Release No. 33-10618; 34-85381; IA-5206; IC-33426; File No. S7-08-17] RIN 3235-AM00 FAST Act Modernization and Simplification of Regulation S-K AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: We are adopting amendments to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide all material information to investors. The amendments are also intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information. To provide for a consistent set of rules to govern incorporating information by reference and hyperlinking, we are also adopting parallel amendments to several rules and forms applicable to investment companies and investment advisers, including amendments that would require certain investment company filings to be submitted in HyperText Markup Language format. DATES: The final rules are effective May 2, 2019, except for the amendments to 17 CFR 229.601(b)(2) and (b)(10)(iv); paragraph 4(a) of Instructions as to Exhibits of 17 CFR 249.220f; Instruction 6 to Item 1.01 of 17 CFR 249.308; Instruction 4 to Item 28 of 17 CFR 239.15A and 274.11A; Instruction 6 to Item 25.2 of 17 CFR 239.14 and 274.11a-1; Instruction 5 to Item 29(b) of 17 CFR 239.17a and 274.11b; Instruction 5 to Item 24(b) of 17 CFR 239.17b and 274.11c; Instruction 3 of Instructions as to Exhibits of 17 CFR 239.24 and 274.5; new Instruction 3 to Item 26 of 17 CFR 239.17c and 274.11d; Instruction 3 to Item 16 of 17 CFR 239.23; Additional Instruction 3 to the Instructions as to Exhibits of 17 CFR 239.16; and Instruction 3 to IX. Exhibits of 17 CFR 274.12, which are effective April 2, 2019. For more information, see Section III (Other Matters). Compliance dates: See Section IV (Transition Matters) and Section V (Compliance Dates). FOR FURTHER INFORMATION CONTACT: Daniel Greenspan, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430; Michael C. Pawluk or Sean Harrison, Investment Company Rulemaking Office, Division of Investment Management, at (202) 551-6792; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are adopting amendments to: Commission reference CFR citation (17 CFR) Regulation S-K §§ 229.10 through 229.1305. Item 10 § 229.10. Item 102 § 229.102. tem 202 § 229.202. Item 303 § 229.303. Item 401 § 229.401. Item 405 § 229.405. Item 407 § 229.407. Item 501 § 229.501. Item 503 § 229.503. Item 512 § 229.512. Item 601 § 229.601. Regulation M-A §§ 229.1000 through 229.1016. Item 1016 § 229.1016. Regulation AB §§ 229.1100 through 229.1125. Item 1100 § 229.1100. Regulation S-T §§ 232.10 through 232.903. Rule 11 § 232.11. Rule 102 § 232.102. Rule 105 § 232.105. Rule 303 § 232.303. Rule 312 § 232.312. Rule 406 § 232.406. Securities Act of 1933 1 (“Securities Act”): § 230.405. Rule 405 Rule 411 § 230.411. Rule 491 § 230.491. Form S-1 § 239.11. Form S-3 § 239.13. Form S-6 § 239.16. Form S-11 § 239.18. Form N-14 § 239.23. Form S-4 § 239.25. Form F-1 § 239.31. Form F-3 § 239.33. Form F-4 § 239.34. Form F-7 § 239.37. Form F-8 § 239.38. Form F-10 § 239.40. Form F-80 § 239.41. Form SF-1 § 239.44. Form SF-3 § 239.45. Securities Exchange Act of 1934 2 (“Exchange Act”): § 240.12b-23. Rule 12b-23 Schedule 14A § 240.14a-101. Rule 16a-3 § 240.16a-3. Form 3 § 249.103. Form 4 § 249.104. Form 5 § 249.105. Form 8-A § 249.208a. Form 10 § 249.210. Form 20-F § 249.218. Form 40-F § 249.240f. Form 8-K § 249.308. Form 10-Q § 249.308a. Form 10-K § 249.310. Form 10-D § 249.312. Investment Company Act of 1940 3 (“Investment Company Act”): § 270.0-4. Rule 0-4 Form N-8B-2 § 274.12. Securities Act and Investment Company Act: §§ 239.15A and 274.11A. Form N-1A Form N-2 §§ 239.14 and 274.11a-1. Form N-3 §§ 239.17a and 274.11b. Form N-4 §§ 239.17b and 274.11c. Form N-5 §§ 239.24 and 274.5. Form N-6 §§ 239.17c and 274.11d. Exchange Act and Investment Company Act: Form N-CSR §§ 249.331 and 274.128 Investment Advisers Act of 1940 4 (“Investment Advisers Act”): § 275.0-6. Rule 0-6 § 275.0-6 We are also adopting 17 CFR 229.105 (new “Item 105”) to Regulation S-K) and rescinding the following: 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. 3 15 U.S.C. 80a-1 et seq. 4 15 U.S.C. 80b-1 et seq. Commission reference CFR citation (17 CFR) Exchange Act: Rule 12b-32 § 240.12b-32. Investment Company Act: Rule 8b-23 § 270.8b-23. Rule 8b-24 § 270.8b-24. Rule 8b-32 § 270.8b-32. Table of Contents I. Introduction II. Final Amendments A. Adoption of Proposals with Modifications 1. Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 303) 2. Redaction of Confidential Information in Material Contract Exhibits 3. Financial Statements: Incorporation by Reference and Cross-Reference of Information B. Adoption of Amendments as Proposed 1. Description of Property (Item 102) 2. Management, Security Holders, and Corporate Governance 3. Corporate Governance (Item 407) 4. Registration Statement and Prospectus Provisions 5. Exhibits 6. Incorporation by Reference 7. Manner of Delivery C. Proposed Amendments Not Being Adopted 1. Forms—Captions and Item Numbers 2. Subsidiaries of the Registrant and Entity Identifiers D. Removal of Outdated Requirement III. Other Matters IV. Transition Matters V. Compliance Dates VI. Economic Analysis A. Baseline B. Economic Analysis of the Amendments: General Assessment, Including Impact on Efficiency, Competition, and Capital Formation C. Economic Analysis of the Specific Amendments: Amendments That Clarify, Streamline, or Update Existing Rules 1. Amendments That Clarify or Streamline a Rule's Requirements 2. Amendments To Update Rules To Account for Subsequent Developments D. Economic Analysis of the Specific Amendments: Amendments That Simplify the Disclosure Process or Eliminate Disclosures 1. Management's Discussion and Analysis (Item 303 and Item 5 of Form 20-F) 2. Information Omitted From Exhibits E. Economic Analysis of the Specific Amendments: Amendments That Require More Disclosure or the Incorporation of New Technology 1. Description of Registrant's Securities (Item 601(b)(4)) 2. Tagging Cover Page Data 3. Amendments for Additional Disclosure With Minimal Additional Costs to Registrants F. Economic Analysis of HTML and Hyperlinking Requirements of Forms Under the Investment Company Act VII. Paperwork Reduction Act A. Background B. Summary of Comment Letters and Revisions to PRA Estimates C. Summary of the Amendments' Impact on Collections of Information 1. Amendments Expected To Decrease Burdens 2. Amendments Expected To Increase Burdens 3. Amendments Not Expected to Meaningfully Affect Burdens D. Burden and Cost Estimates to the Amendments 1. Form 10-K and Form 10-Q; Schedule 14A and Schedule 14C 2. Form S-1, Form S-3, Form S-4, Form F-3, Form F-4, Form SF-1, Form SF-3, Form 10, and Form 20-F 3. Form 8-A, Form 10-D, Form 40-F, Form F-7, Form F-8, Form F-10, and Form F-80 4. Form S-6, Form N-1A, Form N-2, Form N-3, Form N-4, Form N-5, Form N-6, Form N-14, Form N-8B-2, and Form N-CSR VIII. Final Regulatory Flexibility Act Analysis A. Need for, and Objectives of, the Amendments B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Amendments D. Projected Reporting, Recordkeeping, and Other Compliance Requirements E. Agency Action to Minimize Effect on Small Entities IX. Statutory Authority I. Introduction On October 11, 2017, the Commission proposed amendments to modernize and simplify certain disclosure requirements in Regulation S-K and related rules and forms, 5 as mandated by the 2015 Fixing America's Surface Transportation Act (the “FAST Act”). 6 The proposals were based on the Commission's report to Congress, published on November 23, 2016 (the “FAST Act Report”), 7 which contained “specific and detailed recommendations on modernizing and simplifying the requirements in Regulation S-K in a manner that reduces the costs and burdens on companies while still providing all material information” and “[recommendations] on ways to improve the readability and navigability of disclosure and to discourage repetition and the disclosure of immaterial information.” 8 The proposals were also informed by the Commission's experience with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and our staff's broader review of the Commission's disclosure regime. 9 In addition, the Commission proposed parallel amendments to several rules and forms applicable to investment companies and investment advisers to provide for a consistent set of rules governing incorporation by reference and hyperlinking, including proposed amendments that would require certain investment company filings to be submitted in HyperText Markup Language (“HTML”) format. 10 5 See Fast Act Modernization and Simplification of Regulation S-K, Release No. 33-10425 (Oct. 11, 2017) [82 FR 50998 (Nov. 2, 2017)] (“Proposing Release”). 6 Public Law 114-94, Sec. 72003, 129 Stat. 1312 (2015). 7 See Report on Modernization and Simplification of Regulation S-K (Nov. 23, 2016), available at https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf (the “FAST Act Report”). 8 See FAST Act section 72003(c). Section 72003(c) required the Commission to issue the FAST Act Report and Section 72003(d) required the Commission to issue a proposed rule to implement the recommendations contained in the FAST Act Report. 9 See the Proposing Release, supra note 5, at 50989. We are continuing to consider additional changes to our disclosure regime in connection with recent rule releases and requests for comment. See, e.g., Request for Comment on Possible Changes to Industry Guide 3 (Statistical Disclosure by Bank Holding Companies), Release No. 33-10321 (Mar. 1, 2017) [82 FR 12757 (Mar. 7, 2017)]; Business and Financial Disclosure Required by Regulation S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23916 (Apr. 22, 2016)] (the “Concept Release”); and Request for Comment on Subpart 400 of Regulation S-K Disclosure Requirements Relating to Management, Certain Security Holders and Corporate Governance Matters, Release No. 33-10198 (Aug. 25, 2016) [81 FR 59927 (Aug. 31, 2016)] (the “Regulation S-K Subpart 400 Release”). 10 The Commission has adopted requirements for exhibit hyperlinks and HTML format for operating companies. See Exhibit Hyperlinks and HTML Format, Release No. 33-10322 (Mar. 1, 2017) [82 FR 14130 (Mar. 17, 2017)] (the “ Exhibit Hyperlinks Adopting Release”) (adopting amendments to require registrants to hyperlink to each exhibit listed in the exhibit index and, to enable the inclusion of hyperlinks, requiring registrants to submit all such filings in HTML format). Commenters on the Proposing Release generally supported the proposed amendments and the Commission's efforts to improve and modernize the disclosure requirements of Regulation S-K. 11 While commenters were largely supportive of the proposals, we also received a number of suggestions for modifying the amendments in ways that commenters believed would clarify the revised disclosure requirements, simplify compliance, or more consistently reflect the policy objectives cited in the Proposing Release. 11 Comment letters related to the Proposing Release are available at https://www.sec.gov/comments/s7-08-17/s70817.htm. Unless otherwise indicated, comment letters cited in this release are to the Proposing Release. After taking into consideration the public comments, we are adopting the majority of the amendments as proposed. As we discuss further below, in certain cases we are adopting amendments with modifications from those proposed and, in other cases, we have chosen not to adopt the proposed amendments. In the discussion that follows, we first address the proposals we are adopting with modifications from those proposed, then the amendments we are adopting as proposed, and, finally, the proposed amendments we have elected not to adopt. The changes we are adopting, consistent with the Commission's mandate under the FAST Act, are intended to improve the quality and accessibility of disclosure in filings by simplifying and modernizing our requirements. The amendments also clarify ambiguous disclosure requirements, remove redundancies, and further leverage the use of technology. Taken together, we believe these rule changes should result in significant savings of time and money for registrants. We also believe they will increase investor access to information without reducing the availability of material information. The following table highlights some of the changes we are adopting, as described more fully in Section II (Final Amendments) and elsewhere in this release: Rule Summary description of amended rules 12 Principal objective Discussed below in section Regulation S-K, Item 303 and Form 20-F Registrants will generally be able to exclude discussion of the earliest of three years in MD&A if they have already included the discussion in a prior filing Simplify disclosure requirements to reduce repetition, reduce costs and burdens to registrants, focus disclosure on material information and improve readability II.A.1. Regulation S-K, Items 601(b)(10) and 601(b)(2) and investment company registration forms Registrants will be able to omit confidential information in material contracts and certain other exhibits without submitting a confidential treatment request to the Commission, so long as the information is (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed Substantially reduce the burden borne by registrants in preparing and responding to confidential treatment requests while still providing all material information to investors II.A.2. Regulation S-K, Item 601(b)(10) Only newly reporting registrants will be required to file material contracts that were entered within two years of the applicable registration statement or report Eliminate duplicative and unnecessary disclosure and reduce costs and burdens to registrants while still providing all material information to investors II.B.5.c. Regulation S-K, Item 601(a)(5) and investment company forms Registrants will not be required to file attachments to their material agreements if such attachments do not contain material information or were not otherwise disclosed Reduce costs and burdens to registrants while still providing all material information to investors II.B.5.b.i. Regulation S-K, Item 102 Registrants will need to provide disclosure about a physical property only to the extent that it is material to the registrant Clarify and simplify the disclosure requirement to reduce costs and burdens to registrants, while focusing on material information II.B.1. Forms 8-K, 10-Q, 10-K, 20-F and 40-F. Registrants will be required to disclose on the form cover page the national exchange or principal U.S. market for their securities, the trading symbol, and title of each class of securities Improve investors' efforts to search news websites and stock market databases for information about registrants and distinguish among similarly named companies II.B.4.a.iii . & II.B.7.a. Securities Act Rule-411(b)(4); Exchange Act Rules 12b-23(a)(3), and 12b-32; Investment Company Act Rule 0-4; and Regulation S-T Rules 102 and 105 Registrants will no longer be required to file as an exhibit any document or part thereof that is incorporated by reference in a filing, but instead will be required to provide hyperlinks to documents incorporated by reference Improve readability and navigability of disclosure documents and discourage repetition II.B.6.i, & II.B.6.b.ii. Forms 10-K, 10-Q, 8-K, 20-F and 40-F. Registrants will be required to tag all cover page data in Inline XBRL Further enhance investors' use of interactive data to identify, count, sort, compare, and analyze registrants and their disclosures II.B.7.a. Regulation S-T Rules 102 105, 201, 202 and 311; Form N-CSR; and investment company registration forms Investment companies will be required to file reports on Form N-CSR and registration statements and amendments thereto in HTML format and provide hyperlinks to exhibits and other information incorporated by reference Improve navigability of disclosure II.B.7.b. II. Final Amendments 12 The information in this chart is not comprehensive and is intended only to highlight some of the more significant aspects of the final amendments. It does not reflect all of the amendments or all of the rules and forms that are affected. All changes are discussed in their entirety below. As such, this table should be read together with the referenced sections and the complete text of this release. A. Adoption of Proposals With Modifications 1. Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 303) a. Year-to-Year Comparisons (Instruction 1 to Item 303(a)) i. Proposed Amendments Item 303(a) requires registrants to discuss their financial condition, changes in financial condition, and results of operations. 13 Instruction 1 to Item 303(a) states that the discussion and analysis shall be of the financial statements and other statistical data that the registrant believes will enhance a reader's understanding of its financial condition, changes in financial condition, and results of operations. This instruction also provides that, generally, the discussion shall cover the three-year period covered by the financial statements and either use year-to-year comparisons or any other format that in the registrant's judgment would enhance a reader's understanding. The instruction states that reference to the five-year selected financial data may be necessary where trend information is relevant. 13 17 CFR 229.303(a). The Commission proposed to amend Item 303 to clarify that discussion of the earliest year would not be required in certain situations. 14 Specifically, when financial statements included in a filing cover three years, 15 discussion about the earliest year would not have been required under the proposed amendments if (i) that discussion was not material to an understanding of the registrant's financial condition, changes in financial condition, and results of operations, and (ii) the registrant had filed its prior year Form 10-K 16 on EDGAR and that Form 10-K included in its Management's Discussion and Analysis (“MD&A”) a discussion of the earliest of the three years included in the financial statements of the current filing. By allowing registrants to eliminate MD&A disclosure about the earliest year in these situations, the proposal was intended to discourage repetition of disclosure that is no longer material, which we believe would further our mandate under the FAST Act to modernize and simplify Regulation S-K in a manner that reduces costs and burdens on companies while still providing all material information. 14 See Proposing Release, supra note 5, Section II.B.1., n. 46 through 53. See also FAST Act Report, supra note 7, at Recommendation C.1. 15 The proposed amendments to Item 303(a)(3) would not affect smaller reporting companies, as smaller reporting companies may limit their disclosure to the two-year period covered by their financial statements. See Instruction 1 to Item 303(a) of Regulation S-K. See also Rule 12b-2 under the Exchange Act and Rule 405 under the Securities Act. Similarly, the proposed amendments would not affect emerging growth companies that provide two years of audited financial statements. Emerging growth companies are only required to provide two years of audited financial statements in an initial public offering of common equity securities and may limit their MD&A to only those audited periods presented in the financial statements. Pub. L. 112-106, Sec. 102(b)-(c), 126 Stat. 306 (2012). See also Instruction 1 to Item 303(a) of Regulation S-K. 16 17 CFR 249.310. For the reasons discussed in the Proposing Release, the Commission also proposed to eliminate the reference to five-year selected financial data in Instruction 1 to Item 303(a). 17 In addition, the Commission proposed to simplify Instruction 1 to Item 303(a) to emphasize that registrants may use any presentation that, in the registrant's judgment, would enhance a reader's understanding. 18 17 See Proposing Release, supra note 5, Section II.B.1., at 50993. 18 Id. ii. Comments The proposal generated a wide range of responses among commenters. While some commenters supported the amendments as proposed, 19 many commenters sought revisions or clarifications to the proposed rule. In particular, several commenters focused their remarks on the proposed conditions by which registrants could omit discussion of the earliest of the three years of financial statements covered by a filing. One commenter opposed the amendments to Item 303, asserting that retaining the discussion of the earliest year would help investors “understand the validity of analysis” in the MD&A where a company's circumstances have changed. 20 19 See letters from American Fuel and Petrochemical Manufacturers (“American Fuel”), Center for Capital Markets Competitiveness (“CCMC”), Davis Polk & Wardwell (“Davis Polk”), FedEx Corporation (“FedEx”), Fenwick & West LLP (“Fenwick”), Nasdaq, Inc. (“Nasdaq”), and UnitedHealth Group (“UnitedHealth”). 20 See letter from Public Citizen. A number of commenters found the first proposed condition to be problematic, largely due to uncertainty over the phrase “material to an understanding.” 21 While many of these commenters supported the concept underlying the proposal, they advocated that the Commission first refine or clarify the materiality condition to ensure that its implementation would have the effect the Commission intended. 22 These commenters questioned how the “material to an understanding” condition would be applied in practice and were uncertain how it differed, if at all, from the standard of materiality registrants already use to fulfill their disclosure obligations. 23 Several commenters advised that without further clarification registrants would be unlikely to omit the discussion of the earliest year for fear that their judgment would be challenged. 24 Along these lines, one commenter predicted that, because of litigation risk, registrants would find it much easier to simply repeat the disclosure made in the prior year rather than expose their assessment of materiality to second-guessing. 25 21 See, e.g., letter from Ernst & Young LLP (“E&Y”) (noting that the proposed standard “could be challenging to apply in practice . . . registrants could struggle to consistently evaluate whether discussion of the earliest of the three years is `material to an understanding'. . .”). 22 See, e.g., letters from E&Y (raising a series of interpretive questions about the proposal) and Deloitte & Touche LLP (“Deloitte”) (questioning whether the phrase “material to an understanding” was intended to convey any special considerations beyond a registrant's customary assessment of materiality). 23 See, e.g., letter from E&Y (noting the abundance of instances in Regulation S-K where the disclosure requirements reference some variation of materiality, creating a lack of clarity in many cases about whether the Commission intended registrants to evaluate materiality in a different context than its general application under federal securities law). 24 See, e.g., letters from BDO USA, LLP (“BDO”), CNA Financial Corporation (“CNA”), Cravath, Swaine & Moore LLP (“Cravath”), Institute of Management Accountants (“IMA”), KPMG LLP (“KPMG”), Piercy Bowler Taylor and Kern, CPAs (“Piercy Bowler”), and Society for Corporate Governance (“Society for Corp. Gov.”). 25 See letter from IMA. See also letter from Society for Corp. Gov. (suggesting that modifying the default requirement of Item 303 from “disclosure of the earliest year's discussion, unless not material” to “omission of the earliest year's discussion, unless material” may more effectively accomplish the Commission's objective of reducing the amount of immaterial and repetitive disclosure). To mitigate these concerns and add more certainty to the process, some commenters favored revising the proposal to make the condition less subjective, 26 while others suggested adding conditions that would preclude registrants from omitting disclosure of the earliest year in certain specified situations. 27 Other commenters favored removing the materiality condition altogether because they believed it was unnecessary and would only create confusion. 28 These commenters stated that registrants should be permitted to omit the discussion of the earliest year covered by the financial statement in a filing based solely on the condition that the disclosure was already included in a previous filing. One such commenter noted that it is unnecessary to embed an explicit materiality reference within the proposed rule because materiality is already the overarching principle for a registrant's disclosure and has been well defined by federal securities law. 29 The commenter went on to state that, as such, materiality is always a factor in disclosure, whether or not the proposed revision makes explicit reference to it. In this context, another commenter asserted that adding an additional materiality assessment would only add ambiguity and complexity to the registrant's decision whether to include a discussion of the earliest period presented. 30 26 See, e.g., letter from Financial Executive International (“Financial Executives”) (requesting that the rule be revised to permit the omission of the discussion about the earliest year unless there has been a material change to the previous disclosures). 27 See, e.g., letter from Council of Institutional Investors (“CII”) (suggesting that registrants not be allowed to exclude discussion of the earliest year if there has been a material change to either of the two earlier years due to a restatement or a retrospective adoption of a new accounting principle). 28 See, e.g., letters from BDO, Center for Audit Quality (“CAQ”), and Northrop Grumman Corporation (“Grumman”). 29 See letter from CAQ. 30 See letter from BDO. Several commenters supported expanding the second of the two proposed conditions for omission of the earliest year's discussion to allow registrants to use filings other than the prior year's Form 10-K as the reference document. 31 These commenters recommended that any filing available on EDGAR ( e.g., Form S-1, Form S-4, Form 8-K, Form 10, etc.) that contains the relevant MD&A discussion should suffice. 32 31 See letters from BDO, Cravath, Deloitte, E&Y, KPMG, Piercy Bowler, and Sullivan & Cromwell LLP (“Sullivan”). 32 Id. Finally, several commenters expressed support for the proposal to eliminate the reference to five-year selected financial data in Instruction 1 to Item 303(a), and no commenters opposed it. 33 33 See letters from CAQ, CCMC, CNA, Cravath, Davis Polk, Fenwick, Financial Executives, Securities Industry and Financial Markets Association (“SIFMA”), and Sullivan. iii. Final Amendments We are adopting amendments to Item 303 in substantially the form proposed, but with modifications in response to comments received. We are adopting as proposed the revision to Instruction 1 of Item 303 that eliminates the reference to year-to-year comparisons. Instruction 1 will now state that registrants may use any presentation that in the registrant's judgment enhances a reader's understanding of the registrant's financial condition, changes in financial condition, and results of operations, without suggesting that any one mode of presentation is preferable to another. We anticipate that many registrants will continue to provide year-to-year comparisons, as this is a familiar and, in many cases, appropriate method of presentation. However, we recognize that this presentation may not always be the most effective format, depending on the unique circumstances of a particular registrant. Also, as proposed, we are deleting the reference to five-year selected financial data in Instruction 1 to Item 303(a). Item 303(a)(3)(ii) already requires disclosure of known trends and uncertainties, so we do not anticipate that the removal of similar wording from Instruction 1 will discourage trend disclosure or otherwise reduce disclosure of material information. We are revising Instruction 1 to Item 303(a) to allow registrants who are providing financial statements covering three years in a filing to omit discussion of the earliest of the three years if such discussion was already included in any other of the registrant's prior filings on EDGAR that required disclosure in compliance with Item 303 of Regulation S-K. 34 Registrants electing not to include a discussion of the earliest year in reliance on this instruction must, however, identify the location in the prior filing where the omitted discussion may be found. These amendments reflect two changes from the proposal. 34 Instruction 1 to Item 303(a), as revised. Amended Form 20-F will include analogous wording in new Instruction 6 to Item 5. See infra Section II.A.1.b. of this release. First, we are expanding the condition regarding the earliest year discussion to allow registrants to rely on any prior EDGAR filings that include such discussion. We agree with commenters who recommended expanding this condition to encompass MD&A of the earliest year included in filings other than Form 10-K. 35 We do not believe it is necessary to designate the registrant's prior Form 10-K as the only filing that may serve as the location of the omitted disclosure, so long as the registrant clearly identifies the prior filing that includes the relevant discussion. 35 See supra note 31. Second, we are not adopting, as an explicit condition, that the omitted discussion must not be “material to an understanding” of the registrant's financial condition, changes in financial condition, and results of operations. This is not to suggest, however, that materiality is not relevant to management's judgment about what disclosure is provided in MD&A. Materiality remains, as always, the primary consideration. Rather, this change recognizes that the language of the proposed condition was superfluous and never intended to modify, supplement, or alter the overarching materiality analysis that management must undertake with respect to the information it provides investors in MD&A. As several commenters pointed out, this superfluous language may serve to create confusion for registrants and discourage them from tailoring their disclosure in a manner that is most useful for investors. 36 36 See supra note 21. For similar reasons, we are not adopting different or additional conditions on the omission of the earliest year discussion as suggested by several commenters. See supra notes 26 and 27. Although a discussion of the earliest year of the financials could in some circumstances be material, in many cases the entirety of the discussion of the earliest year that was presented in the MD&A of a prior filing would not need to be reiterated if, in management's view, that discussion is not necessary to understand the financial condition, changes in financial condition, and results of operations. 37 This is the standard that applies to all of MD&A, 38 and our amendments do not change that standard. A registrant's obligation is to provide investors with all material information, customized in light of the company's particular circumstances, and presented in a manner that best reflects the discussion and analysis of the business as seen through the eyes of those who manage that business. 39 We continue to encourage registrants to take the opportunity to reevaluate their disclosure in light of these amendments and determine whether a discussion of the earliest year's information remains material. 40 We believe these amendments underscore the continuing relevance of the Commission's guidance in the 2003 MD&A Release that “it is increasingly important for companies to focus their MD&A on material information. In preparing MD&A, companies should evaluate issues presented in previous periods and consider reducing or omitting discussion of those that may no longer be material or helpful, or revise discussions where a revision would make the continuing relevance of an issue more apparent.” 41 37 For investors who find the earliest year discussion useful in understanding the MD&A, this information will remain readily available from prior filings on EDGAR. See supra note 20. 38 See Item 303(a): “The discussion . . . shall provide such other information that the registrant believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.” 39 See Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operation, Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29,2003)] (“2003 MD&A Interpretive Release”), Sections I.B and III.B.2. See also Concept Release on Management's Discussion and Analysis of Financial Condition and Operations, Release No. 6711 (Apr. 17, 1987) [52 FR 13715, 13717] (Apr. 23, 1987)] (“MD&A Concept Release”) (“an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company”). 40 See 2003 MD&A Interpretive Release, Sections I.B. and III.B.2.; and see Proposing Release, supra note 5, at 50993. 41 See 2003 MD&A Release, Section III.B.2. We believe the revisions to Item 303 that we are adopting give registrants the flexibility to tailor their presentation in MD&A in a manner that is most suitable for their varying circumstances, while at the same time continuing to require that they provide all of the information necessary to an understanding of their financial condition, changes in financial condition and results of operations. In that respect, we view the elimination of references to year-to-year comparisons and the new language in Instruction 1 of Item 303 allowing registrants to omit discussion of the earliest of the three years covered by the financial statements as complementary. b. Application to Foreign Private Issuers i. Proposed Amendments The disclosure requirements for Item 5 of Form 20-F (Operating and Financial Review and Prospects) are substantively comparable to the MD&A requirements under Item 303 of Regulation S-K. 42 To maintain a consistent approach to MD&A for domestic registrants and foreign private issuers, the Commission proposed changes to Form 20-F to conform with the proposed amendments to Instruction 1 to Item 303(a). 43 42 When the Commission revised the wording of Item 5 of Form 20-F in 1999, the adopting release noted that the requirements correspond with Item 303 of Regulation S-K. See International Disclosure Standards, Release No. 33-7745 (Sept. 28, 1999) [64 FR 53900 (Oct. 5, 1999)], at 53904. 43 The Commission did not propose similar changes to Form 40-F. Form 40-F generally permits Canadian issuers to use Canadian disclosure documents to satisfy the Commission's registration and disclosure requirements. As a result, the MD&A contained in Form 40-F is largely prepared in accordance with Canadian disclosure standards. ii. Comments Several commenters supported the proposal to make conforming changes to Form 20-F, and no commenters opposed. 44 44 See letters from BDO, CAQ, Cravath, E&Y, PricewaterhouseCoopers (“PWC”), and Sullivan. iii. Final Amendments We are adopting the proposed revisions to Item 5 of Form 20-F, as modified to be consistent with the amendments to Item 303. In its amended form, Item 5 of Form 20-F will provide that, when a filing includes financial statements covering three years, discussion about the earliest year may be omitted if such discussion was already included in the registrant's prior year Form 20-F filed on EDGAR or in any other of the registrant's prior filings on EDGAR that required disclosure in compliance with Item 5 of Form 20-F or with Item 303 of Regulation S-K. Registrants electing not to include a discussion of the earliest year must, however, include a statement that identifies the location in the prior filing where the omitted discussion may be found. Similar to revised Item 303, we are revising the instructions to Item 5 to emphasize that registrants may use any presentation that, in the registrant's judgment, would enhance a reader's understanding. 2. Redaction of Confidential Information in Material Contract Exhibits a. Proposed Amendment As a general matter, current Item 601(b)(10) requires registrants to file as an exhibit to their applicable disclosure document each of their material contracts entered into within the preceding two years or which is to be performed, at least in part, in the future. It is not unusual for some of the information contained in such exhibits to be highly sensitive, most often for competitive reasons. If such information is not material and is covered by an exemption from the Freedom of Information Act, 45 a registrant may request confidential treatment which, if granted by the Commission, would allow the registrant to redact specific information from the material contract exhibit that it files publicly on EDGAR. 45 5 U.S.C. 552 (“FOIA”). Rule 80 [17 CFR 200.80 et seq. ], the Commission's rule adopted under FOIA, incorporates the criteria for permissible non-disclosure set forth in FOIA. Of the list of available FOIA disclosure exemptions provided in Section 552(b), most applicants for confidential treatment rely on paragraph (b)(4), which exempts certain trade secrets or privileged or confidential commercial or financial information. Exchange Act Rule 24b-2 and Securities Act Rule 406 set forth the exclusive procedures for obtaining confidential treatment in regard to exhibits filed under the Exchange Act and Securities Act. Registrants who wish to avail themselves of these rules must submit a detailed application to the Commission that identifies the particular text for which confidential treatment is sought, a statement of the legal grounds for the exemption, 46 and an explanation of why, based on the facts and circumstances of the particular case, disclosure of the information is unnecessary for the protection of investors. 47 Upon receipt of the application, known as a “confidential treatment request” or “CTR,” Commission staff will evaluate whether the request appears appropriate and whether to issue comments on the application. 46 Exchange Act Rule 24b-2 and Securities Act 406 require that applicants for confidential treatment justify their nondisclosure on the basis of the applicable exemption(s) from disclosure under Rule 80. 47 The Division has published procedural and substantive guidance on how to prepare and submit confidential treatment requests in Staff Legal Bulletins 1 and 1A, available on the Commission's website at https://www.sec.gov/interps/legal/slbcf1.txt and https: / /www.sec.gov/interps/legal/slbcf1r.htm. The Commission proposed revisions to Item 601(b)(10) that would permit registrants to omit confidential information from material contracts filed pursuant to that item without the need to submit a CTR, if the information (i) is not material and (ii) would be competitively harmful if publicly disclosed. Although registrants would not be required to file a confidential treatment request in accordance with Rule 406 or Rule 24b-2 in connection with the redacted exhibit, the responsibility of a registrant to determine whether all material information has been disclosed and whether it may redact the information under the proposed rules would remain unchanged. 48 Redactions made in accordance with revised Item 601(b)(10) should include no more information than necessary to prevent competitive harm to the registrant. 48 See Rule 12b-20 [17 CFR 240.12b-20], Rule 408(a) [17 CFR 230.408(a)], and proposed Item 601(b)(10)(iv). Under the proposal, the requirements for marking exhibits subject to confidential treatment would remain in place as well. Just as registrants must do under the current rules, the proposed amendments would require registrants to: • Mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted; • include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed; and • indicate with brackets where the information has been omitted from the filed version of the exhibit. Under the proposed revisions, the Commission staff would continue its selective review of registrant filings and would selectively assess whether redactions from exhibits appear to be limited to information that is not material and that would cause competitive harm if publicly disclosed. Upon request, registrants would be expected to promptly provide supplemental materials to the staff similar to those currently required in a CTR, including an unredacted copy of the exhibit and an analysis of why the redacted information is both (i) not material and (ii) would be competitively harmful if publicly disclosed. 49 Pursuant to Rule 83, registrants may request confidential treatment of this supplemental information while it is in the staff's possession. If the registrant's supplemental materials do not support its redactions, the staff may request that the registrant file an amendment that includes some, or all, of the previously redacted information, similar to the process the staff currently follows for confidential treatment requests under Rule 406 and Rule 24b-2. After completing its review of the supplemental materials, the Commission or its staff would return or destroy them at the request of the registrant if the registrant complies with the procedures outlined in Rule 418 under the Securities Act or Rule 12b-4 under the Exchange Act, as applicable. 49 This analysis would be substantially the same as is currently required in confidential treatment requests. b. Comments Many commenters favored this proposal. 50 Several commenters that supported the proposal stated that the current rules impose a significant burden on registrants and that reducing the significant cost and time expended to prepare and process confidential treatment requests would provide much needed relief without diminishing the quality of information available to investors. 51 Along these lines, commenters indicated the proposed revisions to Item 601(b)(10) would effectively change only the confidential treatment process, not the substance of registrants' disclosure. 52 For example, two commenters noted that published guidance, such as Staff Legal Bulletins 1 and 1A, is readily available to registrants and sets forth the staff's long established views on appropriate redactions of confidential information in accordance with Rules 406 and 24b-2. 53 Commenters also observed that the staff would retain the ability to review any of the information redacted by registrants from their filings, as necessary on a case-by-case basis. Several commenters noted that the prospect of staff review and request for further information would continue to act as a safeguard for investors, much as the staff's selective review process of filings generally operates today. 54 50 See, e.g., letters from Eversheds Sutherland (US) LLP, on behalf of the Committee of Annuity Insurers (“Comm. of Annuity Insurers”), CCMC, Cravath, Davis Polk, FedEx, Fenwick, Financial Executives, Grumman, IMA, Reed Smith LLP (“Reed Smith”), SIFMA, Society for Corp. Gov., and Sullivan (supporting the proposal). But see, letters from CII and Public Citizen (opposing the proposal). 51 See letters from Comm. of Annuity Insurers, Cravath, Davis Polk, FedEx, IMA, Reed Smith, Society for Corp. Gov., and Sullivan. See also letter from Reed Smith (stating that the current requirements for confidential treatment disproportionately burden smaller reporting companies). 52 See, e.g., letters from Cravath, Davis Polk, and Society for Corp. Gov. 53 See letters from Cravath and Davis Polk. 54 See letters from Comm. of Annuity Insurers, Cravath, Fenwick, Reed Smith, SIFMA, and Society for Corp. Gov. However, not all commenters supported the proposal. In particular, two commenters expressed concern that if registrants were no longer required to formally request confidential treatment of redactions in their exhibits, they may be motivated to err on the side of redacting much more information than would likely be afforded confidential treatment under the current system. 55 55 See letters from CII and Public Citizen. In the Proposing Release, the Commission asked whether to extend the proposal beyond Item 601 to reach: • Exhibits required by other subsections of Item 601, including Item 601(b)(2); • Exhibits required by certain of the Commission's disclosure forms to which the exhibit requirements of Item 601 do not specifically apply; 56 and 56 For example, Form 20-F, for use by foreign private issuers, has its own exhibit requirements that do not reference Item 601 of Regulation S-K. See Item 19 of Form 20-F. • Exhibits required by certain of the Commission's disclosure forms related to investment companies. 57 57 See Proposing Release, supra note 5, Section II.E.2.c, at 51004. Several commenters supported expanding the proposed accommodation to exhibits filed pursuant to Item 601(b)(2), which requires registrants to file as exhibits any plans of acquisition, reorganization, arrangement, liquidation, or succession. 58 One such commenter stated that including Item 601(b)(2) within the coverage of the proposed amendments was a sensible approach given that Item 601(b)(2) exhibits are substantively a subset of 601(b)(10) exhibits. However, this commenter also suggested initially limiting the proposed amendments to Item 601(b)(2) and 601(b)(10) and revisiting potential expanded applicability at a future date. 59 58 See letters from Cravath, Fenwick, SIFMA, and Sullivan. 59 See letter from Cravath. By contrast, a few commenters favored immediately expanding the proposal beyond 601(b)(2) and 601(b)(10), specifically to underwriting agreements required by Item 601(b)(1) 60 or generally to all exhibits filed pursuant to Item 601. 61 These commenters reasoned that, for purposes of the proposed rule change, there was no meaningful basis to distinguish these additional exhibits from material contracts filed under Item 601(b)(10). One such commenter noted that broadening the rule change to all Item 601 exhibits would promote a more consistent approach to confidential treatment overall. 62 60 See letter from SIFMA. 61 See letter from Society for Corp. Gov. 62 Id. None of the commenters that supported the proposal objected to an analogous change to the exhibit requirements of Commission disclosure forms for which Item 601(b)(10) does not apply. In addition, two commenters recommended that the proposals should be expanded to provide similar accommodations to investment companies. 63 63 See letters from Comm. of Annuity Issuers and Investment Company Institute (“ICI”). c. Final Amendment We are adopting the amendment to Item 601(b)(10) as proposed. We have, however, slightly revised the language of the amendment to refer to information that “would likely cause competitive harm” to more closely track the standard under FOIA. 64 In addition, we are amending Item 601(b)(2) in a similar manner to allow registrants to redact immaterial provisions or terms from agreements filed under that item that would likely cause them competitive harm if publicly disclosed. 65 To facilitate consistency across our exhibit requirements, we are also expanding the proposal to certain exhibit related requirements in specified disclosure forms for which Item 601(b)(10) does not apply. 66 64 See new paragraph (iv) to Item 601(b)(10). 65 Additional amendments to the exhibit requirements of Item 601 that will allow registrants to omit (i) schedules, appendices and attachments to exhibits that are not material and (ii) personally identifiable information are discussed infra at Section II.B.5.b.i. and ii. 66 See amendments to Form 20-F (Instructions as to Exhibits), Form 8-K (Instructions 4-6 to Item 1.01), Form N-1A (new Instruction 4 to Item 28), Form N-2 (new Instruction 6 to Item 25.2), Form N-3 (new Instruction 5 to Item 29(b)), Form N-4 (new Instruction 5 to Item 24(b)), Form N-5 (new Instruction 3 of Instructions as to Exhibits), Form N-6 (new Instruction 3 to Item 26), Form N-14 (new Instruction 3 to Item 16), Form S-6 (new Additional Instruction 3 to the Instructions as to Exhibits), and Form N-8B-2 (new Instruction 3 to IX. Exhibits). We believe that these amendments will substantially reduce the burden currently borne by registrants in preparing and processing requests for confidential treatment while still providing all material information to investors. As such, we believe these amendments are in keeping with our mandate under the FAST Act. In our view, the sizeable costs to registrants, in terms of financial expenditures, staff time, and potential transactional delays resulting because of time spent on confidential treatment request applications, justifies such an approach where, as here, any corresponding negative impact on investors is expected to be minimal. The amendments to Item 601 do not substantively alter registrant disclosure requirements—they do not affect the principles of what a registrant may or may not permissibly redact from its disclosure for reasons of confidentiality, nor do they change the fundamental disclosure obligations a registrant owes its shareholders under the federal securities laws. Rather, the amendments recognize that the administrative process by which registrants currently are permitted to protect confidential information in certain exhibits is not the most efficient way to serve investors' interests. In response to commenters who expressed concern that registrants would err on the side of redacting much more information than would likely be afforded confidential treatment under the current system, we note that these procedural revisions do not limit the Commission or its staff's prerogative to scrutinize the appropriateness of a registrant's omissions of information from its exhibits. In this regard, we emphasize that the amended rules retain the requirement that exhibits be clearly marked to indicate where immaterial and competitively harmful information has been omitted 67 and that any redactions will remain subject to review and comment at the staff's discretion. 68 67 Both Item 601(b)(2)(ii) and new Item 601(b)(10)(iv) require the registrant to mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. The registrant also must indicate by brackets where the information is omitted from the filed version of the exhibit. 68 Where applicable, the staff may request that a registrant file an amendment that includes some, or all, of the information previously redacted from an exhibit. We note that the rule, as revised, does not require a registrant to include an explanatory note in its amendment describing why the amendment was necessary. In the Proposing Release, the Commission asked whether it should impose such a requirement. No commenters advocated in favor of such a requirement and, after consideration, we do not think it necessary. This is consistent with the Commission's approach to filing amendments generally, whereby registrants are not required to annotate their changes to documents. We also are mindful that such explanations could, by drawing the attention of the reader, overemphasize the importance of the amended information. See letters from Reed Smith and Society for Corp. Gov. As noted, consistent with several commenters' suggestions, we are adopting revisions to Item 601(b)(2) that will conform to the treatment of exhibits in amended Item 601(b)(10). We agree with those commenters who stated that these exhibits are generally a subset of the material agreements filed under Item 601(b)(10) and should be treated the same way. At this time, we are not expanding this approach to other exhibits required by Item 601, given the specialized subject matter and specific considerations relevant to each exhibit. For example, we believe it would be a very rare case that a company would appropriately be able to exclude portions of other exhibits such as the articles of incorporation, bylaws, legal or tax opinions, and codes of ethics. Moreover, by a significant margin, the vast majority of confidential treatment requests handled by the Commission is made in connection with exhibits filed pursuant to Item 601(b)(10). 69 69 For example, in the fiscal year ended 2018, out of 1,239 requests for confidential treatment 1,130 related to exhibits filed pursuant to Item 601(b)(10). Similarly, of the 1,188 CTRs granted by the Commission that year, 1,086 related to exhibits filed pursuant to Item 601(b)(10). Finally, to facilitate the consistency of our exhibit requirements across different forms, we are adopting a parallel approach to information omitted from exhibits required by certain other forms and rules for which the exhibit requirements of Item 601 do not apply. For example, as we discuss below, we are adopting amendments to Form 20-F 70 to maintain a consistent approach to the exhibit filing requirements for domestic registrants and foreign private issuers. We are also amending Item 1.01 of Form 8-K to conform to the revisions to Item 601(b)(10)(iv). Item 1.01 of Form 8-K requires the disclosure of material definitive agreements that are not made in the ordinary course of business. The item parallels Item 601(b)(10) of Regulation S-K with regard to the types of agreements that are material to a company, but it does not require that the material agreements themselves be filed as exhibits to the Form 8-K. In 2004, when Item 1.01 was added to Form 8-K, the Commission considered mandating an Item 1.01 exhibit filing requirement but ultimately chose not to do so after considering the views of commenters. 71 Commenters expressed concern that the short Form 8-K filing period would make it too difficult to prepare and submit requests for confidential treatment of sensitive terms of the agreements in a timely manner. 72 Instead, the Commission retained the rule that material agreements disclosed on Form 8-K do not need to be filed until the company's next periodic report or registration statement, but encouraged companies to file such agreements with the Form 8-K to the extent practicable. 73 Accordingly, although the language of Item 1.01 and its instructions reference Item 601(b)(10) of Regulation S-K for purposes of determining which agreements must be reported under this Form 8-K item, they do not specifically incorporate the exhibit filing requirements of Item 601(b)(10). We are therefore adopting changes to Form 8-K to clarify that the accommodations to the exhibit filing requirements extend to Item 1.01 of Form 8-K as well, to the extent such exhibits are filed with the intention of being incorporated into future filings in satisfaction of Item 601(b)(10). 70 Unlike the exhibit requirements of Form 20-F, which are separate from and do not reference Item 601 of Regulation S-K, the registration statement Forms F-1, F-3, F-4 for foreign private issuers all require registrants to comply with the exhibit requirements of Item 601. 71 See Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69 FR 15593] (“2004 8-K Release”), at 15996-7. 72 Id. 73 Id. at 15597. For policy reasons similar to those described above, we are adopting parallel amendments to the registration forms used by investment companies to allow them to redact immaterial provisions or terms from exhibits filed as “other material contracts” that would likely cause the registrant competitive harm if publicly disclosed. 74 We are also extending this treatment to information in reinsurance agreements required to be filed as exhibits under Forms N-3, N-4, and N-6. 75 Staff of the Division of Investment Management has routinely granted confidential treatment as to information in reinsurance agreements in the past. We believe that extending this relief to these specific categories of exhibits will substantially reduce the burden currently borne by registrants in preparing and processing requests for confidential treatment, while still providing all material information to investors holding those contracts. 74 See new Instruction 4 to Item 28 of Form N-1A; new Instruction 6 to Item 25.2 of Form N-2; new Instruction 5 to Item 29(b) of Form N-3; new Instruction 5 to Item 24(b) of Form N-4; new Instruction 3 of Instructions as to Exhibits of Form N-5; new Instruction 3 to Item 26 of Form N-6; new Instruction 3 to Item 16 of Form N-14; new Additional Instruction 3 to the Instructions as to Exhibits of Form S-6; and new Instruction 3 to IX. Exhibits of Form N-8B-2. 75 See new Instruction 5 to Item 29(b) of Form N-3, new Instruction 5 to Item 24(b) of Form N-4, and new Instruction 3 to Item 26 of Form N-6. Reinsurance agreements are required to be filed as separate and distinct exhibits within the list of exhibit items required by Forms N-3, N-4, and N-6. Registrants often seek confidential treatment of the negotiated terms and of proprietary information about how they operate their insurance business that is included in these agreements. 3. Financial Statements: Incorporation by Reference and Cross-Reference of Information 76 76 For a discussion of other amendments we are adopting that also pertain to our rules regarding incorporation by reference, see Section II.B.6 infra. a. Proposed Amendments Having financial statements cross-reference to disclosure in other parts of a filing or incorporate information by reference from other filings can raise questions as to the scope of an auditor's responsibilities. 77 To address this concern, the Commission proposed amendments to our rules and forms that would prohibit such incorporation by reference or cross-referencing. 78 The proposed amendments did not, however, prohibit cross-references to other parts of a filing when otherwise specifically permitted by our rules. The proposed amendments also did not prohibit incorporating financial information from other filings to satisfy financial reporting requirements when otherwise permitted or required. 79 In addition, for consistency with both current and proposed Rule 411 and Rule 12b-23, we also proposed an additional amendment to Rule 0-4 providing restrictions on the incorporation of financial information required to be given in comparative form for two or more fiscal years or periods. 80 77 See Proposing Release, supra note 5, Section II.F.2.c. at 51010. 78 The Commission proposed amendments to Rule 411, Rule 12b-23, and Rule 0-4 and Securities Act Forms S-1, S-3, S-11, and F-1. Because Rule 0-6 governs incorporation by reference only for applications filed under the Investment Advisers Act, the Commission did not propose to make similar amendments to that rule, but did request comment on whether the final amendments should include this provision. We received no comments regarding extending similar amendments to Rule 0-6. 79 For example, registrants using Form S-3 would continue to be permitted to incorporate financial statements filed with a Form 8-K that reports the acquisition of a significant business. Also, registrants using Form S-4 to report a merger with another registrant would continue to be able to incorporate the financial statements of the registrant filed on Form 10-K and Form 10-Q. Similarly, investment company registrants using, for example, Form N-1A would continue to be permitted to incorporate financial statements included as part of reports to shareholders that are filed on Form N-CSR. 80 See proposed Rule 0-4(b). b. Comments Several commenters supported the proposed amendments, 81 while one commenter opposed. 82 Although this commenter shared the concern over the need to define the scope of the auditor's responsibilities, it stated that prohibiting incorporation by reference or cross-referencing of information into the financial statements was a significant lost opportunity to improve the delivery of information to investors by improving the technology platform on which the Commission collects and disseminates that information. A number of commenters suggested that the final rule permit foreign private issuers on Form 20-F to cross-reference outside the financial statements when expressly permitted by applicable accounting standards, such as IFRS or by law, regulation or by the primary securities regulator in the registrant's home country jurisdiction or market. 83 A few commenters requested confirmation that the proposal would not affect financial reporting for certain investment company “fund of funds” arrangements, such as a master/feeder arrangement. 84 81 See letters from BDO, CAQ, Deloitte, E&Y, Grant Thornton LLP (“Grant Thornton”), Piercy Bowler, PWC, and ICI. 82 See letter from Sullivan. 83 See letters from CAQ, Deloitte, E&Y, KPMG, and PWC. 84 See letters from CAQ, KPMG, and PWC. Feeder funds typically invest their assets solely in another investment company (a master fund), and provide financial statements of the master fund together with the feeder fund's financial statements. Generally, the staff of the Division of Investment Management has taken the position that the financial presentation that is most meaningful in the feeder fund context is unconsolidated, provided that, among other things, the feeder fund attaches the financial statements of the master fund to its financial statements. See Investment Management Guidance Update No. 2014-11, Investment Company Consolidation, available at http://www.sec.gov/investment/imguidance-2014-11.pdf; and SEC Staff Generic Comment Letter for Investment Company CFOs (Dec. 30, 1998), available at https://www.sec.gov/divisions/investment/imlr1230.htm. The amendments we are adopting today would not change the staff interpretation that the master fund's financial statements should be attached to the feeder fund's financial statements and not incorporated by reference. c. Final Amendments We are adopting the amendments as proposed, with the following modification. In response to commenters who were concerned that the proposed amendments may create uncertainty regarding cross-references and incorporation by reference in the financial statements when expressly permitted by applicable accounting standards, such as IFRS, our amendments explicitly provide that incorporating by reference, or cross-referencing to, information outside of the financial statements is not permitted unless otherwise specifically permitted or required by the Commission's rules or by U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards as issued by the International Accounting Standards Board, whichever is applicable. 85 85 See, as amended, Rule 411, Rule 12b-23, Rule 0-4, and Forms S-1, S-3, S-11, and F-1. While the use of cross-references and incorporation by reference to present information can help investors access information, navigate disclosure and focus on key information, we believe it is necessary to place restrictions on the ability of registrants to cross-reference and incorporate by reference information into the financial statements. By generally prohibiting this practice, with certain exceptions as noted above, the amendments address concerns that referencing information outside the audited financial statements to satisfy financial statement disclosure requirements could create confusion about which financial information has been audited or reviewed by the independent auditor. 86 We think these changes will reduce potential confusion and make it less cumbersome for investors to determine what pieces of financial information form a set of audited or reviewed financial statements. While we appreciate the views of the commenter who opposed the amendments on the grounds that they represented a missed opportunity to improve the technology platform on which the Commission collects and disseminates information to investors, broader changes to the Commission's EDGAR system are outside the scope of this rulemaking and we do not agree that adoption of this change would pre-condition the Commission's approach in any future technology changes. 86 See letter from Deloitte. B. Adoption of Amendments as Proposed 1. Description of Property (Item 102) a. Proposed Amendments Item 102 of Regulation S-K requires that registrants disclose “the location and general character of the principal plants, mines, and other materially important physical properties of the registrant and its subsidiaries.” The instructions to Item 102 further clarify the type of information required, specifying that registrants: • Must disclose such information as reasonably will inform investors as to the suitability, adequacy, productive capacity, and extent of the registrant's utilization of the facilities; 87 and 87 See Instruction 1 to Item 102 of Regulation S-K. Detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required. • should take into account both quantitative and qualitative factors when determining whether properties should be described. 88 88 See Instruction 2 to Item 102 of Regulation S-K. Disclosure specific to the mining, oil and gas, and real estate industries is outside the scope of this rulemaking. Instruction 3 of Item 102 applies to the mining industry. The Commission has separately adopted revisions to the property disclosure requirements for mining registrants. See Modernization of Property Disclosures for Mining Registrants, Release No. 33-10570 (Oct. 31, 2018) [83 FR 66344 (Dec. 26, 2018)] (“Modernization for Mining Registrants Release”). Instructions 4, 5, and 6 of Item 102 apply to the oil and gas industry. The Commission considered disclosure specific to the oil and gas industry in 2008. See Modernization of Oil and Gas Reporting, Release No. 33-8995 (Dec. 31, 2008) [74 FR 2158 (Jan. 14, 2009)]. Instruction 9 of Item 102 applies to the real estate industry. Despite existing language in Item 102 that limits the required information to properties that are “materially important” to the registrant and its subsidiaries, the disclosure elicited in response to this item may not have been consistently material. 89 For many companies, the only physical properties held may be their headquarters, office space, or ancillary facilities, a description of which is likely to be unimportant to an investor's evaluation of an investment in the company. Even where a description of the registrant's physical properties is more likely to be salient to investors, such as with manufacturing companies, data centers, or casinos, the language of Item 102 may not provide sufficient clarity to registrants for determining which of their properties must be described. For example, commenters have pointed out that Item 102 contains a mixture of different disclosure triggers, such as references to “principal” plants and mines, “materially important” physical properties, and “major” encumbrances, which together in the same disclosure requirement may create unnecessary ambiguity. 90 In addition, while Instruction 2 of Item 102 incorporates the materiality concepts of Instruction 1 to Item 101 of Regulation S-K, Instruction 1 of Item 102 provides no such materiality overlay. This lack of harmony in Item 102 has created uncertainty about the scope of the rule and has likely contributed to the disclosure of immaterial information. 89 See the Proposing Release, supra note 5, at nn. 21 through 23 and see generally Section II.A. of the Proposing Release, supra note 5. See also Fast Act Report, supra note 7, at Section IV.B.1, and Concept Release, supra note 9, at Section IV.A.6.b. 90 See Section II.A. of the Proposing Release, supra note 5, and note 28 of that release (citing to the American Bar Association's comment letter of March 6, 2015 with respect to the Commission's Disclosure Effectiveness initiative). To address this issue, the Commission proposed revising Item 102 to emphasize materiality, which was consistent with several commenters' suggestions and the staff's recommendation in the FAST Act Report. 91 The Commission proposed to amend Item 102 to require disclosure to the extent physical properties are material to the registrant, which would include those properties that are material to the registrant's business. 92 The proposal was also intended to harmonize the various non-industry-specific triggers 93 for disclosure in Item 102 by replacing them with a consistent materiality threshold that would facilitate its application. The Commission also proposed to clarify that the disclosure required under Item 102 may be provided on a collective basis, if appropriate. 91 See FAST Act Report, supra note 7, at Recommendation B.1. 92 In the Proposing Release, the Commission stated the belief that this approach would not inadvertently omit disclosures that would be material to the registrant, but not its ongoing business, such as properties that have value that is material to the registrant but are no longer important to its operations. See Proposing Release, supra note 5, Section II.A., at 50991. 93 In light of the particular significance of this disclosure for registrants in the mining, real estate, and oil and gas industries, the Commission did not propose to modify any of the instructions of Item 102 specific to those industries. Instructions 3 through 7 to Item 102 are industry-specific. For example, Instruction 3 of Item 102 requires that registrants engaged in mining operations must refer to, and if required, provide the disclosure under §§ 229.1300 through 229.1305 (subpart 1300) of Regulation S-K, in addition to any disclosure required by Item 102. See supra note 88. b. Comments Many commenters supported the proposal to focus the required disclosure on material physical properties, with several of these commenters stating that the proposed amendments would help reduce unnecessary disclosure. 94 Several commenters suggested different formulations of the rule. For example, one commenter recommended that Item 102 be subsumed into the disclosure objectives of Item 101 and specific references to “material” and “materiality” in the item be omitted in favor of a more precisely articulated disclosure objective. 95 Another commenter suggested that the rule require disclosure only of properties that present specific risks to the registrant, which might mitigate the use of boilerplate disclosure. 96 A third commenter supported the proposed amendment but recommended that it apply uniformly to all issuers regardless of industry, including the real estate and extractive industries. 97 94 See letters from American Fuel (supporting the revision because it “would help reduce disclosure of immaterial information and therefore alleviate the possibility of disclosure overload”), Business Roundtable (stating generally that a focus on materiality “helps filter unnecessary information out of disclosures, providing investors a clearer picture of a company's business and financial profile”) and Cravath (stating that the proposed amendments “should enhance [Item 102] disclosure where appropriate or eliminate it where not material”), CCMC, CNA, Davis Polk, E&Y, FedEx, Fenwick, Financial Executives, Grumman, IMA, Lark Research, Nasdaq, Reed Smith, SIFMA, Society for Corp. Gov., and Sullivan. 95 See letter from E&Y, recommending that the disclosure objective for properties should be “to identify assets that contribute significantly to enterprise value, that are unique or provide competitive advantage, that could not be readily replaced or that present a significant risk to the enterprise if the registrant loses [its] use or access to them.” 96 See letter from IMA (providing as an example the risk of expropriation of an oil and gas facility by an unstable government). 97 See letter from CCMC (acknowledging that while physical properties will often be material to companies in the real estate and extractive industries, there are many situations where individual properties or groups of related properties are not material to particular issuers in these industries). In the Proposing Release, the Commission also requested comment on whether to further amend Item 102 to require additional disclosure about material properties, such as uncertainties in connection with these properties. A number of commenters responded that requiring such additional disclosure would only duplicate existing requirements, such as those in Items 101, 103, 303, and 503(c) of Regulation S-K and Exchange Act Rule 12b-20, as well as the financial statement footnotes. 98 98 See letters from American Fuel, Cravath, Davis Polk, Fenwick, Reed Smith, SIFMA, Society for Corp. Gov., and Sullivan. Finally, some commenters favored removing Item 102 as a separate disclosure item and incorporating it into the description of business required by Item 101, 99 an approach that the staff previously put forward in the FAST Act Report. 100 99 See letters from E&Y and Sullivan. 100 See letters from E&Y and Sullivan. See also FAST Act Report, supra note 7, at Recommendation B.1. c. Final Amendment We are adopting the amendment to Item 102 as proposed. 101 The revised item makes clear that, unless otherwise specified, disclosure need only be provided about a physical property to the extent that it is material to the registrant. The final rules provide a uniform standard of disclosure based on materiality for non-industry specific properties. Because determinations of materiality are fact-specific and encompass a wide range of possible considerations, we do not think it is appropriate to further limit the criteria for Item 102 disclosure by focusing only on certain specific risks or other narrowly defined measures of materiality. We believe that registrants are best suited to determine which, if any, of their physical properties warrant discussion based on what is material to them in light of their particular circumstances. Under this approach, some physical properties held by a registrant may not be material. In some cases, application of this analysis may result in a description of property on an individual basis or on a collective basis, or may result in no disclosure. 101 See r evised Item 102. We have not modified any of the instructions to Item 102 that relate to specific industries. As stated in the Proposing Release, the particular significance and unique considerations of property disclosure for registrants in the mining, real estate, and oil and gas industries weigh in favor of separate consideration. 102 102 See supra note 88, noting that the Commission has separately adopted revisions to the property disclosure requirements for mining registrants. We are also not opting to combine Item 102 with Item 101, as some commenters recommended. We continue to believe any effort to combine these requirements should be in the context of a broader inquiry into the purpose and function of a registrant's disclosure of its business operations, which was outside of the scope of this rulemaking. 2. Management, Security Holders, and Corporate Governance a. Amendment to Item 401 of Regulation S-K (Directors, Executive Officers, Promoters, and Control Persons) Item 401 of Regulation S-K sets forth disclosure requirements about the identity and background information of a registrant's directors, executive officers, and significant employees. 103 Form 10-K, which is one of several forms that calls for such disclosure, allows registrants to incorporate this information (and all other information required by Part III of Form 10-K) by reference to their definitive proxy or information statement. 104 As an alternative to incorporating this information by reference to a definitive proxy or information statement, Instruction 3 to Item 401(b) allows registrants to include required information about their executive officers in Part I of Form 10-K. If a registrant chooses this alternative, Instruction 3 states that the registrant is not required to repeat that information in its definitive proxy or information statement. 103 Item 401 was adopted in 1982 as part of the Commission's integrated disclosure initiative, although similar requirements can be traced back to Schedule A of the Securities Act. See Adoption of Integrated Disclosure System, Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (the “Integrated Disclosure System Adopting Release”). See also Securities Act, Schedule A, Paragraph 4 [15 U.S.C. 77aa(4)]. 104 General Instruction G.3 of Form 10-K. This instruction allows the information required by Item 401, along with other items required by Part III of Form 10-K, to be incorporated by reference from the registrant's definitive proxy or information statement (prepared in accordance with Schedule 14A) if the statement is filed with the Commission within 120 days after the end of the fiscal year covered by the Form 10-K. If the definitive proxy statement or information statement is not filed within the 120-day period or is not required to be filed with the Commission, the Part III information must be filed as part of the Form 10-K, or an amended Form 10-K, no later than the end of the 120-day period. To make clear that Instruction 3 applies to any executive officer disclosure required by Item 401, and therefore registrants need not duplicate such disclosure in their definitive proxy or information statement if they have already provided it in their Form 10-K, the Commission proposed to clarify the scope of the instruction by moving it from Item 401(b) and making it a general instruction to Item 401. The Commission also proposed to revise the required caption for the disclosure if it is included in Part I of Form 10-K to reflect a “plain English” approach. The required caption would be “Information about our Executive Officers” instead of “Executive officers of the registrant.” Several commenters supported the amendments to Item 401 as proposed, and no commenters opposed. 105 One commenter suggested further expanding the instruction in Item 401 to allow registrants to omit additional disclosure from their definitive proxy or information statement if the disclosure was previously filed on Form 10-K. 106 105 See letters from CCMC, Cravath, FedEx, Fenwick, Nasdaq, and Society for Corp. Gov. 106 See letter from Cravath (regarding previously filed Item 404 disclosure). But see letter from Society for Corp. Gov. (arguing against expanding the instruction to Item 404 and other disclosure items relating to executive officers). We are adopting the amendment to Item 401, as proposed, to eliminate any confusion arising from the current location of the instruction. 107 We are not expanding this amendment to cover other Part III disclosure about executive officers, such as Item 404 disclosure about related-party transactions, because doing so could result in bifurcating Part III disclosure between the Form 10-K and a separate proxy or information statement based on whether a party is an executive officer of the registrant. We think it is preferable to have the disclosure required by the Item in one filing. 107 New Instruction to Item 401 of Regulation S-K. b. Compliance With Section 16(a) of the Exchange Act (Item 405) Section 16(a) of the Exchange Act requires officers, directors, and specified types of security holders to report their beneficial ownership of a registrant's equity securities using forms prescribed by the Commission, 108 which must be filed electronically on EDGAR. 109 Item 405 requires registrants to disclose each reporting person 110 who failed to file Section 16 reports on a timely basis during the most recent fiscal year or prior fiscal years. 111 The disclosure is required under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Rule 16a-3(e) currently requires reporting persons to furnish a duplicate of those Section 16 reports to the registrant. 112 Registrants are instructed under Item 405(a) to provide the required disclosure relying solely on their review of such furnished reports and any written representation provided by such persons that no Form 5 is required. 113 108 See Form 3, Form 4, and Form 5. 109 Reporting persons have been required to file their Section 16 reports on EDGAR since 2003. See Mandated Electronic Filing and website Posting for Forms 3, 4 and 5, Release No. 33-8230 (May 7, 2003) [68 FR 25788 (May 13, 2003)] (“Section 16 Mandatory Electronic Filing Release”). In addition, all registrants who maintain a corporate website are required to post any Section 16 reports relating to the equity securities of the registrant on such website pursuant to Rule 16a-3(k) of the Exchange Act [17 CFR 240.16a-3(k)], and many registrants satisfy this requirement by providing hyperlinks directly to the electronic filings once they are made on EDGAR. The Commission has noted that any concerns a registrant may have about obtaining an electronic copy of the filing from a Section 16 reporting person in order to satisfy the web posting requirement “would not arise for issuers that rely on a hyperlink (for example, to EDGAR) instead of, or in addition to, direct website posting.” Id. at 25790. 110 Item 405(a)(1) of Regulation S-K [17 CFR 229.405(a)(1)] defines a “reporting person” as “each person who, at any time during the fiscal year, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the registrant registered pursuant to Section 12 of the Exchange Act, or any other person subject to Section 16 of the Exchange Act with respect to the registrant because of the requirements of Section 30 of the Investment Company Act.” 111 Item 405 was initially proposed in 1988 in an attempt to reduce the high delinquency rate for Section 16 reports. See Ownership Reports and Trading by Officers, Directors and Principal Stockholders, Release No. 34-26333 (Dec. 2, 1988) [53 FR 49997 (Dec. 13, 1988)] and Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Release No. 34-27148 (Aug. 18, 1989) [54 FR 35667 (Aug. 29, 1989)] (re-proposing Item 405 in response to comments on the 1988 proposing release). 112 See 17 CFR 240.16a-3(e). 113 See Item 405(a) and (b)(1). As described in the Proposing Release, the Commission proposed the following changes: 114 114 See Proposing Release, supra note 5, Section II.C.2 at 50995-6. These proposed amendments were based on staff recommendations in the FAST Act Report, which called for revisions to Item 405 and Rule 16a-3(e) in light of the availability of Section 16 reports on EDGAR. See FAST Act Report, supra note 7, at Recommendation D.2. See also Section 16 Mandatory Electronic Filing Release, supra note 109, at 25790. • Eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant. • Amend Item 405 to: ○ Clarify that registrants may, but are not required, to rely only on Section 16 reports that have been filed on EDGAR (as well as any written representations from the reporting persons) to assess whether there are any Section 16 delinquencies to disclose. 115 115 Proposed Item 405(b). ○ Change the disclosure heading required by Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to the more specific “Delinquent Section 16(a) Reports” and encourage registrants to exclude this heading altogether when they have no Section 16(a) delinquencies to report. • Eliminate the checkbox on the cover page of Form 10-K (and the related instruction in Item 10 of Form 10-K) whereby the registrant indicates that there is no disclosure of delinquent filers in the Form 10-K and, to the best of the registrant's knowledge, will not be included in a definitive proxy or information statement incorporated by reference. We received several comments on the proposed amendments, 116 all of which generally supported the revisions, with some commenters recommending slight modifications to the rules as proposed. 117 116 See letters from CCMC, Cravath, FedEx, Fenwick, and Society for Corp. Gov. 117 See letter from Society for Corp. Gov. (suggesting that changing the caption to “Delinquent Section 16(a) Reports” was unnecessary) and letter from Cravath (suggesting that there may be some value in requiring affiliates, other than officers and directors, to provide registrants with electronic notice of delinquent Section 16 reports). We are adopting the amendments to Item 405, Section 16a-3(e), and the cover page of Form 10-K, as proposed. We believe these amendments, taken together, will improve the Section 16 disclosure regime for the benefit of both registrants and investors by making the rules more straightforward, compliance less burdensome, and the disclosure itself more streamlined. Rule 405, as amended, will allow registrants to leverage the availability of Section 16 reports on EDGAR to perform their diligence for Item 405 disclosures more efficiently and with a greater degree of confidence in the results. 118 By shifting the focus of a registrant's inquiry to Section 16 reports filed electronically on EDGAR, revised Item 405 modernizes and simplifies the registrant's compliance with Item 405 while still providing all material information. However, registrants are not restricted to only these documents and may, but are not required, to expand the scope of their inquiry. 119 Consistent with this shift away from furnished reports, as proposed, we are also removing the provision in Rule 16a-3(e) that requires Section 16 reporting persons to provide a duplicate copy of their reports to the registrant. This provision, which predates EDGAR and the requirement that all reporting persons electronically file their Section 16 reports, has become unnecessary. 120 118 See revised Item 405(b) [17 CFR 229.405(b)]. Revised Item 405(b) permits registrants to rely on a review of Section reports filed electronically with the Commission during the registrant's most recent fiscal year and any written representations from reporting persons that no Form 5 is required. 119 Item 405 previously provided that the registrant “shall” make its disclosure “based solely upon” the Section 16 reports furnished to it pursuant to Rule 16a-3(e) and any written representation from a reporting person that no Form 5 is required. As stated in the Proposing Release, this language could be read to suggest that registrants may not rely on information outside of the Section 16 reports furnished to the registrant pursuant to Rule 16a-3(e). Therefore, revised Item 405(b) provides that registrants “may” rely only on the Section 16 reports and the written representation. As a result, if a registrant were aware that information in a Section 16 report submitted on EDGAR was not complete or accurate, or that a reporting person failed to file a required report, it could provide appropriate disclosure pursuant to Item 405, as revised. See Proposing Release, supra note 5, at 50995. 120 For the same reason, we are not amending our rules to require that reporting persons provide notice to the registrant when they file a Section 16 report on EDGAR. We believe such a notice requirement is not only unnecessary, but contrary to the objectives of this rulemaking to streamline our disclosure rules and make them less burdensome. We are also changing the required caption in Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports” and including an instruction to this item to clarify that registrants are encouraged not to provide this caption if there are no delinquencies to report, as proposed. This revision is intended to minimize unnecessary disclosure and, at the same time, facilitate the ability of investors to identify and monitor Section 16 delinquencies. Finally, we are modifying the cover page of Form 10-K, as proposed, to eliminate the checkbox indicating the absence of Item 405 disclosure in a registrant's Form 10-K and its definitive proxy or information statement incorporated by reference. We believe the value of this cover page disclosure has outlived its usefulness as a tool to facilitate the staff's processing and review of the form. 121 121 See Proposing Release, supra note 5, Section II.C.2 at 50995-6. 3. Corporate Governance (Item 407) Several disclosure requirements related to corporate governance are consolidated in Item 407. 122 The Commission proposed amendments to update a reference to an outdated auditing standard in Item 407(d)(3)(i)(B) and proposed to revise Item 407(e)(5) to clarify that emerging growth companies (“EGCs”) are not required to provide a compensation committee report. 123 We are adopting these amendments as proposed, as further discussed below. 122 17 CFR 229.407. Item 407 was adopted in 2006 to consolidate various corporate governance requirements under a single disclosure item. See Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)]. 123 See FAST Act Report, supra note 7, at Recommendations D.4 and D.5. a. Audit Committee Discussions With Independent Auditor (Item 407(d)(3)(i)(B)) Under existing Item 407(d)(3)(i)(B), when a registrant files a proxy or information statement relating to an annual or special meeting of security holders at which directors are elected or written consents are provided in lieu of a meeting, a registrant's audit committee must state whether it has discussed with the independent auditor the matters required by AU section 380, Communication with Audit Committees (“AU sec. 380”). 124 As described in the Proposing Release, the reference to AU sec. 380 has become outdated. 125 As such, the Commission proposed to update the reference to AU sec. 380 in Item 407(d)(3)(i)(B) by referring more broadly to “the applicable requirements of” the Public Company Accounting Oversight Board (“PCAOB”) and the Commission. 126 Several commenters supported the proposed amendments, and no commenters opposed. 127 We are therefore adopting the amendments to Item 407(d)(3)(i)(B) as proposed. We believe this language will more easily accommodate any future changes to audit committee communication requirements. 124 See Instruction 3 to Item 407(d) of Regulation S-K. 125 See Proposing Release, supra note 5, Section II.C.3.a. at 50996. 126 See Auditing Standard No. 1301, Communications with Audit Committees (“AS 1301”), including Appendix B to AS 1301; Section 10A(k) of the Exchange Act [15 U.S.C. 78j-1(k)]; Rule 2-07 of Regulation S-X [17 CFR 210.2-07]; and Exchange Act Rule 10A-3 [17 CFR 240.10A-3]. 127 See letters from BDO, CAQ, CCMC, Cravath, Deloitte, E&Y, FedEx, Fenwick, Nasdaq, PWC, Society for Corp. Gov., and Sullivan. Two of these commenters also encouraged the staff to publish guidance that catalogs the specific PCAOB and Commission rules that are covered by revised Item 407(d)(3)(i)(B) at the time to avoid confusion and provide clarity to registrants. See letters from Cravath and Society for Corp. Gov. The staff will consider the necessity of such additional guidance. b. Compensation Committee Report (Item 407(e)(5)) Item 407(e)(5) 128 requires a registrant's compensation committee to state whether it has reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) required by Item 402(b). 129 Based on this review and discussion, Item 407(e)(5) requires that the compensation committee state whether it recommended to the board of directors that the CD&A be included in the registrant's annual report, proxy statement, or information statement. The Commission proposed to amend Item 407 to explicitly exclude EGCs from the Item 407(e)(5) requirement because they are not subject to a requirement to include a CD&A in their public disclosures. 130 Specifically, the proposed amendment added a reference to EGCs in Item 407(g), which currently excludes smaller reporting companies from Item 407(e)(5), among other provisions of Item 407. Several commenters supported the proposed amendments, and no commenters opposed. 131 Accordingly, we are adopting the amendments to Item 407(e)(5) as proposed. 128 17 CFR 229.407(e)(5). 129 17 CFR 229.402(b). 130 See Item 402(l) of Regulation S-K. 131 See letters from CAQ, Cravath, FedEx, Fenwick, Nasdaq, Society for Corp. Gov., and CCMC. 4. Registration Statement and Prospectus Provisions a. Outside Front Cover Page of the Prospectus (Item 501(b)) Item 501(b) 132 sets forth disclosure requirements related to the outside front cover page of prospectuses. 133 The proposed amendments were intended to streamline these requirements and to provide registrants with greater flexibility in designing a cover page tailored to their business and the particular offering. We are adopting these amendments as proposed, as discussed below. 132 17 CFR 229.501(b). 133 See FAST Act Report, supra note 7, at Recommendations E.1-5. i. Name (Item 501(b)(1)) Item 501(b)(1) requires disclosure of a registrant's name, including an English translation of the name of foreign registrants. The instruction to Item 501(b)(1) states that if a registrant's name is the same as that of a “well known” company, or if the name leads to a misleading inference about the registrant's line of business, the registrant must include information to eliminate any possible confusion with the other company. If disclosure is insufficient to eliminate the confusion, the instruction indicates that the registrant may be required to change its name. The instruction provides an exception, however, if the registrant is an “established company,” the character of the registrant's business has changed, and the “investing public is generally aware of the change and the character of [the registrant's] current business.” 134 134 This policy reflected in Item 501(b)(1) with regard to misleading company names was first articulated by the Commission in 1969 in response to an increase in the number of registrants using names that the staff considered to be misleading. At the time, the Commission noted that registrants were using words such as “nuclear,” “missile,” “space,” “nucleonics,” and “electronics” in their names when they were not engaged in activity normally associated with those words, or were engaged to a limited extent. See Guide for Preparation and Filing of Registration Statements; Misleading Names of Registrants, Release No. 33-4959 (Apr. 16, 1969) [34 FR 6575 (Apr. 17, 1969)]. This policy was contained in Guide 53 of the Commission's Guides for Preparation and Filing of Registration Statements before being moved into Item 501 in 1982. See Integrated Disclosure System Adopting Release, supra note 103; Rescission of Guides and Redesignation of Industry Guides, Release No. 33-6384 (Mar. 3, 1982) [47 FR 11476 (Mar. 16, 1982)]. As discussed in the Proposing Release, in an effort to streamline Item 501(b)(1), the Commission proposed to eliminate the portion of the instruction to Item 501(b) that discusses when a name change may be required and the exception to that requirement. 135 135 See Proposing Release, supra note 5, Section II.D.1.a. at 50997. A few commenters supported the proposed amendment to Instruction 1 of Item 501(b)(1), 136 while some opposed it. 137 One commenter encouraged the Commission to eliminate the language about a registrant being required to change its name because this subject matter is already addressed by state law, as well as common law and federal trademark law. 138 The commenter asserted that the Commission's resources should not be devoted to matters “outside its core mission of investor protection that are already addressed by other regulators and non-securities laws.” 139 However, one of the commenters who objected to the proposal stated that the Commission should be developing and expanding guidance on misleading names, not reducing it, noting that this issue continues to raise investor protection concerns. 140 136 See letters from K. Bishop, CCMC, and Fenwick. 137 See letters from Cravath and Sullivan. 138 See letter from K. Bishop. 139 Id. 140 See letter from Sullivan. After considering these comments, we have decided to adopt the amendment as proposed. Our intent is to streamline the instruction to Item 501(b) in accordance with the objectives of this rulemaking to modernize and simplify our disclosure requirements, not to signal a change in Commission policy with respect to the use of potentially misleading company names. We continue to believe that a registrant's name could mislead investors under some circumstances. However, these situations can typically be addressed by the addition of clarifying disclosure and exercise of the Commission's discretion to take registration statements effective commensurate with the public interest and the protection of investors. 141 141 15 U.S.C. 77h. ii. Offering Price of the Securities (Item 501(b)(3)) Item 501(b)(3) requires disclosure on the prospectus front cover page of the price of the securities being offered, the underwriter's discounts and commissions, and the net proceeds that the registrant and any selling security holders will receive. 142 The disclosure must be provided on an aggregate and per share basis, but registrants may present the required information in any format that fits the design of the cover page and is clear, easily read, and not misleading. 142 17 CFR 229.501(b)(3). Item 501(b)(3) also includes specific disclosure requirements for offerings being made on a minimum/maximum basis. In situations where it is not practicable to provide a price for the securities, Instruction 2 to Item 501(b)(1)(3) permits registrants to explain the method by which the price is to be determined. 143 The Commission proposed to amend Instruction 2 to explicitly allow registrants to include a clear statement on the cover page, when applicable, that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus. This proposal was based on the belief that investors may be better served if registrants were given the option to provide a full explanation of the pricing method in the body of the prospectus, with a reference to this more fulsome disclosure displayed prominently on the prospectus cover page. 143 The instruction also provides that if the securities are to be offered at the market price, or if the offering price is to be determined by a formula relating to the market price, the registrant should indicate the market and market price of the securities as of the latest practicable date. The Commission did not propose any change to this portion of the instruction. After considering the responses from a number of commenters who supported this proposal, 144 with no commenters opposed, we are adopting the amendment to Item 501(b)(3). We continue to believe that requiring a detailed explanation of the pricing method on the outside front cover page of the prospectus could reduce the impact of other significant disclosures and is unnecessary so long as the cover page clearly directs investors to the location in the prospectus where the disclosure is provided in full. 144 See letters from Cravath, Fenwick, Sullivan, and CCMC. iii. Market for the Securities (Item 501(b)(4)) Item 501(b)(4) requires a registrant to disclose on the prospectus cover page the name of any national securities exchanges that list the securities being offered and the trading symbols for those securities. A “national securities exchange” is defined in the Exchange Act as a securities exchange that has registered with the Commission under Section 6 of the Exchange Act. 145 Item 501(b)(4) is specific to “national securities exchanges” and does not, under its terms, require registrants to identify markets that are not national securities exchanges. 146 145 See Section 6 of the Securities Exchange Act of 1934 [15 U.S.C. 78f]. 146 Item 501(b)(4) requires registrants whose securities are listed on “any national securities exchange or the Nasdaq Stock Market” to identify the market(s) and trading symbol(s) for the securities. The Nasdaq Stock Market became operational as a registered national securities exchange on August 1, 2006, following the Commission's approval of its application for registration on January 13, 2006. A list of registered national exchanges is available on the Commission's website at https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html. The Commission proposed to amend Item 501(b)(4) to require disclosure on the prospectus cover page of the principal United States market or markets for the securities being offered and the corresponding trading symbols based on the premise that the information required by Item 501(b)(4) could be important to investors even as to markets that are not “national securities exchanges.” 147 The Commission proposed to expand the scope of the item only to the principal United States markets where the registrant, through the engagement of a registered broker-dealer, has actively sought and achieved quotation. By limiting the proposal in this way, the Commission acknowledged that registrants cannot always control whether their securities are quoted on an over-the-counter market and should not be burdened with making that determination. 147 The proposed changes to Item 501(b)(4) align with recent amendments to Item 201(a) [17 CFR 229.201(a)]. See Disclosure Update and Simplification, Release No. 33-10532 (Aug.17, 2018) [83 FR 50148 (Oct. 4, 2018)] (the “Disclosure Update and Simplification Release ” ) at 51688. Several commenters supported the proposal, 148 and only one commenter opposed it. 149 The commenter that opposed expanding the cover page disclosure of applicable securities markets stated that the identification of trading markets other than national securities exchanges on the prospectus cover page may confuse investors by suggesting that the markets were equivalent to national exchanges. 150 148 See letters from CCMC, Cravath (noting that in connection with the implementation of the European Union Market Abuse Regulation, many registrants have discovered that it is possible for third parties—without any participation by or even notice to the registrant—to list the registrant's securities on a securities exchange), Fenwick, and Sullivan. 149 See letter from Nasdaq. 150 Id. The commenter pointed out that national securities exchanges are registered under Section 6(b) of the Exchange Act and therefore subject to more rigorous requirements than non-registered domestic exchanges. Cover page disclosure of these other exchanges might, in the commenter's view, give them the “imprimatur” of a national securities exchange, thus complicating the disclosure rather than streamlining it. We are adopting amended Item 501(b)(4), as proposed. We continue to believe, as stated in the Proposing Release, that investors would benefit from the addition of this information. 151 In adopting this disclosure requirement, we considered the concern that the presentation of this information on the prospectus cover page might suggest to some investors that the registrant's principal United States market, while not a national securities exchange, carries the imprimatur of an exchange registered under Section 6(b) of the Exchange Act. It is not clear, however, that providing the name of the principal market on the prospectus cover page, in and of itself, is sufficient to create an inference about the quality of the market, or that such identification carries any implication about the market that would not already be produced by identification of the market under the existing prospectus disclosure requirements of Item 202 and Item 508 of Regulation S-K. 152 Therefore, we do not think that there is a significant risk that investors will equate the principal market or markets listed on the cover page with a national stock exchange. 151 See Proposing Release, supra note 5, Section II.D.1.c. at 50998. 152 Item 202 [17 CFR 229.202] requires a description of the registrant's securities, including relevant market information. Item 508 [17 CFR 229.508] pertains to disclosure about the plan of distribution of the securities offering, including identification of the exchange, if any, on which the securities are to be offered. iv. Prospectus “Subject to Completion” Legend (Item 501(b)(10)) Item 501(b)(10) requires a registrant that is using a preliminary prospectus to include a legend advising readers that the information will be amended or completed. The legend also must include a statement that the prospectus is not an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted. The latter statement was introduced in 1958 to harmonize the legend with what was required by state securities administrators at the time. 153 153 See Amendment of Rules 134 and 433, Release No. 33-3885 (Jan. 7, 1958) [23 FR 184 (Jan. 10, 1958)]. This requirement was originally in Rule 433, a predecessor to the current requirement. The legend requirement has remained mostly unchanged since 1958, even after the National Securities Markets Improvement Act (“NSMIA”) allowed for preemption of state blue sky laws in many offerings. 154 The Commission proposed to amend Item 501(b)(10) to permit registrants to exclude from the prospectus the portion of the legend relating to state law for offerings that are not prohibited by state blue sky laws. This change would allow for a more tailored prospectus cover page in recognition of the changes to securities law brought by NSMIA. 154 Public Law 104-290, 110 Stat. 3416 (1996). The Commission also proposed to streamline Item 501(b) by consolidating existing Item 501(b)(11), regarding the use of Rule 430A, into Item 501(b)(10) for the sake of simplicity without substantive change. A number of commenters supported the amendments to Item 501(b)(10) that would simplify the “subject to completion” legend on preliminary prospectuses, and no commenters opposed these amendments. 155 Therefore, and for the reasons noted in the Proposing Release, we are adopting the revisions to Item 501(b)(10) as proposed. 155 See letters from CCMC, Cravath, Fenwick, and Sullivan. b. Risk Factors (Item 503(c)) Item 503(c) requires disclosure of the most significant factors that make an offering speculative or risky. 156 This risk factor disclosure was initially called for only in the offering context, 157 but in 2005 the risk factor disclosure requirements were extended to periodic reports and registration statements on Form 10. 158 Consistent with this change, the Commission proposed to relocate Item 503(c) to new Item 105, as Subpart 100 covers a broad category of business information and is not limited to offering-related disclosure. 159 156 17 CFR 229.503(c). 157 See Guides for Preparation and Filing of Registration Statements, Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 1964)] and Guides for Preparation and Filing of Registration Statements, Release No. 33-4936 (Dec. 9, 1968) [33 FR 18617 (Dec. 17, 1968)]. 158 See Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform Adopting Release”). 159 Additionally, the proposed amendments use the term “registrant” instead of “issuer.” Use of and reference to “registrant” instead of “issuer” was intended to better reflect the application of risk factor disclosure outside of the offering context. The term “registrant” is defined under both the Exchange Act and Securities Act. See Rule 12b-2 [17 CFR 240.12b-2] and Rule 405 [17 CFR 230.405]. The Commission also proposed amendments to several Commission forms that require risk factor disclosure and reference Item 503(c). The proposed amendments would revise references to Item 503 to specify new Item 105. A number of forms that require risk factor disclosure do not reference Item 503(c). The proposed amendments did not include revisions to these forms. For example, Forms 10-Q and 20-F require risk factor disclosure but do not reference item 503(c). The Commission also proposed amendments that would eliminate the specific risk factor examples that are currently enumerated in Item 503(c). Although Item 503(c) is principles-based, and the Commission has eschewed “boiler plate” risk factors that are not tailored to the unique circumstances of each registrant, the following examples of factors that may make an offering speculative or risky have remained unchanged since the Commission first published guidance on risk factor disclosure in 1964: 160 160 See Guides for Preparation and Filing of Registration Statements, Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 1964)]. • A registrant's lack of an operating history; • a registrant's lack of profitable operations in recent periods; • a registrant's financial position; • a registrant's business or proposed business; and • the lack of a market for a registrant's common equity securities or securities convertible into or exercisable for common equity securities. As discussed in the Proposing Release, the Commission's principles-based approach to risk factor disclosure is not consonant with the item's list of examples of material risks. 161 These examples may not apply to all registrants and may not correspond to the material risks of any particular registrant. In addition, the inclusion of these examples could suggest that a registrant must address each one in its risk factor disclosures, regardless of the significance to its business. Finally, the Commission was concerned that the inclusion of any examples in Item 503(c), whether to illustrate the specific kinds of risks that should be disclosed or generic risks that should be avoided, could anchor or skew the registrant's risk analysis in the direction of the examples. 162 161 See Proposing Release, supra note 5, Section II.D.2. at 50998-10. 162 See Proposing Release, supra note 5, at n. 145. Numerous commenters supported the proposed amendments to relocate the risk factor disclosure requirements from Item 503(c) to new Item 105 and eliminate the examples of risk factors that currently appear in the rule. 163 Commenters generally agreed that the examples are not helpful because they are written generically and, as such, are not well suited to the particular circumstances and material risks of individual registrants. Some commenters pointed out that the examples may even prompt registrants to include risk factors that address the risks highlighted in the examples even if they are not material to their business. 164 One commenter opposed the elimination of examples in Item 503(c) because, in its view, the examples are helpful guidance that brings focus to the risk factor disclosures. 165 The commenter suggested that eliminating the examples may not further the Commission's objective of eliciting more specific and relevant risk factor disclosure. 163 See letters from American Fuel, BDO, CAQ, Cravath, Edison Electric Institute & American Gas Association, E&Y, Fenwick, Financial Executives, PNC Financial Services Group (“PNC”), Reed Smith, SIFMA, Sullivan, and UnitedHealth. 164 See, e.g., letters from Reed Smith and SIMFA. 165 See letter from CII. We are adopting the amendments as proposed. With respect to the elimination of the specific examples of material risks currently found in Item 503(c), we continue to think that retaining these examples, which have remained unchanged since they were first articulated in 1964, would be inconsistent with the Commission's emphasis on principles-based requirements that encourage registrants to provide risk disclosure that is more precisely calibrated to their particular circumstances and therefore more meaningful to investors. By removing this language from the risk factor disclosure rules, we seek to encourage registrants to focus on their own risk identification processes. c. Plan of Distribution (Item 508) Item 508 requires disclosure about the plan of distribution for securities in an offering, including information about underwriters. Paragraph (a) requires disclosure about the principal underwriters and any underwriters that have a material relationship with the registrant, while paragraph (h) requires disclosure of the discounts and commissions to be allowed or paid to dealers. If a dealer is paid any additional discounts or commissions for acting as a “sub-underwriter,” paragraph (h) allows the registrant to include a general statement to that effect without giving the additional amounts to be sold. “Sub-underwriter” is not a defined term, and its application may be unclear. “Principal underwriter,” however, is defined in Regulation C as “an underwriter in privity of contract with the issuer of the securities as to which he is an underwriter.” 166 The Commission accordingly proposed to amend Rule 405 to define the term “sub-underwriter” as a dealer that is participating as an underwriter in an offering by committing to purchase securities from a principal underwriter for the securities but is not itself in privity of contract with the issuer of the securities. 167 166 Rule 405. 167 The only other use of the term “sub-underwriter” or “subunderwriter” in Regulation S-K, the Securities Act rules, or the Exchange Act rules is in Rule 491. The Commission proposed to amend Rule 491 to reference “sub-underwriter,” consistent with the proposed amendments to Rule 405. The proposed definition of sub-underwriter would not change the meaning of that term in Rule 491. A number of commenters supported the proposed amendments to Rule 405 and no commenters opposed them. 168 We are therefore adopting the amendment to add the definition of “sub-underwriter” to Rule 405, as proposed. 168 See letters from CCMC, Cravath, and Sullivan. d. Undertakings (Item 512) Item 512 provides undertakings that a registrant must include in Part II of its registration statement, depending on the type of offering. As further described in the Proposing Release, the Commission proposed the following amendments to eliminate undertakings that are duplicative of other rules or that have become unnecessary due to developments since their adoption. 169 Specifically, the Commission proposed to eliminate Item 512(c) 170 in its entirety because it is no longer necessary, 171 and proposed to eliminate the Item 512(d), Item 512(e), and Item 512(f) undertakings, because they are obsolete. 172 169 See Proposing Release, supra note 5, Section II.D.4. at 51000-1. 170 17 CFR 229.512(c). 171 See Proposing Release, supra note 5, Section II.D.4. at 51000. Item 512(c) sets forth undertakings that a registrant must include if it registers a warrant or rights offering to existing security holders and the securities not purchased by those security holders will be reoffered to the public. The Item requires a registrant to supplement the prospectus to disclose the results of the subscription offer and the terms of any subsequent reoffer to the public. If any public reoffer is made on different terms than the offer to existing security holders, the registrant must undertake to file a post-effective amendment. The purpose of the undertaking is to provide current information about warrants or rights offerings. See FAST ACT Report, supra note 7, at Recommendation E.8. Given that the registrant would already have to register and disclose the offering to existing security holders, as well as the reoffering to the public, the undertaking is duplicative and unnecessary. Furthermore, disclosure of material changes in the terms of the offering would also be required as part of the Item 512(a)(1) undertaking, thus obviating the need for Item 512(c). 172 Id. at 51000-1. Item 512(d) is applicable when the securities to be registered are to be offered at competitive bidding. Item 512(e) sets forth undertakings that are required if the registration statement incorporates by reference in the prospectus all or any part of the annual report to security holders meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act. Item 512(f) pertains to equity offerings of registrants that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act. Each of these items is no longer necessary because of prior changes in our rules, as described in the Proposing Release. For example, the undertaking in Item 512(d) arose from a requirement in the Public Utility Holding Company Act of 1935 (“PUHCA”) that public utility company securities be sold through competitive bidding. That requirement was rescinded in 1994 and PUHCA was repealed by Congress in 2005. A number of commenters supported the proposed amendments to the undertakings and no commenters opposed them. 173 Accordingly, and for the reasons noted in the Proposing Release, we are amending Item 512 to remove the undertakings in paragraphs 512(c), (d), (e), and (f), as proposed. 173 See letters from Cravath, FedEx, Nasdaq, Sullivan, and CCMC. 5. Exhibits a. Description of Registrant's Securities (Item 601(b)(4)) Item 202 requires registrants to provide a brief description of their registered capital stock, debt securities, warrants, rights, American Depositary Receipts, and other securities. 174 Registrants provide Item 202 disclosure about registered securities in their registration statements, 175 but are not required to provide this disclosure in their Form 10-K or Form 10-Q. 176 174 Items 202(a)-(d) and (f) [17 CFR 229.202(a)-(d) and (f)]. Item 202(e), “Market information for securities other than common equity,” is outside the scope of this rulemaking; it requires that if securities other than common stock are to be registered and there is an established trading market for such securities, registrants are required to provide market information for such securities comparable to that required by Item 201(a) of Regulation S-K. 175 Item 202 disclosure is often incorporated by reference into a registration statement on Form 8-A from a prior registration statement on Form S-1. See Concept Release, supra note 9, at Section IV.D.2. 176 Registrants are required to file com [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-05695. Public record. Not legal advice.