SEC Approves Form 8-K Changes

SEC Approves Form 8-K Changes
Bringing Markets Closer to Real-Time Reporting

The Securities and Exchange Commission in March approved a resolution to alert investors of significant corporate developments, such as financial restatements or the departure of officers or directors.

The SEC voted unanimously at its March 11 open meeting to amend its Form 8-K requirements for significant events that publicly traded companies currently must report in between their regular, periodic reports.

“The Commission’s rules must reflect the reality of modern communications practices,” SEC Chairman William Donaldson said. “Today’s investors need more timely access to material information about the companies in which they’ve invested. We must seek to prevent situations where investors just receive the good news companies choose to disclose but are left in the dark on other important developments until companies are required to file their next periodic report.”

The regulation originally proposed that companies report any kind of material event that should be disclosed. Under the new regulation, companies must file Form 8-K with the SEC when certain triggering events occur. Companies will have four business days to file their forms after a triggering event.

The amendment, another result of the Sarbanes-Oxley Act, require companies “to disclose on a rapid and current basis material information regarding changes in a company’s financial condition or operations,” according to an SEC release.

The SEC said the amendment establishes eight new specific items that must be reported, including: entry into a material non-ordinary-course agreement; termination of a material non-ordinary-course agreement; creation of a material direct financial obligation or a material obligation under an off-balance-sheet arrangement; triggering events that accelerate or increase a material direct financial obligation or a material obligation under an off-balance-sheet arrangement; material costs associated with exit or disposal activities; material impairments; notice of delisting or failure to satisfy a continued listing rule or standard; transfer of listing; and nonreliance on previously issued financial statements or a related audit report or completed interim review (restatements).

Additionally, the amendment transfers two items from periodic reports, including unregistered sales of equity securities and material modifications to rights of security holders. It also expands existing disclosure items, such as the departure of directors or principal officers, the election of directors, or the appointment of principal officers; and amendments to articles of incorporation or bylaws and changes in fiscal year.

The new Form 8-K rules will go into effect Aug. 23.

Aside from the more precise triggers for a company to determine when it is required to file, the new amendment eliminates a requirement for a company to analyze the impact of the disclosure. It also provides for a limited safe-harbor for failure to disclose some items, extending to the due date of the periodic reports.

Commissioners called the amendment one of the most significant actions the SEC has taken in some time.

“This takes our disclosure laws into the 21st century,” SEC Commissioner Harvey Goldschmid said. “It also takes us one step closer to real-time reporting, which is a goal I think we all share.”

Other Action

The commission also voted on two other items regarding adoption of international financial reporting standards by foreign registrants, and a requirement for disclosure regarding portfolio managers of registered management investment companies.

“The commission voted to propose amendments to Form 20-F that would affect foreign private issuers that change their basis of accounting to international accounting standards,” stated a report released by the SEC. The proposal allows companies, mainly registrants from the European Union, some leeway in reporting requirements when switching to International Reporting Standards or IFRS.

Companies adopting IFRS for the first time after the beginning of 2007 would be able to, in their first year, include only two years of audited financial statements in SEC filings, as opposed to the three years required in Form 20-F, among other provisions. Those companies also have to disclose information about reconciling their prior basis for accounting with IFRS.

The SEC also approved proposed amendments designed “to provide greater transparency regarding portfolio managers, their incentives managing a fund, and the potential conflicts of interest that may arise when they also manage other investment vehicles,” the SEC reported.

The amendments would require detailed identification of portfolio management teams in a fund’s prospectus, information on other accounts managed by the management, with a description of potential conflicts of interest, and other information.

Comments on these proposals should be received by the SEC within 60 days of its publication in the Federal Register.