SEC Proposes Disclosure Simplification Rules as Part of FAST Act

Chris Gaetano
Published Date:
Oct 12, 2017

The Securities and Exchange Commission has released draft rules that aim to simplify public company disclosures as mandated in the FAST Act, a transportation funding bill that also contained securities law-related measures. The rule changes are meant to reduce the cost and burdens of complying with certain disclosure rules, improve the the readability and navigability of disclosure documents, and discourage redundant and immaterial information disclosures. 

"The FAST Act has given the Commission the opportunity to update our rules, simplify our forms, and utilize technology to make disclosure more accessible," said SEC Chairman Jay Clayton. "An effective disclosure regime provides investors with the information necessary to make informed investment choices without imposing unnecessary burdens of time and money on issuers, and today's action embodies that goal."

The proposal affects a wide variety of disclosure items. For example, the SEC's proposed revision of Item 102 would emphasize materiality as it relates to the registrant, clarifying that the disclosure required under Item 102 should focus on physical properties material to the registrant and may be provided on a collective basis if appropriate. It would also harmonize some of the non-industry-specific triggers for disclosure in Item 102, such as replacing the references to "major" encumberances and "materially important" physical properties in Item 102 with references to a consistent materiality threshold. 

It would also affect Item 303, Manager's Discussion and Analysis. Here the SEC is proposing to eliminate discussion of the earliest year when financial statements included in a filing cover three years, on the condition that the discussion is not material to understanding the registrant's financial conditions, changes in financial conditions and results of operations. This would only be applicable if the registrant has filed its prior year Form 10-K on EDGAR contaning an MD&A of the earliest of the three years included in the financial statements of the current filing. The proposal would also eliminate the reference to five-year selected financial data in Instruction 1 to Item 303(a) as a way to eliminate duplication. The instructions would also emphasize that registrants may use any presentation that, in their judgment, would enhance a reader's understanding. So, for example, they could opt for a narrative disclosure if circumstances call for it. 

On Item 407, Corporate Governance, the SEC would update the reference to AU sec. 380 to refer more broadly to the applicable requirements of the PCAOB and SEC, which is believed to better accommodate future changes to audit committee communication requirements. Item 407 would also explicitly exclude emerging growth companies from the Item 407(e)(5) requirement as they are not subject to the requirement to include a Compensation Discussion and Analysis in their public disclosures.  

The 253 page document has many more possible disclosure changes. 

The SEC will be accepting comments on the proposal for 60 days. 

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