United States: No More CTRs! (And Other SEC Updates To Modernize And Simplify Disclosure For Public Companies)

On March 20, 2019, the Securities and Exchange Commission (SEC) adopted amendments to existing rules to modernize and simplify its disclosure obligations. The adopting release for these amendments can be found here. The most significant changes relate to the new streamlined process for redacting confidential information from documents required to be filed as exhibits with the SEC. Prior to these amendments, a company would only be able to redact confidential information from material contracts filed with the SEC by submitting a detailed confidential treatment request (CTR) that specifically identified the legal grounds for requesting confidential treatment and explaining why disclosure of the information was unnecessary for the protection of investors. CTRs are often lengthy and take substantial time to prepare and have been a particular pain point for companies (and their outside law firms), especially life sciences companies with lengthy and complex partner agreements. Under the final rules, companies will now be able to redact confidential information from material contracts without the need to submit a CTR if the information is not material and would likely cause competitive harm if publicly disclosed. The amendments also make some additional modest changes to public company disclosure requirements, largely to eliminate redundant or obsolete disclosure requirements. However, in certain instances, the amendments require additional disclosure.

New Rules

Below is a summary of the major categories of amendments in the adopting release, and a summary of the additional amendments can be found here.

  • Elimination of the requirement to discuss third prior year in MD&A. Regulation S-K (Reg. S-K) Item 303 requires that most companies discuss their financial condition and results of operations for the three-year period covered by the financial statements included in their annual reports and prospectuses. This results in a discussion of changes between the third and second prior year preceding the date of the report, which is typically included in a previously filed report. The amendments eliminate the requirement to discuss the third prior year provided that (1) such disclosure is included in a prior filing on EDGAR and (2) the report includes a statement that identifies the location in the prior filing of this discussion. Additional amendments to Item 303(a) include (1) eliminating the reference to five-year selected financial data for trend information and (2) stating that a company may use any presentation that, in its judgment, would enhance a reader's understanding of the company's financial condition, changes in financial condition and results of operations, in lieu of specifying the use of year-to-year comparisons. This revision does not affect smaller reporting companies and emerging growth companies that are allowed to provide just two years of audited financial statements.

    To maintain a consistent approach to the MD&A disclosure requirements for domestic companies and foreign private companies, the SEC is adopting changes to Form 20-F that conform to the changes to Item 303(a).
  • Redaction of confidential information from exhibits. Reg. S-K Item 601(b)(10) requires companies to file certain material agreements as an exhibit to their SEC filings. SEC rules currently provide a procedure by which companies can redact confidential information contained in these filed agreements. This procedure currently requires companies to submit a CTR that specifically identifies the legal grounds for requesting confidential treatment and explain why disclosure of the information was unnecessary for the protection of investors. The CTR process is a cumbersome and sometimes slow-moving and time-consuming process. The amendments will now allow companies to redact portions of filed exhibits if these provisions are not material and would likely cause competitive harm to the company if disclosed.

    Just like under the current rules, companies would still be required to (1) mark the exhibit index to indicate that portions have been omitted; (2) include a prominent statement on the first page of each redacted exhibit that information in the marked sections of the exhibit has been omitted from the filed version because it is not material and would likely cause competitive harm if publicly filed; and (3) indicate with brackets where the information has been omitted from the filed version of the exhibit. The SEC reserves the ability to review these redaction determinations by requesting that it be provided with copies of unredacted versions of the agreements and to require an amendment to the subject filing if it disagrees with the scope of the redactions. A company that is required to provide unredacted agreements, and accompanying explanations, to the SEC will want to request confidential treatment of the information provided to the SEC under Rule 83 (similar to the existing procedure for requesting confidential treatment).

    The transition provisions of the amendments provide that companies with pending confidential treatment requests on file may withdraw their application and amend the subject filing to include the subject exhibits, redacted as allowed by the amendments. In addition to reducing the cumbersome burden that the CTR process places on all registrants, the amendments will have a significant impact on registrants that are not considered well known seasoned issuers (non-WKSIs) since these registrants are not eligible for use of an automatic shelf registration statement. When non-WKSIs file a shelf registration statement, it is not automatically considered effective. Instead, the registration statement is subject to potential delay resulting from SEC review — including a delay from any outstanding CTR application. Though the SEC still reserves the ability to review redacted determinations by requesting unredacted versions of the agreements, the new rules should minimize any risk of delay that non-WKSIs may experience when waiting for the SEC to declare a shelf registration statement effective in light of an outstanding CTR application.
  • Omission of schedules and similar attachments to exhibits. Reg. S-K Item 601(a)(5) will allow companies to omit entire schedules and similar attachments to all exhibits required to be filed under Item 601, provided the omitted information is not material and has not been otherwise disclosed. The amendments will also require companies to provide with each exhibit a list briefly identifying the contents of any omitted schedules and attachments. Companies will not need to prepare a separate list of omitted information if that information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. In addition, companies will be required to provide, upon request of the SEC and on a supplemental basis, a copy of any omitted schedules or attachments to the SEC. The SEC will add comparable provisions to the exhibit requirements of Item 1016 of Regulation M-A (Reg. M-A) and Form N-CSR.
  • Redaction of personally identifiable information. The amendments codify, in Reg. S-K Item 601(a)(6), an existing practice of the SEC to allow the redaction from filed exhibits of personally identifiable information such as bank account numbers, social security numbers, home addresses and similar information. This information may be redacted without including an analysis supporting the redactions at the time of filing.
  • Brief description of securities. Item 202(a)-(d) and (f) require companies to provide a brief description of their registered capital stock, debt, warrants, rights, American Depositary Receipts and other securities as an exhibit to Form 10-K, rather than limiting this disclosure to registration statements.
  • Limitation of the two-year look back period. Item 601(b)(10)(i) requires companies to file every material contract not made in the ordinary course of business, provided that one of two tests is met: (1) the contract must be performed in whole or in part at or after the filing of the registration statement or report, or (2) the contract was entered into not more than two years before that filing. The amendments would limit the two-year look back test to "newly reporting registrants" as such term is defined in Item 601.

Other Adopted Amendments

  • Companies need only describe real estate property to the extent material. S-K Item 102 has, in certain cases, resulted in expansive disclosures of real property interests, including in many cases disclosures of immaterial property interests. The amendments employ a more principles-based approach, requiring the disclosure of physical properties "to the extent material." We believe this will result in many technology and life sciences companies, whose physical properties are often only their headquarters, office space and ancillary facilities, being able to pare down their property disclosures and, as noted in the adopting release, may lead companies to describe certain of their properties on a collective basis.
  • New XBRL tagging of cover page information of Exchange Act reports. The Amendments require XBRL tagging of all information on the cover page of Forms 10-K, 10-Q, 8-K, 20-F and 40-F.

Effective Dates

The amendments to the rules governing the redaction of confidential information in certain exhibits will become effective as of the date of publication in the Federal Register. The remainder of the amendments are effective 30 days after publication in the Federal Register, except for the requirements to tag data on the cover pages of certain filings. Compliance dates for cover page tagging are staggered over a three-year period, with large accelerated filers required to tag for periods ending after June 15, 2019, accelerated filers for periods ending after June 15, 2020, and other filers for periods ending after 2021.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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