Securities Quarterly

Winter 2020

Date: January 13, 2020

Welcome to the second issue of Securities Quarterly, a publication that provides updates and guidance on securities regulatory and compliance issues. In this edition, we look at developments during 2019 affecting periodic reporting requirements that public companies should consider as they prepare their Form 10-K filings for the fiscal year ended December 31, 2019.

Form 10-K cover page updates. The SEC made three changes to the Form 10-K cover page. Companies are now required to:

  • Include trading symbol(s) for all classes of securities registered pursuant to Section 12(b) of the Exchange Act, which is the same table required on Forms 8-K and 10-Q cover pages.
  • Delete the checkbox indicating whether the company will be disclosing delinquent Section 16 filings (i.e., untimely Forms 3, 4 and 5) in its Form 10-K or proxy statement.
  • Ensure Inline XBRL (iXBRL) tags are included, subject to the available phase-in period. Only large accelerated filers are currently subject to iXBRL requirements; accelerated filers are required to begin using iXBRL in reports for fiscal periods ending on or after June 15, 2020, and all other filers must comply for fiscal periods ending on or after June 15, 2021. The requirements are triggered for the first Form 10-Q for the fiscal quarter ending on or after the applicable compliance date.

Risk factors and related disclosures.

  • SEC staff and commissioners have issued recent statements regarding cybersecurity, intellectual property- and technology-related risks to doing business internationally, LIBOR transition, Brexit, international trade, and diversity and other human capital-related risk disclosures, and companies should evaluate if any changes to their SEC filings are necessary based on the new guidance. Companies should also determine whether any additional disclosures regarding climate change or sustainability are needed. The SEC has made it clear that “boilerplate” risk factors and hypothetical disclosures when the events discussed have occurred are not sufficient. When updating and tailoring risk factors, companies should also assess how material risks may impact their MD&A disclosure, insider trading and internal controls.
  • From a more technical standpoint, the requirements for risk factors are now included under new Regulation S-K Item 105. The SEC has also clarified that companies should discuss factors that make an investment in them speculative or risky; it previously required a discussion of such factors relating to an offering.

Simplified MD&A. The MD&A instructions have been revised to provide that companies may use any presentation in the MD&A that enhances a reader’s understanding, no longer suggesting that a presentation of year-to-year comparisons is preferable. In addition, companies that are required to provide their financial statements for their past three fiscal years may now omit the MD&A discussion for the earliest of the three years, if not material, so long as the discussion was included in a previous SEC filing and the current filing includes a statement indicating where the omitted discussion may be found (generally a reference to the MD&A in the prior year’s Form 10-K). If, however, prior financial statement disclosures have materially changed (for instance, due to the impact of an acquisition, adoption of a new accounting policy, or change in segment reporting), companies should consider including a full discussion of the earliest year. Smaller reporting companies have already been able to take advantage of scaled-down reporting requirements and provide financial statements and MD&A discussion for only their past two fiscal years.

Contractual obligations table. Companies that include a contractual obligations table in the MD&A should assess whether any explanatory disclosures are needed due to the leases or any other recently adopted accounting standards. Smaller reporting companies are not required to include a contractual obligations table, but may choose to do so.

Critical audit matters. The phase-in of critical audit matters (CAMs) disclosures began for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and some auditor reports addressing CAMs have already been filed. Audit committees of other filers (for which CAM requirements are effective for fiscal years ending on or after December 15, 2020) should engage in “mock-up” exercises relating to CAMs with their auditors in connection with their 2019 audits, if they have not already done so, and consider whether any expanded disclosures relating to CAMs should be included in the MD&A.

Non-GAAP financial measures. The SEC continues to review non-GAAP financial measures, with recent comments focusing on the substance of the measures, rather than their presentation, accompanying disclosure or the required prominence of GAAP measures over non-GAAP measures. The SEC staff appears to be evaluating whether any non-GAAP measures are potentially misleading, whether they are calculated consistently from quarter to quarter, and whether they are based on “individually tailored accounting principles” in violation of SEC rules. The staff also recently reminded companies and their audit committees to ensure that the company’s internal controls include the use of non-GAAP measures and that the SEC regularly reviews disclosures outside of SEC filings and compares them with disclosures in SEC filings.

Description of property. The SEC clarified that companies need only disclose, “to the extent material,” the location and general character of their principal physical properties; companies were previously required to disclose their “principal plants and other materially important physical properties.” Disclosure on an aggregate basis, as appropriate, is also permitted.

Section caption changes.

  • Executive officers. Companies including biographical disclosures about their executive officers in their Form 10-K should now title the section “Information about our Executive Officers.” The SEC further clarified that companies including such disclosure in their Form 10-K do not need to repeat it in their proxy statement.
  • Delinquent Section 16 filings. Companies that include Part III disclosures in their Form 10-K, or reference specific headers when incorporating by reference from the proxy statement in Part III of their Form 10-K, should use the caption “Delinquent Section 16(a) Reports” for disclosures of any untimely Section 16 reports. Companies with no late Forms 3, 4 or 5 to disclose should exclude the caption entirely.

New exhibits.

  • Securities description. Companies are now required to include an exhibit containing a “brief” description of every class of their securities registered under Section 12 of the Exchange Act. Often, companies can start with their description of securities included in previous filings with the SEC, such as a Form 8-A or recent Securities Act registration statement, and update as needed. The description will be more complex if the company has multiple classes of registered securities, including preferred stock and debt securities.
  • iXBRL. An exhibit index for filings using iXBRL should include the words “Inline XBRL” in the Exhibit 101 title description and a separate listing of Exhibit 104 for cover page tags (for example, “Cover Page Interactive Data File, embedded within the Inline XBRL Document”). Exhibit 104 is not a separate attachment to the Form 10-K; it is included as part of the Exhibit 101 file.

…And (no more) old exhibits. The SEC limited the application of the two-year lookback for inclusion of material contracts as exhibits to apply solely to “newly reporting registrants” (as defined in Regulation S-K Item 601(b)(10) Instruction 1). As such, companies are only required to include in their exhibit index material contracts that will be performed, in whole or in part, after the Form 10-K is filed; companies may remove from the index any material contracts that have been fully performed or are otherwise no longer in effect.

When reviewing and updating the exhibit index, companies should ensure that all exhibits are correctly hyperlinked and that the exhibit index is included before the Form 10-K signature page.

Cross-references in financial statements. Companies are not permitted to include cross-references to, or incorporate by reference, information from the MD&A or other parts of the Form 10-K in the notes to the financial statements.

Incorporating information by reference. When incorporating information by reference into their Form 10-K (as well as Forms 10-Q and 8-K), companies are now required to include a hyperlink to the information that is being incorporated by reference and to identify where that information was originally included.

Proposed SEC rules. If adopted, some proposed SEC rules may also impact Form 10-K. The proposals seek to modernize and simplify business descriptions, risk factors and disclosure of legal proceedings. They emphasize a principles-based approach to disclosure but would also likely require companies to undertake additional efforts to prepare their Forms 10-K, particularly the business strategy section, risk factors and proposed new human capital disclosure. Proposed changes to financial disclosures regarding acquired and disposed businesses are also pending, as are rules proposing updates to statistical disclosures that banks and similar institutions are required to provide. Under the recently expanded definition of “smaller reporting company,” more companies have been able to take advantage of scaled-down disclosure requirements. It remains to be seen, however, if any additional relief becomes available from the requirement to provide an auditor report on the effectiveness of internal controls, as the SEC’s proposed rules to amend the definitions of “large accelerated filer” and “accelerated filer” remain pending.


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